How to Trust a Third-Party Payroll Provider

“You see? You just can’t trust anyone. The first girl I let into my life, and she tries to eat me.” --Columbus in Zombieland, played by Jesse Eisenberg

Sure. It’s unlikely anyone from your payroll service provider is going to turn into a zombie and try to eat your brains. But that doesn’t diminish your concerns in finding a trustworthy group to process your payroll. 

And while we aren’t dealing with your brains, hearts, or any particular part of your innards, we are talking about trusting someone with your money, personal data, and tax payments. All are still super important to your livelihood. 

Trust is hard to come by, and once it’s broken, it’s nearly impossible to repair. So how should payroll service providers prove they are trustworthy? And what measures should they have in place if a breach is made? 

As an accountant-packed payroll provider, Whirks has serviced hundreds of small businesses in over 40 states for the past 18 years. Accuracy and efficiency guide our path, and technological innovation fuels the drive.

Paying your employees on time and keeping your funds safe is always front and center. That’s why we wrote this article because we believe that everyone should know the specific safety measures payroll providers should have in place for their clients. 

We have no intention of letting zombies, hackers, thieves, or mistakes derail our mission. Let’s walk through the safety measures your payroll provider should have in place to keep your business on track. With this knowledge, you’ll be able to have confidence in your payroll provider when you know they have these measures in place. 

​​Electronic Federal Tax Payment System (EFTPS)

(AKA What if your payroll provider steals your money?)

You may have heard news stories of CEOs embezzling millions from small businesses. While these stories aren’t commonplace, they are jarring and problematic. 

Handing over your banking logins and passwords is nerve-wracking. It’s like handing your car keys to your 16-year-old kid for the first time. It will save you time not driving him to school, and he can run errands for you. But OMG! The anxiety and worry!!

In terms of bank account access, writing a check to the kid next door for his cookie dough fundraiser is just as dangerous as handing over your passwords to your payroll processor. Doesn’t that make you feel better? No, I didn’t think so. 

Whether you are shopping for your first payroll partner or are switching after having a negative experience, you want to make sure they use the Electronic Federal Tax Payment System (EFTPS). EFTPS is a free, secure service offered by the U.S. Department of Treasury that allows employers to make and verify federal tax payments 24 hours a day. 

According to the Internal Revenue Service (IRS), “A red flag should go up the first time a service provider misses a payment or makes a late payment.” Even if you use an IRS-certified Reporting Agent as your payroll processor, you, as the small business owner, are ultimately responsible for all tax payments. 

Ask your potential provider when they withdraw funds to distribute to employees or pay your quarterly payroll taxes. You should always know exactly when funds are removed from your account and delivered to your employees. Communication and transparency are keys to building and maintaining trust. 

At Whirks, our payroll software system distributes funds at the same time it withdraws them. Clients receive instant electronic verification whenever funds are removed from their accounts and when those funds are distributed to their employees. We give you this example to show you the best practice your payroll provider should use.

Errors and Omissions (E&O) Insurance

And part of maintaining trust is having a plan in place if something goes wrong. Make sure your next payroll provider carries Errors and Omissions (E&O) Insurance. This liability insurance protects businesses from loss of funds if a payroll partner makes a mistake, intentionally or not.

In addition to carrying E&O insurance, your payroll provider should regularly run background checks on all employees with access to client funds. 

Only a handful of employees should be able to transfer funds from clients’ accounts to your employees’ accounts on payday. Plus, all clients’ statements need to be reconciled each day by a different set of employees to ensure the correct amounts were transferred. 

Cyber Security Insurance

(AKA what if hackers steal my employees’ identities?)

According to Aite-Novarica Group, a financial technology research firm, 47 percent of Americans experienced identity theft in 2020. More than a third of the country experienced application fraud and account takeover.

We have never had more personal information floating around in the world than we do today. And that information, especially when stored with lots of other peoples’ personal data, is worth megabucks. 

Therefore, payroll service providers should be taking every known precaution to stop hackers from accessing your business’s information. Your employees' personally-identifying data should never be easily accessed or exported.

You’ll want to make sure your service provider has a set of policies and procedures in place to keep your data secure. Also ask if they have Cyber Security Insurance, which covers the cost of a client’s recovery and reparations.

Our policy here at Whirks covers up to $1million per instance per person. Plus, we provide credit monitoring to stop fraud on the first attempt. 

Payday contingency plans

(AKA so, what happens if one or more of your employees doesn’t get paid?)

Any worthy payroll partner will have plans in place to correct this immediately. 

Depending on the breadth of the issue, the payroll partner will calculate the amount owed to each affected employee, and the employer will draft paper checks. This solution works best if only a handful of employees didn’t receive funds. 

If a larger group of employees has been impacted, wire transfers to each employee’s account would work. And in a worst-case scenario, we would physically deposit funds into the employees’ accounts. 

At Whirks, we understand that ensuring your employees are paid in full and on time is of the highest importance. And we will do whatever it takes to make sure that happens each payday. Any responsible payroll partner will have contingency plans in place for common payroll issues. 

And if it was our fault that one or more of your employees didn’t get paid on time or accurately, our Errors and Omissions insurance will kick in to prevent you from experiencing loss of funds. 

IRS Tax Notices

(AKA What if my third-party payroll provider doesn’t pay my taxes?)

Everyone wants to avoid the ire of the Internal Revenue Service. 

As we talked about above, if you enroll in the Treasury Department’s Electronic Federal Tax Payment System, you can and should verify that tax payments have been made on your behalf. Until you feel comfortable entrusting your payroll distribution and employer tax filing to a third party, create calendar reminders for tax due dates and paydays and follow up to ensure your funds went to the proper places. 

Also, be sure that the IRS has your name and business address on file, in addition to your payroll provider. The IRS strongly recommends that businesses do NOT change their address of record to that of their payroll provider. This ensures you will receive all time-sensitive notices and can take appropriate reactions. 

This is a question you must know the answer to before signing on with a new payroll provider. 

If they fail to pay your taxes accurately, in full, or on time, what will they do to correct the situation? They should voluntarily contact the IRS and take whatever action necessary to resolve the issue. 

Your payroll partner should acknowledge any government notice received on behalf of your company. Update you on every stage of resolving the issue. And keep track of all government notices in their payroll software system, so nothing will fall through the cracks. 

And what if their mistake costs you penalties for late or underpaid taxes?

This is yet another reason you MUST make sure your payroll partner carries Errors and Omissions insurance. You should not have to pay for someone else’s mistake. 

If Whirks makes a mistake that results in a government fine, we will either fight to waive the fees or pay it ourselves. Every payroll provider should provide this as well.

Vet potential third-party payroll providers throughly

Handing over the keys to your bank account and sensitive information is scary. You should be aware of and understand all the safety measures your payroll provider uses. And all of your questions should be answered before you sign the contract. 

And now that you know what to ask and how to keep your business safe, you can fearlessly wander outside without fear of identity-stealing zombies! 

Having battled and conquered our share of zombies, invaders, gaffes, and snafus, we know what Whirks and what doesn’t. At Whirks, we measure our successes by those of our clients. 

Need more questions to vet your next payroll partner? ReadCheck out Five Crucial Questions to Ask Before Choosing Your Next Payroll Provider.