What is a payroll service provider, and how do you pick the right one?

SaaS Buying

Discover the benefits of partnering with a payroll service provider for accurate and timely employee payments. Learn how payroll service providers work and why choosing the right one is essential for your business's unique needs.

Two people evaluating payroll service providers
Written by
Vendr Team
Published on
June 5, 2023
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From marketing and sales to operations and human resources (HR), business owners have plenty of tasks to juggle on a daily basis. Amid these responsibilities, managing payroll can become an overwhelming burden.

Thankfully, payroll service providers exist to help alleviate this load, ensuring that your employees get paid accurately and on time. Choosing the right one is paramount to ensuring that your company has the right partner based on its unique characteristics.


Payroll service providers: How do they work?

As a pivotal cog in a company's operational wheel, a payroll service provider (PSP) offers services that manage all the payroll and employment tax obligations on behalf of a business. They facilitate the entire process, handling details from tracking employee hours and calculating wages to issuing paychecks, managing direct deposits, and withholding taxes. Moreover, they ensure that all these transactions comply with the complex labyrinth of federal, state, and local laws.

By assuming the administrative burden of payroll, PSPs free business owners and managers to dedicate their attention and resources towards better serving their customers. The best ones effectively become an external payroll department with the ability to adapt and scale with your business needs.

So, how does a PSP work exactly? Here's a closer look at the broad range of services they provide:

Payroll processing: Payroll service providers use software platforms to calculate how much each employee should be paid during each pay period. These calculations aren't as straightforward as they may seem—they have to take into account varying factors such as hours worked, the rate of pay, overtime, and commissions (if applicable). Additionally, deductions like taxes, insurance, and retirement contributions need to be accurately calculated and applied. PSPs automate these complex calculations, ensuring accuracy and timeliness in wage payments.

Payroll tax handling: One of the biggest headaches businesses face in managing payroll is handling payroll taxes. This process involves accurately calculating the amount of tax to be withheld from each employee's wages, filing necessary documents with tax agencies, and making timely payments. PSPs have the knowledge and systems to handle these responsibilities efficiently, ensuring that businesses stay compliant with tax laws and avoid costly penalties.

Year-end tax forms: At the end of each fiscal year, businesses are required to provide their employees with W-2 or 1099 forms. These forms report an individual's annual wages and the amount of taxes withheld from their salary. They're necessary for employees to file their personal tax returns. A PSP typically generates these forms for all employees and distributes them either electronically or via mail. Some providers also file these forms with the appropriate tax agencies on behalf of the business.

Direct deposit and check services: Employees usually have a preference for how they receive their wages. Some prefer direct deposit into their bank accounts, while others may want a physical check. PSPs offer both services, taking care of the logistics behind each payment method. They coordinate with banking institutions to facilitate direct deposits and have systems in place to print and mail checks when needed.

Benefits administration: While not all PSPs offer to administer benefits, those that do can provide significant value. This involves managing things like health insurance, retirement contributions, paid time off, and other employee benefits. They ensure that the correct deductions are made from each paycheck and that the funds are properly managed and allocated. They may also help with benefits enrollment, tracking, and compliance.

Compliance: Compliance with employment laws and regulations is a crucial part of payroll. This covers everything from minimum wage and overtime laws to tax compliance and record-keeping requirements. Non-compliance can result in heavy fines and penalties, not to mention damage to a company's reputation. PSPs are experts in these areas. They keep up to date with changes in laws and regulations and ensure that the businesses they serve stay compliant.


Choosing the right payroll service provider

While partnering with a PSP can bring immense benefits to your business, the task of choosing the right one can be daunting. There are numerous providers out there, each offering different service packages, pricing structures, and software solutions.

Here are some factors to consider when navigating the complex landscape of PSPs.

Understand your unique needs

Before you start the hunt for a payroll provider, you need to understand what your business needs. Here are some questions to ask:

  • Are you looking for a service that solely handles payroll, or are you seeking a provider that can manage benefits and HR functions as well?
  • How many employees do you have, and do you anticipate that number to grow?
  • Do you operate in multiple states or countries?

Answering these questions will help you define your requirements and narrow down potential providers.

Features and services

Once you understand your needs, you can evaluate the features and services that different PSPs offer. Most providers will handle basic functions like payroll processing and tax handling, but there may be variations in additional services.

For instance, some PSPs offer integrations with time and attendance systems or human resource management software. Others may provide access to a dedicated payroll specialist who can assist with setup and ongoing management. Assess your current and future needs to determine which features and services are most important to you.

Ease of use

The payroll service provider you select should have a system that's easy to use and doesn’t require prior training. This applies to both the setup process and the ongoing management of your payroll. The interface should be intuitive, with features that are simple to understand and use. In addition, the provider should offer support during the setup process to ensure a smooth transition.

Customer service

Even with the most user-friendly system, you'll likely need assistance at some point. Excellent customer service is, therefore, an essential consideration when choosing a PSP. You should be able to reach a knowledgeable and helpful representative when you need one. Consider the provider's support hours and communication channels. Is support available when you'll most likely need it? Can you reach them through your preferred method, such as phone, email, or live chat?

Payroll compliance and accuracy

A crucial aspect of any payroll system is its compliance with various tax laws and regulations. Non-compliance can result in penalties and legal issues, which can be costly for your business. The right payroll service provider will ensure you're in compliance with all relevant laws and regulations, both at the federal and state levels.

Accuracy is also paramount in payroll. Mistakes can lead to disgruntled employees and potentially legal troubles. Your PSP should have a proven record of accuracy and a system for catching potential errors.


Your business isn’t static—it will grow and evolve. Consequently, the payroll service provider you select should be able to scale with your business. As you add more employees or expand into new markets, your PSP should have the capabilities to accommodate these changes. A provider that's a good fit for your company now may not be suitable in the future if they can't scale their services to match your growth.

Reputation and reliability

Reputation is a key indicator of a PSP's reliability and performance. Research potential providers online, look at reviews, and seek out feedback from their customers. How long have they been in business? Have they consistently received positive reviews? Have they had any major complaints or legal issues?


Payroll involves handling sensitive information, including social security numbers, bank account details, and home addresses. Therefore, it's crucial that the PSP you select takes data security seriously. They should have robust security measures in place, including encryption and secure servers, to protect your data.


While it's important to find a provider that offers all the features and services you need, cost can’t be ignored. PSP pricing can vary widely, so compare costs among providers. Be sure to understand what's included in the base price and which services require additional fees.

Remember that while price is a consideration, it shouldn't be the only factor in your decision. A cheaper service might save you money in the short term, but if it doesn't meet your needs or results in errors and compliance issues, it could cost you more in the long run.

Picking the right payroll service provider

Choosing a payroll service provider is a significant decision for your business. It's not just about offloading the task of payroll; it's about forming a partnership with a provider that can meet your needs and help your business grow. With the right payroll service provider, you can streamline your payroll processes, ensure accuracy and compliance, and free up time and resources to focus on your business's core functions.

Whether you're a small business owner who's tired of the time-consuming task of payroll, or a large company looking to improve efficiency and compliance, the right payroll service provider can be a valuable asset. So, evaluate your options carefully, and make the choice that's right for your business.


Vendr Team
Vendr's team of SaaS and negotiation experts provide their curated insights into the latest trends in software, tool capabilities, and modern procurement strategies.

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