After years of languishing as a peripheral accounting service, payroll has become one of the hottest trends adopted by CPA firms.

Payroll has traditionally been a dividing factor among CPAs. Some firms found it to be a profit center, while others eschewed it as a mechanical, high-risk endeavor best referred to a service bureau.

The providers of payroll services responded accordingly. Payroll services were available from banks and insurance agencies. Some services worked directly with clients and offered only minimal involvement by the CPA firm. Other services catered to CPA firms that wanted to manage payroll on behalf of their clients, but wanted to outsource the mechanics. And finally, some CPA firms simply invested in the hardware, software and expertise to run their own payroll service bureaus.

But a combination of market trends and technology is changing all of that, and driving a dramatic resurgence among CPA firms that offer payroll services to their clients.

"We have had an outstanding year, with tremendous growth in both CPA firms getting into payroll, and existing firms processing more clients," said Sal Hazday, vice president and general manager of specialty products for ADP's Small Business Services division. "We are seeing accounting firms becoming more aggressive in their growth, and we are rolling out new tools and services to meet that demand."

"We have seen these accountants growing their payroll business by 25 to 30 percent year over year," said Dr. Chandra Bhansali, president of AccountantsWorld. "In the past year, we have seen this level of growth again. Roughly two thirds of our customers are accountants who are growing their payroll business among existing clients, and the other third are accountants getting into the payroll business to expand their service base."

For accounting firms, the traditional driving force behind payroll services has been client demand. Clients have asked that their CPAs, already involved in after-the-fact payroll, provide oversight of payroll and benefits. That force has not diminished, but other factors are also beginning to drive a new level of demand.

"There are a series of things that have changed that affect whether or not to do payroll," said Michael Alter, president and chief executive officer of SurePayroll. "These include the convergence of benefits and payroll, the impact of the Patient Protection and Affordable Care Act, and a better understanding of how cloud-based SaaS services affect the ability to perform payroll efficiently. Added to these is a heightened level of competition in the accounting marketplace."

Finally, a driving force may be the emergence of client accounting services among CPA firms. CAS is a service line in which the accounting firm serves directly as the client's accounting and finance departments. Under this emerging model, payroll becomes an integral part of the service mix.

"We are watching to see how client accounting works out over the long term," said Andy Childs, vice president of marketing at Paychex. "It is still a very emerging area of practice, and most accounting firms are just getting started at it. We may also find that the enthusiasm for these services may wane when the economy improves, or it may continue to grow. Either way, it is definitely a trend worth keeping an eye on."

The consensus is that payroll has seen a series of fundamental shifts - in the regulatory environment, in client demand, in its core technologies, and in the options available to accounting firms.


The regulatory environment

Much has been written about the impact of the Patient Protection and Affordable Care Act, which is now beginning to affect businesses of every size. But it is not the legislation itself driving concerns -- it is compliance with the employee "trigger points" that may require compliance, including the requirement that firms with more than 50 full-time employees offer health care benefits.

"The real challenge in compliance is not with the PPACA directly, but in how the law is interpreted in regulations going forward," said Mark Strippy, senior vice president for payroll operations at CompuPay, a BenefitMall Company. "It is going to be extremely significant for CPAs, because payroll and employee benefits have historically been viewed as two different processes. With the PPACA, that is no longer the case. Now they have to be viewed as two parts of the same compliance process."

"The government has become our best salesperson," agreed SurePayroll's Alter. "Uncertainty around taxes and other issues related to payroll and benefits is increasing, and the penalties for being wrong are increasing. Companies are worried about compliance issues, and looking to their CPA firms for assistance."

"There has always been some level of uncertainty about regulation in previous years," said ADP's Hazday. "In most years, the issues are resolved early on, and the level of change is manageable. This year, the changes have been much more substantial, and are driving opportunities for accountants that will likely last for many years."


Client demand

Part of the increasing attention to payroll and related services is that payroll has become a leading indicator of other problems in a business. While it is still true that cash flow can be the life or death of a business, often the first indication of cash flow problems will be irregularities in payroll and payroll taxes.

Payroll has shifted from a labor-intense, high-risk and low-margin business into a critical business indicator that can make or break a business.

"The mentality that holds that payroll is too difficult doesn't hold up under examination," said AccountantsWorld's Bhansali. "After all, accountants must already have the expertise to perform after-the-fact payroll. The real challenge is not in how to do payroll, but how best to meet the needs of clients for help with emerging business issues in human resource management."

