From the January 2004 issue of Entrepreneur

Robert Nagel was spending up to two hours each pay period doing payroll for the 20 employees of Surf Taco. "It was taking way too long, and it wasn't always accurate," says the owner of the Point Pleasant Beach, New Jersey, restaurant.

After Nagel hired an outside payroll service to process employee checks, the time he spent on the job dropped to a few minutes, and the error count fell to zero. Every Monday morning he gives information about each employee's hours by phone to Automatic Data Processing Inc.(ADP) of Roseland, New Jersey, and checks accurate to the penny are delivered the next morning. "I just tell them the hours, and they take care of the rest," says Nagel, 32.

Most small companies do their payroll themselves, and if you have just a few employees and payrolls that don't vary much from one pay period to the next, that may be fine. But for many entrepreneurs, outside payroll services can be cost- and time-effective solutions to payroll processing hassles. There are many national and regional providers, and serving firms with fewer than 100 employees is an important focus of the industry. If you'd like to look into an outside payroll service, keep these points in mind:

  • Make sure the services you need are offered. At a minimum, you'll want someone who can figure gross wages and deductions and produce checks in a timely manner. Not all payroll companies handle city and local taxes or companies with locations in multiple states, so if you need these services, make sure the company can provide them.
  • Look for a way to communicate with the service that matches your needs. You can send payroll data by phone, by e-mail or over the Internet. Larger companies tend to like Internet and e-mail; small companies may prefer to make a scheduled call and say, "Same as last week."
  • Find an established firm that will stand behind you. Ask if the firm will promise to represent you before the taxing authorities if a mistake is made and pay any penalties that are assessed. Get references, and check them.
  • Look for flexibility and good customer service. If you forget to make the call or make it late, the service should be able to rush the job so employees get paid.

Prices vary by provider, location and size of company but are generally modest: around $50 per payroll period for a company with 20 employees. Here's a look at some of the top national providers:

1. ADP is the giant of the field, handling payroll for approximately 500,000 companies. ADP also provides companies with employment background checks and other services. Nagel pays approximately $40 weekly to have ADP prepare 20 checks, including processing, tax withholding and payment and check delivery. When he forgot to call one week, Nagel said, his ADP rep tracked him down to get checks issued on time.

2.Paychex Inc.,of Rochester, New York, is another giant in the field, with 490,000 customers. It offers a full array of services, from simple phoning in of employee hours to Web-based offerings including retirement plans and other benefits. Paychex rates vary by locale, but simple payroll processing for 10 employees paid every two weeks in Austin, Texas, for example, would cost about $42 per pay period.

3.SurePayrollis a newer, fast-growing entry in payroll processing. The Skokie, Illinois, company focuses entirely on businesses with fewer than 100 employees, serving 10,000 with its Web-based payroll service. Its service includes direct deposit, guaranteed tax filing and quarterly reports, and for 10 employees, it would cost $38.45 per payroll. Built-in error-checking ensures that data gets punched in correctly.

For entrepreneurs like Robert Nagel, having a payroll service takes a job he doesn't like or do well off his plate. "It allows me the opportunity," he says, "to focus on running a restaurant."


Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.