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Updated: June 17, 2024

Payroll service providers 101: Employer’s guide on how to choose one in 2024

Published By:

Jon Davis

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Payroll service providers (PSPs) help businesses pay employees accurately and on-time, while meeting state and federal tax obligations. Employers looking for a PSP have several options, including working with a bookkeeper, securely running payroll with cloud-based software via their internet browser, or installing tools on their desktop or laptop. But picking the option that best fits their needs can take some time, and it’s not always clear what features to look for.

Fast facts about payroll service providers

  • Many handle all payroll responsibilities, such as managing direct deposit, printing checks and pay stubs, to filing payroll taxes and year-end W-2/1099 forms
  • Most modern PSPs integrate with accounting software, time-tracking tools, HR databases, and more for a seamless payroll process
  • Choosing a payroll service is an investment, but the payoff is increased efficiency, avoiding IRS penalties, and giving staff more time for revenue-generating work
  • Many businesses work with PSPs to save time, reduce compliance risks, and outsource payroll calculations and tax filings, while staying up to date on regulations

In this employer’s guide, we’ll go over why some businesses choose to work with payroll service providers, some of the must-have functionality to look for, and tips on how to find one that best fits your business needs.

Why do companies use payroll service providers?

First things first, running payroll takes a lot of time and energy. In fact, OnPay’s research found that business owners spend nearly 40 hours a month on HR and payroll tasks alone. Even if an employer has payroll know-how, managing this process manually can be overwhelming. Furthermore, errors can be more than just an inconvenience for employees. That’s because depending on the number of employees on a staff, potential penalties can be costly for employers.


Here are some more high-level reasons why employers choose to work with a service provider for their payroll needs.


Time savings: Service providers handle the heavy lifting, freeing up time for employers to focus on other facets of their business.


Accuracy: They help reduce errors, ensuring your employees are paid correctly and on time. Companies also spend less time fixing mistakes or addressing employee concerns that can stem from payroll errors.


Compliance: PSPs stay up-to-date with tax laws and regulations, helping you avoid costly penalties.


Security: They offer strong data protection measures to keep your employees’ information safe. For example, software tools have multi-factor verification in place, so if an employee tries to log in, they’ll receive an access code on their phone (so only they can access the account).


Cost: Using a service can end up costing less than hiring an accountant or a professional employment organization

Responsibilities and role of payroll service providers

Put simply, payroll service providers are third-party vendors that businesses use to outsource tasks like payroll processing, handle state and federal tax filing obligations, and complete new hire reporting.


Here’s a more detailed list of what to look for when working with a vendor.


Automatic payroll processing: Without question, any service provider you decide to work with should be able to automate the process of calculating and paying employee wages, offering options like paychecks, direct deposit, or in some cases, pay cards.


Tax withholding and wage garnishment: PSPs make sure that all taxes, garnishments, and deductions (for benefits such as health insurance or 401(k)s are accurately withheld from employee wages and paid on time).


Tax filing services: A common offering is filing payroll taxes (federal, state, local) on the client’s behalf, including year-end reporting and form preparation.


New hire reporting: Employers are responsible for reporting new hires to the state to stay compliant. For example, in Florida and California, employers must share information about their new employees with the state within 20 days of their first day on the job. Meeting state requirements for reporting new employee information within the set timelines is usually handled by payroll providers.


Compliance expertise: PSPs stay current on wage and tax laws and notify clients of any changes that may affect their business.


Payroll reporting: PSPs supply access to detailed reports on wages, taxes, and hours worked, helping companies track payroll operations. This can be especially helpful because the IRS recommends holding onto payroll records for at least four years.


Employee self-service: PSPs (usually through payroll software) offer self-service options that so employees can view pay statements, update withholdings, and manage personal information independently (and provide access to do this when it’s convenient for them – workers generally have access 24 hours a day, seven days a week through a secure dashboard).


Integrating payroll with other software and business processes: They offer the ability to integrate payroll data with accounting, benefits, and time tracking.


The takeaway is that most employers look outside their organization for payroll help because keeping up with compliance and ever-changing tax regulations can feel like a full-time job (and is a reason why some companies hire an in-house payroll clerk or administrator to take the reins).

Software is standard

Nearly 50% of small businesses are using a payroll software provider when paying employees.


Source: OnPay 2024 small business market survey

Are there different types of payroll service providers?

