What is Payroll Service?

Donna Reynolds

Generally, employees are paid at a set rate, either on an hourly or salary basis. In the United States, employers are obligated to pay Social Security, Medicare, workman’s compensation, state, federal, and often local taxes for each employee. An employer also must deduct a portion of these taxes and other fees from the employees’ paycheck, and all of these transactions must be recorded for auditing and tax purposes.

A payroll preparation service helps businesses manage their payroll.
A payroll preparation service helps businesses manage their payroll.

A payroll service is a company that will, for a fee, handle all of these functions independently, freeing up the business owner's time for more important matters. Once an account is established, the employer simply provides the service with a list of all employees, the hours they worked, and any variances. This data is then processed and the funds are transferred from the employer's bank to the payroll service's account. Employees are paid either by standard check or direct deposit. The employer is then provided with payroll and tax reports.

A payroll preparation service can print paychecks.
A payroll preparation service can print paychecks.

A payroll service often offers other services as well. Employers can turn over the management of the company’s benefit administration and retirement services. Vacation and time off can also be tracked. Some services even offer the option of managing the employer’s tax payments, handling time and labor management issues, assisting with tax compliance, managing expenses, and even pre-screening assistance. The service also routinely handles the necessary paperwork for direct deposit of employees’ paychecks. Fees for services vary depending on the size of the account and the types of services rendered. Normally, there is a charge per person, plus a charge per check issued.

Payroll services often track employee vacation time.
Payroll services often track employee vacation time.

The first payroll service company was founded in 1949 by former New Jersey Senator Frank Lautenberg, and brothers Henry and Joseph Traub. Initially named Automatic Payrolls, the company offered simple services using an electro-mechanical calculator and a Comptometer bookkeeping machine. Automatic Payrolls, which was later renamed Automatic Data Processing (ADP), kept up with technology. ADP became a pioneer in the use of computerized bookkeeping, starting with punch cards and ending up with the most sophisticated technology in the industry.

Payroll services often are given access to the confidential financial records of several businesses.
Payroll services often are given access to the confidential financial records of several businesses.

ADP grew by acquiring smaller payroll companies, and ultimately went public in 1961. The company has continued to grow, and is recognized as an leader in the payroll service industry with over 500,000 customers and a staff of over 40,000 people. Today, ADP handles not only payrolls, but also handles a variety of brokerage and dealer services as well.

The success of ADP served as a payroll service business model, and this concept continues to evolve with improvements in technology. Today, many services interface with their customers directly through the Internet. A customer can simply enter payroll data into his or her Web portal and the transaction is processed immediately. The customer has access to all payroll and personnel records, and this information can be updated when the need arises. Reports can be quickly accessed, simplifying corporate payroll tasks and eliminating costly errors.

The proliferation of the computerized payroll service has led to some instances of fraud and outright theft of funds. Therefore, it is critical to do some research to ensure that a given company is reputable and reliable. This company, after all, will have access to a company's most confidential records, including its bank account. In addition, if a service fails to make tax payments on schedule, the company will be held accountable and fined accordingly. Because these cases are generally rare, the benefits of using a payroll service outweigh any of the risks.

Employees are typically paid on either an hourly or salary basis.
Employees are typically paid on either an hourly or salary basis.

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Discussion Comments


@Markerrag -- A lot of people have proposed simplifying things with the flat tax rate. Politically, though, that has been a hot potato as some groups would wind up paying more taxes than they do know and they don't like it. Interestingly, it seems the ridiculously wealthy and the very poor would see taxes go up under a flat tax system.

Even if that issue is addressed, it is hard to imagine a flat tax would ever pass because there are too many people who want to keep the complex tax system the way it is (payroll professionals, accountants and the like aren't interested in seeing things change and they have lobbies).

So the chances are good that those payroll headaches will be with us for some time.


@Terrificli -- Not all companies can save money like that. Very large corporations seem to have entire departments that deal with payroll and there is a reason for that. It is, clearly, not cost effective for a lot of those companies to hire outside folks (or, that is the perception, at least).

It seems a lot of companies using those payroll services are small to mid-size ones that might not realize the economies of scale of having an entire department that does nothing but deal with payroll.


@Terrificli -- And that is a very good argument for simplifying the tax code so that the complexity is taken out of it. The irony is that such a simplification could cost a lot of jobs as accountants, third party payroll folks, in-house payroll folks and other people who are needed to deal with taxes would almost become obsolete.

Still, perhaps such a simplification needs to be done.


It is downright incredible how much money companies can save by hiring a payroll company and essentially outsourcing that traditional function to some other company. But the fact is that handling payroll is a very time consuming thing thanks to the complexity of withholding taxes and the like and companies can save a bundle by paying someone else to deal with that headache.

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