Payroll service bureau

Payroll service bureau

A payroll service bureau is an accounting business whose main focus is the preparation of payroll for other businesses. Such firms are often run by Certified Public Accountants, though a typical payroll processing company will refer to itself as a service bureau rather than a CPA firm, to distinguish its payroll services from the general tax and accounting services that are generally not offered by a payroll service bureau. The typical client of a service bureau is a small business - one just large enough for payroll to be complicated to the point of a hassle, but one still small enough to not merit its own full-time payroll department.

The tasks that can generally be expected of just about all payroll service bureaus are as follows:

  • Printing of employee pay checks on time for payday
  • Direct deposit of pay into employee bank accounts, when desired
  • Appropriate calculation and withholding of federal, state, and local taxes
  • Calculation of payroll taxes to be paid by employer (such as Social Security and Medicare in the US)
  • Filing of quarterly and annual payroll reports
  • Depositing of withheld amounts with tax authorities
  • Printing and filing of year-end employee tax documents such as Form W-2.

Additional services may be offered and vary from firm to firm.

  • Management of retirement and savings plans
  • Health benefits or "cafeteria" plans
  • Timekeeping, either online or in the physical form of "time clocks"
  • Producing export files containing payroll/general ledger data to be imported into a client's accounting software
  • Human Resources (HR) tracking/reporting
  • Workers' Compensation Insurance intermediary

In the United States, it is usual and customary that any penalties or liabilities incurred by a service bureau's mistakes are borne by the service bureau. In practice, they are more successful at having penalties and other fees abated than most other businesses, mainly because tax authorities have a stake in the success and longevity of service bureaus simply because they make the tax man's job easier.

There are several ways a service bureau can move money from the client to the people whom the client must pay. The simplest way is when a service bureau prints checks on blank check stock, printing the client's account number in MICR digits at the bottom of the check, resulting in the funds being drawn directly from the client when the check is cashed. Other bureaus initiate automated clearing house (ACH) transactions from the client, and remit payment either electronically or in the form of paper checks against the service bureau's holding account. Because payroll transactions can be enormous (thousands to hundreds of thousands per pay period per client), service bureaus often consider the interest earned ("float") on those amounts in the interim to be a substantial source of revenue. The interim is the period of time between when the funds are collected from the employer (client), and either when the paper checks are cashed, or when electronic payments (in the case of taxes) become due on their due dates.


Different types of service bureaus

In the United States, there are several nationwide chains for payroll processing. Then there are countless local service bureaus which vary in scope and size. Because local service bureaus tend to service only a very narrow geographic area and often see themselves as competing together against the nationwide giants rather than one another, they often band together and form alliances and trade associations whereby they share expertise and consolidate their negotiating power with their vendors.

There are specific and distinct perceived differences between having payroll processed by a national chain and a local service bureau. National chains have experience under their belts, and have a standard set of well documented processes. Local service bureaus vary in their ability to accommodate special needs, they also add a level of service that can be lost in the national arena. Local service bureaus have opportunities to at meeting specific local and national needs. This is also particularly true in regions whose needs are heavily influenced by a single industry.

It is common practice in the service bureau industry to purchase and resell private-labeled products and services from other vendors to enhance the service offering. Specifically, products such as time clocks, ATM "pay" cards, savings or cafeteria plans, Worker's Compensation insurance and payroll data-entry web sites, are actually the products of companies with expertise in these specific services, and are generally branded so that the customer is unaware of the third party's influence. This type of arrangement is desirable to service bureaus as it allows them to show a competitive portfolio of services that rivals that of the national chains.

Businesses may decide to outsource their payroll functions to reduce the costs involved in having payroll trained employees in-house as well as the costs of systems and software needed to process payroll. In the UK, payroll bureaus will deal with all HM Revenue & Customs enquiries and deal with employee's queries. Payroll bureaus also produce reports for the businesses' account department and payslips for the employees and can also make the payments to the employees if required. Some may decide that a smaller or local bureau can offer a more consistent and personal service than a large nationwide bureau that deals with several thousand payrolls can.

Another reason many businesses outsource is because of the ever increasing complexity of payroll legislation. Annual changes in tax codes, PAYE and National Insurance bands as well as more and more statutory payments and deductions having to go through the payroll often mean there is a lot to keep abreast of in order to maintain compliance with the current legislation.

Service bureau software

At the heart of every service bureau is the computer system that performs the calculations and prints the check. Service bureau software is created solely for payroll professionals and has one purpose: to mass-produce accurate payrolls for many companies simultaneously. There are only a handful of service bureau software vendors in the United States, and the choice of computer system used by the service bureau is often a deciding factor for their clients as the software choice often determines what services the service bureau can regularly render. The software choice is also significant in that service bureau trade associations are often formed based on the choice of software, as they generally face the same challenges and offer the same services in the same manner.

The common wisdom of "newer is better" that applies to most software, does not apply in the service bureau industry. Due to the complexity and potential for expensive errors that goes with moving clients from one system to another, it is very common for older software to be in just as much use as newer software. Clients generally have a low tolerance for errors, simply because payroll is a high-dollar affair that can become very expensive when mistakes are made - and this results in significant apprehensiveness on the part of the service bureau to simply switch from one software package to another. A service bureau software package that has been in service for ten years may be based on obsolete operating systems such as DOS and lack Internet functionality, but on the other hand, such software has the advantage of a proven history and a body of real-world experience using it.

Payroll vendors


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