How does a payroll solution provider make money?

The per-month fees are so low -- how can a payroll service do all that work and still make money? Easy: interest.

Like any business, payroll solution providers 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. Services typically will wait until the last possible minute to transfer your funds, and keep any interest earned on your money.

To avoid this situation, you'll want to take control of the transfer schedule. Establish the date of funds transfer and be sure the service can furnish records of when the transaction takes place. You will then be confident that your provider is on the up and up, and that you are getting the most from their service.

Payroll solution providers also make 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 service 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. But make an effort to determine exactly what you need before accepting any package services, as they might not be appropriate for your payroll needs.

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.

The more insight you have on the profit source of payroll providers, the better you can choose an appropriate provider. Done wisely, you can save some money and then re-invest your savings back into your own business.

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