Payroll Services

By Dylan Mazeika

Like any business, payroll companies need to make a profit. But where does this profit come from?

Most of it doesn't come from the invoices they submit to you -- this amount is minimal. Rather, they profit from floating the interest that is compounded on funds from your account before your payroll is paid out. Payroll companies typically will wait until the last possible minute to transfer your funds, and keep any interest earned on your money.

However, because interest is so low now days, payroll services have had to be inventive in increasing their profits, just like any other company. It is no secret that vendors who bid on government contracts go in with unbelievably low bids to get the job. Where they make their money is with changes that come up during the building process which can cost double what the same job would have cost if it had been included in the original bid. This bidding process is used by a lot of industries. A company bids on a specific plan or service and somewhere along the line a CEO or division manager wants to make a change. Changes are how companies make more profit.

Are you contributing to their bottom line?

A payroll company also makes money from the frequency of your payroll plan. For example, a 20-employee company on a weekly pay schedule might spend $1,800 per year for payroll processing. But if that same company switched to a bi-weekly schedule, they would pay approximately $1,100. In short, providers benefit from how often they are providing a service to you.

In addition, payroll firms rake in more cash by offering other payroll-related services, including payroll distribution, tax filing, data collection, and a newer, growing area -- benefit management services. Like a business searching for building bids it is in your best interest to look at your short term and long term needs. By adding a service into the original package you may negotiate favorable rates. However, if you add a service six months to a year or more after you have been with the payroll provider, the additional service may cost a lot more. Make a concerted effort to determine exactly what you need before accepting any packaged payroll services.

Payroll service firms can also charge fees for extras like tailoring the format of reports generated with your payroll information. Almost all firms will accept a format that you suggest, if you can provide it on software that is compatible with their own.

We are not advocating eliminating profits for a payroll provider. That would be absurd. However, the more insight you have on the profit source of payroll providers, the better you can choose an appropriate vendor. Done wisely, you can save some money and then re-invest your savings back into your own business.