A 2013 global payroll survey conducted by Ernst and Young revealed that 12 percent of respondents outsourced their payroll to a single provider. Approximately 28 percent used a full in-house payroll system, and 60 percent applied a hybrid model, outsourcing only specific aspects of their payroll and completing the rest in-house. A payroll service can be a profitable business if you take the right approach.

Business Model

Some payroll companies provide services only to specific types of customers, while others cater to all types of businesses. Take a realistic look at your qualifications and resources, and then decide on your payroll business model. For example, you might target restaurants, construction companies, or small offices only. If you want to serve larger companies such as those with over 1,000 employees, you may have to perform complex duties, including multi-state, multiple payday, wage garnishment, and benefits processing. A smaller company is more likely to have one payday, such as weekly or biweekly, and all of its employees in one state. Unless you have serviced a large company before and have proper administrative support, you will likely find it difficult to land such clients. Since you’re just starting out, it may be best to target smaller clients.

Strategies for Choosing Clients

By carefully picking your clients, you can avoid difficult and incompatible customers. Don’t be tempted to accept every prospective client that comes your way simply because you’re just starting out. Assess potential clients thoroughly and pay attention to warning signs. For example, accept only clients with a verifiable business address and be cautious of new clients that request next-day direct deposit. In the latter case, have the client send you the payroll funds before you perform the direct deposit transaction. Try to land clients with steady payrolls instead of one-time clients.

Services and Pricing Structure

Create a structured pricing and services list for marketing and informational purposes. Services may include direct deposit, live checks, paycheck deductions, wage garnishments, paid time off tracking, employer contributions, payroll reports and reminders, employee self-service, and mobile access. Research what your competitors are charging and make your price list competitive. For example, you may offer paycheck processing, direct deposit, employer and employee online access, and standard tax filing for a flat monthly fee. Add-on services, such as W-2 processing and issuing emergency paychecks, would incur separate costs. Examine the client’s pay frequency, the number of employees, and the complexity of the payroll when establishing prices. Consider offering incentives, such as free trials and discounts. Invest in payroll software that supports your services.

Legal Considerations

When you obtain new clients, details of each contract should be specific to the client. For example, the contract should state how often you will be running payroll, the services you will provide, any tasks the client will be solely responsible for, related costs, and how payroll errors will be handled. For example, the Internal Revenue Service deems the employer responsible for payroll tax errors that a third party makes, but some states hold the payroll service provider accountable. If applicable, register your business with the state or local government agency and obtain an employer identification number from the Internal Revenue Service. For example, in Arizona, you do not meet the definition of a payroll service company if your clients pay and file their own taxes.