Here are some common types of PSPs that business owners may come across:


Software providers

These are tools that businesses can access right from their internet browser of choice, be it Firefox, Chrome, or Safari. Others can be installed directly on a laptop or computer workstation. There’s a lot to consider, and we offer a resource that makes it easy to compare payroll services if you’re researching the different tools and functions each has.


Reporting agents

Some bookkeepers and accountants run payroll for their clients as a service. In many cases, these providers are considered reporting agents (RAs) and need to file Form 8655, the Reporting Agent Authorization, with the Internal Revenue Service (IRS). The form allows businesses to authorize third-party reporting agents to file certain forms with the IRS on their behalf, such as Form 941 and Form 944.


Professional employer organizations (PEOs)

Another term an employer may come across is PEO. This is a third-party company that provides human resources services to small and midsize businesses, and payroll processing is often a piece of the puzzle.


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How else do payroll service providers help?

Earlier, we mentioned that many PSPs do more than just the heavy lifting that comes with paying employees, and getting more value beyond running payroll is becoming increasingly important to business owners. For example, in a survey conducted by OnPay, nearly 40% of businesses were looking for payroll help, including features related to benefits and HR. So what else are employers looking for that PSPs can help with? Here are some of the items that may appear on wishlists:


  • Benefits administration: Many modern providers have their own in-house team to help with benefits plans that sync with payroll runs and keep pre- and after-tax deductions in order. So if a business is thinking of offering perks such as a 401(k), the PSP can take care of everything in one place. This can be especially helpful because a growing number of states require employers to offer employees access to retirement savings.


  • Workers’ compensation: Because workers’ comp insurance is essentially a requirement in every state (with Texas and South Dakota being exceptions) many providers can help employers get started with a plan. For example, pay-as-you-go workers’ comp can be set up to sync with payroll runs.


  • Time and attendance: Timekeeping systems that track employee hours and integrate with payroll processing are often part of the package. Again, most use software to take care of this.


  • Human resources help: Some PSPs offer help with HR-related tasks such as employee handbook development and make it easy for new hires to complete documents such as Form W-4 and Form I-9 without needing people and culture teams to assist them.


How to choose a payroll service provider that fits your needs


Reputation: With a few clicks, you can read first-person customer reviews, When researching different payroll companies, you can usually find information about a customer’s interactions with an onboarding team, how to contact support, and some even share the amount of time they save running payroll and handling tax filings (so you can get an idea of how this applies to your situation).


Demo or trial: If you are looking at different software options, most providers offer limited free trials to help you get acquainted with dashboards, understand how to process a pay run, and learn where pay stubs are saved.


Setup help: Make sure there is help with setup and data migration. Even though most will be able to automate pay runs and tax obligations once you are up and running, accounts need to be set up to make this happen. You’ll want to make sure you have this assistance.


Industry know-how: Will the vendor you choose be able to handle your specific industry needs? For example, if you’re in the agriculture or farming business, there are payroll software companies that cannot file Form 943 (and some professionals who are not familiar with this form). If you have niche needs, point these out and confirm this is in their wheelhouse.


Customer support: If you need to speak with a customer service representative, does the provider offer phone support or do they only offer email or chat support?


Regulatory compliance: Choose a PSP that understands state and federal tax laws and is willing to offer guidance to ensure all filings and payments are completed correctly and on time.


Integration inquiry: Let them know about the tools in your tech stack and ask if they have integrations for each. If you have any that they don’t currently sync with, ask if they have anything in development on a product roadmap.

Payroll services providers provide peace of mind

Whether using software or a service company, new and established businesses can benefit from partnering with a reputable PSP. It can help you manage your tax obligations, avoid payroll errors, and free up time to focus on other areas of your operations. While handling payroll in-house is possible, outsourcing to a provider may be worthwhile, as the hours saved can be used to take operations up a notch.


Good luck as you grow your business, and if you’re interested in learning more about how OnPay helps small businesses stay ahead of their payroll obligations, we’d love to hear from you.



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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.

Frequently asked questions employers have about payroll service providers

  • Why use a PSP?

    PSPs handle the time-consuming tasks of calculating withholdings, printing checks, filing payroll taxes, and maintaining compliance, allowing businesses to focus on their core operations.

  • What is a third-party payroll service provider?

    A third-party PSP is a company that employers can contract with to handle their payroll processing and related tax filing/payment responsibilities, instead of handling payroll tasks in-house or hiring an accountant.

  • Is a PEO the same as a PSP?

    Though they have some similarities, a PEO and a PSP differ. A PEO typically takes on a broader range of HR responsibilities, such as recruiting and employee management, in addition to handling payroll processing.