But with renewed interest in payroll, the market for services has become more competitive, and is demanding a more flexible approach by CPAs. It's not just a matter of gaining new clients and expanding the revenues of the firm. For most accounting firms, it is also critical to client retention.

"A firm that has been asked by a client to do payroll, and has not responded effectively, risks losing that client," said Alvin Young, senior marketing manager for payroll at Intuit. "For them, payroll is a way to make their client service more 'sticky,' and thus harder for the client to leave. Most do payroll at some level, but what they do is driven by the needs of the clients."


Getting cloudy

It is also driven by the technologies of cloud computing.

Performing payroll in the past required a massive investment in time, expertise and staffing. For firms that didn't want to make the investment, the best option was to refer the payroll out to a third party, keeping a more nominal hand in the game. Services arose to help with these two extremes, and a host of other options that fell somewhere between the two.

But that changed with the rise of cloud computing.

"Without the cloud, payroll would be a much smaller part of accounting," said Bhansali, who founded AccountantsWorld to pioneer the SaaS concept. "Beginning in about 2005, we began to see that the cloud would change how accounting was performed. It allowed accounting services like payroll to become much more efficient than they could be in the past. It allowed accountants to substantially reduce the time investment required to do payroll well. And it has helped to make payroll a higher-margin service."

"Movement to the cloud is a major change for any CPA doing payroll business," said Alter. "It's not just that technology has changed the playing field. It also reminds accounting firms that they must be flexible, able to shift strategies as their client needs change. Cloud computing has brought about a new set of best practices built around strategies that are more efficient and result in fewer errors. We're seeing these best practices emerging, built around the cloud, because they deliver better accounting and better service to clients."


Options for accounting firms

If the regulatory environment, the technology and the needs of clients have changed how payroll is done, vendors who offer support have extensive advice and support tools that can make the effort easier, particularly for firms just spinning up to handle more payroll business.

"Being able to tell your clients that you will handle their payroll needs is a powerful thing," said Louie Calvin, product manager for Accounting CS from the Tax and Accounting business of Thomson Reuters. "But it requires forethought and planning. Payroll services require a different skill set. They require sophisticated software, a different level of staff, and consideration of the right personality type. You even need to consider marketing the payroll service differently than other services with a powerful brand. That is why we have partnered with Sean Manning, of Manning & Co. PC in Colorado, to teach a two-day leadership course on this topic. It's hard to deliver any new service, and we want to help accountants put the right plan and the right infrastructure in place for their payroll service."

"Start by taking a fresh look at the companies in the business, and what they have to offer," said Intuit's Young. "Look at the reputations of the companies - some small vendors are new to the business, with no track record. If you have employees of your own, try it on your own firm first. If you are a sole practitioner, try it out on a small client who is flexible and will work with you. Then strategically expand from there. Do not tackle the complicated clients until you get confidence and efficiency at the process."

Added Paychex's Childs, "Using a hosted solution remains a very viable option, because it brings an experienced and proven partner to your payroll team."

"Compupay and BenefitMall are focused on being able to help our partners to be in compliance, with education and toolkits that help them to interpret the regulatory and legislative issues that affect small to medium- sized businesses throughout the country," said Strippy. "We have introduced a new tool on our Web site to assist in that. Payroll 101 provides insights into the most fundamental and critical components of payroll, breaking ground with a complete, Web-based payroll tool that will help CPAs, their clients and benefit brokers evaluate their own payroll and compliance needs."

"We are very passionate about payroll right now," added Thomson Reuters' Calvin. "Today, there are more resources than ever before to help CPA firms in developing a profitable payroll practice. The knowledge we have gained from previous generations of payroll solutions, and our experience with thousands of CPAs and their clients, is the foundation for the future of payroll."

And what is the next frontier? Firms point to further integration of services, particularly melding more traditional benefits and personnel functions.

"Look at more than just payroll," said ADP's Hazday. "What you must be able to offer is an integrated platform that includes human resources management, workers compensation, time and attendance, and retirement programs. And you will have to build and market that practice - you can't just build it and expect them to come. Most of all, price the product to make it profitable. Pick a partner that can help you manage both the expense and revenue side of your business, because a service that is not profitable is not sustainable."

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