How to Find a Trustworthy Third-Party Payroll Provider

So you've decided you need help with your payroll and people, and you're considering a third-party payroll provider. But there's a lot on the line, right? Trusting someone with your payroll is a big deal. You want to have confidence that your employees will be paid correctly on time, every time. And you need to know that your payroll partner is correctly handling your money, your data, and your tax payments. After all, you're giving them access to a lot of highly sensitive information, including logins, passwords, bank account numbers, Social Security numbers, and other personally identifiable information (PII).

Trusting someone with all of this information and responsibility can be a little scary (ok…maybe really scary). The good news? There are reputable and reliable third-party payroll providers who can give you the service and peace of mind you need to help your business thrive.

So, how do you know you can trust a third-party payroll provider? And where do you start in your search for that trusted payroll partner? Well, here are five things you should look for:

1. Established reputation
2. Complete transparency
3. Proactive planning
4. Comprehensive security
5. Tax and compliance expertise

A Trustworthy Payroll Provider's Reputation Speaks Louder Than Promises

Trust in a payroll provider isn't built on promises alone; it’s built on consistent actions and systems that work. You'll want to learn as much as possible about a provider's reputation in the industry. This can give you an initial picture of how they deliver on their promises.

• Read customer reviews.
• Ask for references and case studies.
• Talk to current customers and ask them questions, such as:
  
  • Is the provider reliable?
  • How is their customer service?
  • Do they instill confidence?
  • Do they simplify processes?

Do your due diligence and research how your potential payroll partner follows through on their promises. After all, your reputation often precedes you, and it's no different in business.

A Trusted Payroll Partner Provides Transparency First, Communication Always

Speaking of verification, how many of you have ever been advised, “Trust but verify”? Yeah, me too. But in order to verify, you need visibility.

If you’re looking for a reputable payroll partner, they’ll provide full transparency about fund withdrawals and distributions. And they’ll use the Electronic Federal Tax Payment System (EFTPS), a free, secure service from the U.S. Department of Treasury that allows employers to make, track, 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.

You should always know exactly when your money is moving. Your provider should be crystal clear about when funds are removed from your account and delivered to your employees and when tax payments are made on your behalf. Communication and transparency are keys to building and maintaining trust.

Trustworthy Third-Party Payroll Providers Expect the Best, Plan for the Rest

We all know that life happens, and sometimes things don’t go as planned. You probably have questions like, "What if a mistake happens? What if one or more of my employees don't get paid?" Any worthy payroll partner will have plans in place to address payroll issues immediately.

Preparation Goes a Long Way

Preparing for the “what ifs” or when things go wrong is essential to building and maintaining trust. Here are a few things that demonstrate a third-party payroll provider's preparedness:

1. They carry Errors and Omissions (E&O) insurance. This liability insurance protects your business from loss of funds if a payroll partner makes a mistake—whether intentional or not.
2. They run regular background checks on all team members with access to client funds. They want to ensure the employees who have access to your accounts are the right people in the right seats.
3. They limit who has access to your funds. With proper access controls in place, only a handful of your provider’s employees should be able to transfer funds from your account to your employee’s accounts on payday.
4. They reconcile statements each day to verify accuracy. And they use a dedicated set of employees to do so.

Swift Solutions Start with Smart Planning

Not only should your provider be prepared for the what-ifs, but they should also have a payday contingency plan in place. What does this mean? It means your payroll partner will have an immediate plan of action to address any common payroll issues, including if one or more of your employees doesn’t get paid.

For example, should one or more of your employees not get paid on time or accurately (and depending on the scope of the issue), your payroll provider may calculate the amount owed to each affected employee and draft paper checks. If a larger group has been impacted, your provider may decide to send wire transfers to each employee’s account instead. And if this is the fault of your payroll provider, the provider's E&O insurance will kick in to prevent you from experiencing loss of funds. (One more reason you need to make sure they have it.)

A Trusted Payroll Partner Has Solid Security That Fosters Calm Confidence

Not all third-party payroll providers are created equal, and you certainly don't want to just hand your payroll over to anyone. After all, you're giving them access to a lot of PII (passwords, bank accounts, personal data). You need to be able to trust that your payroll provider is taking every known precaution to stop hackers from accessing your business’s information.

It's no secret that identity theft and fraud are on the rise. According to a recent study conducted by Debt.com, more than 4 in 10 (43%) have been victims of identity theft. In fact, Americans lodged more than half a million complaints of identity theft in just the first half of 2024.

Your payroll service provider should have an established set of policies and procedures to secure your data and protect your employees’ PII. You need to know that they're watching your back 24/7.

Trustworthy Payroll Providers are Tax-Smart and IRS-Savvy

We’ve all heard the saying: “Nothing strikes fear in the heart of a small business like a notice from the IRS.”

So, when you’re looking for a third-party payroll provider, make sure they are on top of their tax and compliance game. They should acknowledge any government notices received on behalf of your company, handle those notices immediately, and maintain detailed records in the payroll system.

You need to know what they will do to correct the situation if they fail to pay your taxes accurately, in full, or on time. (Spoiler: The answer is they should voluntarily contact the IRS on your behalf and take whatever action is necessary to resolve the issue.)

And if their mistake costs you penalties for late or underpaid taxes? They should either fight to waive the fees or pay it themselves.

One other thing: You’ll want to make sure the IRS has your business address on file along with the address of your payroll provider. This ensures you receive any time-sensitive notices, so you can verify that the appropriate steps are being taken to start the resolution process.

Final Thoughts on Finding Your Trusted Third-Party Payroll Provider

When you're shopping for a payroll provider, don't be shy about asking questions. A trustworthy provider wants you to ask those questions, and they’re ready to answer them. After all, they want to earn your confidence and trust. Ask and listen carefully to their answers. Are they clear and specific, or vague and evasive?

Trust isn't just about who makes the best promises. It's about who has the people, processes, systems, and safeguards to keep those promises. It’s about action that backs up those promises. When you find a provider who checks all these boxes, you’ll know you've found a payroll partner worthy of your trust.

Need suggestions for other questions to ask a potential payroll partner? Check out our article, Five Crucial Questions to Ask Before Choosing a New Payroll Provider.