Intuit has signed a deal to acquire online payroll service PayCycle for approximately $170 million in cash, boosting the accounting and tax software vendor’s presence in the payroll business.

Jim Heeger

The deal, which is expected to close in the third quarter, will help Intuit build on its own payroll services for small businesses, including Intuit Online Payroll and QuickBooks Payroll, by buying the privately held payroll vendor.

PayCycle, based in Palo Alto, Calif., will also help Mountain View-based Intuit expand its payroll customer base to include more small businesses, accountants and financial institutions. Intuit said that the deal would “provide hundreds of thousands of accountants with the ability to easily and profitably offer services as stand-alone payroll providers for their small business customers.”

Nora Denzel, senior vice president and general manager of Intuit Employee Management Solutions, said that the acquisition would also enable Intuit “to develop and deploy the next generation of online payroll tools more quickly.”

The acquisition is part of Intuit’s connected services strategy, which is designed to give customers online access to its products and services. Intuit currently derives more than half its total revenue from connected services.

Intuit said that the deal would advance the company’s move into the Software as a Service market for small business. The company expects to accelerate the growth rate of its overall payroll business as a result.

PayCycle’s partnerships with financial institutions are expected to extend Intuit’s customer base and expand its partnerships for delivering payroll solution to more small businesses.

Intuit expects the acquisition to reduce its GAAP earnings by approximately 2 cents per share in the fourth quarter of fiscal year 2009, but the company does not expect the acquisition to have a material effect on fiscal year 2010 earnings. After the transaction is complete, PayCycle will become part of Intuit's Small Business Group. PayCycle CEO Jim Heeger will serve as a strategic advisor to Intuit for six months to help ensure a smooth integration of the two companies. He is Intuit’s former CFO.