How to choose a payroll vendor: 8 keys for SMBs

Choosing a payroll vendor is one of the most important decisions that leaders of small and medium-sized businesses can make. Learn which factors you must consider.

Payroll is a mission-critical service and one process in which zero errors are tolerated by the consumers: your employees.

Small and medium-sized businesses are hit especially hard when something goes awry, a fact highlighted by the recent MyPayrollHR collapse. Help prevent a similar fate by considering these factors when choosing a payroll vendor.


SMBs can use a number of criteria when searching for a payroll vendor. Whether your company has 100 employees or 1,000 employees, stability is key. For example, you should question whether a startup payroll service is stable enough to handle your payroll processing and tax filings. You also need to assess whether a given vendor can cope with your future growth.

The reputation of a vendor in the market is a telltale sign of whether it is worth considering. Reputation is a due diligence essential.

Every payroll vendor should be well-financed, bonded and adequately insured. Ask for financials and insurance certificates to review and validate. The vendor should have the money to pay your payroll and deposit your payroll taxes on time and simultaneously be able to manage its own operational cash flow. In some markets, a payroll vendor should also be recognized by the appropriate government and state agencies that are responsible for finances or taxation.

You also need to research legal and compliance trustworthiness. Learn how the vendor safeguards and protects employee data it manages and how it applies legal changes. In addition, understand how often the vendor performs internal audits and whether it provides those results to customers.

MyPayrollHR collapses

A bad vendor choice can have major repercussions for businesses and their employees. Read about a recent example as we retrace the collapse of MyPayrollHR.

Overall experience

Once you have a list of payroll vendors to consider, you can dive into the details.

Learn how many customers a vendor has. Also, research whether it has experience processing payroll in different scenarios and for different types of customers in different geographies and tax regions. As you grow, it is important that your payroll vendor is able to handle that growth. Does the vendor have any customers of the size to which you are expecting to grow?

Regulations, taxation, and payroll type and frequency can vary by industry -- including the complexity of unionization and collective bargaining agreements -- and it's important to know if the payroll vendor has experience working in your industry.

Some payroll vendors have a minimum and maximum number of employees that their platform can handle. These should be aligned with your growth plans. Find out whether the vendor guarantees its work -- e.g., pays for late filings costs.

Localization capabilities

While you may only operate in one country or just a handful of countries, if you want to scale out geographically, then it is important to understand whether those countries are covered and to what extent the payroll services are truly localized for those countries.

For example, France has specific regulations around pay slips. In the U.S., employees can have their wages garnished for alimony payments. And in certain Middle Eastern countries, the payroll system must be able to handle two or more currencies in the same country.

Coverage of worker types

If it seems too good to be true, it probably is.

Even though your SMB may have a small workforce, you might have myriad payroll scenarios. For example, you might have full-time, part-time and hourly paid workers. You may also need to pay certain employees overtime wages. Small manufacturing organizations may still have unionized workers or 24-hour manufacturing operations that require hazardous jobs or out-of-hours monitoring or production work.

This is even before you factor in local taxation and other regulations. These are complex needs, even if it's for a small payroll. The vendor must be able to provide the appropriate functionality.

Integration capabilities

If you have a newer business, you might not need integration, but that may change as you grow. Integrations with financial systems, tax systems, pension providers, benefits systems and other systems can provide huge benefits and improve accuracy and timeliness of correct payroll processing.

Payroll vendor selection

These are a few questions you'll want to ask when assessing a vendor:

  • How many customers does the vendor have? What size are those customers?
  • How many of the vendor's customers are in your industry?
  • How many countries are covered? Are all of your operating countries included?
  • What localizations are covered in each country?
  • What is the minimum and maximum number of employees covered in each country?
  • How much complexity can the vendor handle?
  • Does its platform have limitations on how many employees or transactions it can process at any one time or pay period?

Service excellence

As an SMB, the service your payroll vendor provides can be extremely important. Payroll processing can be complex, as are the resources needed to manage execution, payments and filings. But it is not always cost-effective for an SMB to have one or more full-time payroll managers. Having a bureau-style payroll service that can cover everything as part of the overall service is one area that can provide a real added value for SMBs.

Appropriate pricing

Many SMBs are price-conscious. Vendors that are cheap and cost-effective can seem like a good option, but extremely low prices can be a red flag. If it seems too good to be true, it probably is.

Unfortunately, payroll processing is not as inexpensive as you would like. And, more often than not, you are going to have to pay more than you want. However, higher prices can often mean you are going to get a quality service by a reliable provider that is investing in its platform and its services.

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