Building a Profitable Payroll Business

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Just a few years ago, when clients asked their accountants about payroll services, most would have responded, "I don't do payroll." The most common objection was that payroll is not profitable or that the business takes too much time and clients don't want the service. But the tides are turning. Whether accountants love or hate payroll, their clients need, want, and expect them to be involved. In fact, they tend to get involved even when they don't provide the actual processing.

"ADP and Paychex use clerks, but if a question comes up with a customer's payroll-they tell them to call their accountants. It always comes back to us, so it should start and finish with us," says Mark Abramson, director of tax at Merrick, N.Y.-based Roberts, Rick & Moses.

The big service bureaus are also competing with accountants, says Michael Alter, senior vice president of Skokie, Ill.-based Surepayroll.

Partner Insights

"This is creating concern among the accounting community. The larger services are offering 401(k) plans now-they're coming after the accountants' clients," says Alter. But accountants are more capable of responding to that challenge with the new technologies and services that have become available.

"It is now easier for accountants, where before it was time-consuming and complicated," he adds.

For example, most payroll applications can export data to QuickBooks and other accounting packages, eliminating the need for duplicate data entry. Moreover, the number of payroll offerings have increased as new players have emerged because of their ability to offer Internet-based processing with self-service programs, also making it easier for clients to use payroll applications.

More than ever, vendors are providing programs that enable accounting professionals to make money from payroll. Moreover, accounting firms can provide expertise that the service bureaus lack, along with the personal attention clients crave.

London, Ky.-based Greene & McCowan has been in the payroll business for several years. The firm uses Payroll Solution from Dexter, Mich.-based Creative Solutions, often offering the service via CSI's NetClient Web-based client portal. It has 42 payroll clients, including businesses with large payrolls, such as 60 McDonald's restaurants that generate about 2,500 payroll checks per week.

"With the implementation of NetClient in 2001, we were able to move some of our manually processed payrolls to the Remote Data Entry worksheet, which allows us to pull information into the payroll software automatically," says Ryan McCowan. "This created efficiencies allowing us to process payrolls in a third of the time."

Many of the 6,000 Creative Solutions customers that offer payroll services have found the portals to be an important addition to the tools used in the payroll business, says Jack LaRue, CSI's vice president of marketing.

"The combination allows users to calculate payroll, print checks, and make payments through direct deposit," says LaRue. He notes that employees can view pay stubs through Web Employee, introduced during the fall. Web Employee provides employees of an accountant's clients with read-only access to payroll information. The Payroll Solution starts at $1,500.

McCowan says that customers also like buying payroll as part of a one-stop shop for services that include write-up and tax preparation. Because of his firm's combination of services, McCowan does not know how much revenue payroll brings in. But he adds, "It's not difficult to compete with the larger payroll service bureaus because of the better service we can provide. The market for payroll is competitive but not price competitive."

He provides this example: The firm picked up a new client last year that was dissatisfied with its large payroll service bureau. The client didn't care about the price the service bureau was charging her, which was $53 a payroll for eight employees, but wanted more personal attention and the ability to reduce the time it took to complete payroll. McCowan explains, "We set her up on a completely paperless solution with a client portal. Her data is imported into our system and we post the payroll check to be printed to the client. It takes us less than five minutes to process this payroll."

Like other CPA firms that have entered the payroll business, McCowan has established a separate company, Paycheck Solutions, to handle payroll. "We believe by differentiating the name from our firm name, we will be able to better market the service to clients who might not want to change their accountant, but want payroll services," says McCowan.

Service Bureaus Target Accountants

Even the national payroll processors see the need to offer accountant-specific options.

Roseland, N.J.-based ADP launched its wholesale offering in July. "We've seen an increase in accountants wanting to get into payroll, but we've found most don't want to have to create the expertise in their offices," says Richard Watson, vice president of product management and accountant services.

The wholesale system enables accountants to input their clients' payroll data into ADP's Web-based application, EasyPayNet. Then, ADP, which charges 30 to 40 percent of list price, calculates the payroll taxes and handles all related deposits and filings.

"We provide the applications, services, and back-end infrastructure, but the accountant can still have on-going contact with their clients and not have the associated costs. They get business, maintain contact, and acquire a revenue stream with no liability," adds Watson.

Accountants can also print checks and reports from their office or have ADP deliver them directly to their clients. ADP bills accountants for the services, and in turn, the accountants invoice their clients.

Meanwhile, Rochester, N.Y.-based Paychex has teamed up with AICPA Business Solutions.

"We haven't seen many accountants who want to be more involved. We've seen outsourced payroll grow. However, we want to be able to align our products with accountants, and that's why we've teamed up with the AICPA," says Steve Beauchamp, director of product management. CPAs who enroll in the AICPA program can offer Paychex payroll services to their clients. Customers referred by the CPA who sign up for six months of service with a money-back guarantee receive a month's processing for free.

Beauchamp feels the real value is taking the payroll burden from CPAs, so they can focus on other business areas. "CPAs enrolled in the program receive access to their clients' payroll information to increase interaction with clients, free CPE seminars, newsletters, and monthly updates to educate them of any payroll changes," adds Beauchamp.

Making a Profit

Accountants involved in payroll will unanimously agree that the major advantages of offering payroll services are that it's profitable and if done right, it can provide a recurring revenue stream.

It's a business that is also easily sold-ADP and Paychex will often buy the business for up to three times more than the gross annual fees, and low-end staff can perform the job with very little high-level supervision.

In the last year, several vendors have introduced accountant-specific products that are designed to spur this trend.

"At the highest level, payroll is about enhancing client relationships. When accountants are involved in payroll, they can offer better value to customers at a fraction of the cost," says Rene Lacerte, CEO of Palo Alto, Calif.-based PayCycle.

Launched in September, its PayCycle Wholesale Program is priced at $14.99 per client, per month for the first five clients and $9.99 per month for each additional client. The price includes direct deposit services, federal and state electronic tax payments, and filings. There are no additional per-payday or per-employee charges.

"When we came up with the program, we wanted it to be an end-to-end solution. We wanted accountants to be able to understand how to build a profitable payroll business," says Lacerte.

PayCycle has 14,000 customers, with 30 percent of these involved in the Wholesale Program, the fastest growing part of the business.

PayCycle's Web-based system has always offered dual accountant/client access through its Client Retail Program for Accounting Professionals. This service enables accountants to control client payroll without doing all the work.

For example, clients can create paychecks, and the accountant makes any necessary withholding adjustments before the client prints out the paychecks. The wholesale program gives accountants even more control, Lacerte says.

PayCycle has also added paycheck printing on blank check stock, and supports multi-state withholding calculations as well as the new 2004 Form W-2 formats that can be printed on perforated W-2 forms or plain paper. Data can also be exported to QuickBooks, QuickBooks Online, and Microsoft Money.

Dwayne Eichenbaum, president of Accounting Edge of Roseland, Pa., chose PayCycle because, "I was looking for a way to outsource most of the work, but still have control. I wanted electronic features at a minimal cost, and PayCycle had the most services for the price," he says.

In just over two years, Eichenbaum has acquired 60 payroll clients that contribute 20 percent of the firm's revenue. PayCycle has made the job easier. "PayCycle allows me to automate payroll, and has reminders of when everything should be filed and paid," he adds.

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