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Can I change payroll companies in the middle of the year?

May 10th, 2023 | 7 min. read

By Shelby Betts

Not everyone will decide to switch payroll companies during the middle of the year, but if you are one of those business owners who bought a little more than you needed or are frustrated with your current partner, it may be something you're considering. Although you might not have planned to make this change during the middle of a calendar year, sometimes it’s better to throw in the towel than keep trying to make a bad partnership work. 

Look at it another way: life is about adjustments. It’s always about this time of year when I set aside my new year's resolutions. I finally admit to myself that, no, I will not be using that ridiculously expensive Instagram ad-sponsored drawer organizer/calendar combo that I bought back in January that would “eliminate all my disorganization” and “keep me 100% on track for my goals.” The promise of a new year always brings with it the hope of better, and we often make a lot of purchases that are totally aligned with us getting better, whether it’s professional work stuff or just personal goals of being healthier, fitter, etc.  

But now we are five months into the year, a whole quarter-and-a-half of business is behind us, and we’ve had time to execute on some of those New Years’ goals. We’re starting to book our beach travel and vacations and plan for our kids being out of school, so the last thing we all want is one of those expensive vendors or partners we signed up with in January to not be working well for us.  

Cue making a payroll switch in the middle of the year.  

Advantages of changing your payroll provider mid-year

There are several advantages that companies may gain when they change payroll companies during the middle of the year. Some of these advantages include: 

Improved technology and features: Changing payroll providers may allow you to access new technology, improved software, and additional features that can help streamline your payroll processes and increase efficiency. 

Better customer service and support: If you have issues with customer service or support with your current payroll provider, switching to a new provider can provide you with better support and more personalized service. 

Cost savings: By switching to a new payroll provider, you may be able to reduce costs through more competitive pricing or by eliminating fees associated with their current provider. For example, most software companies will increase their cost of service periodically throughout the year to adjust for inflation. By switching to a new company, you might have leverage to negotiate a better rate than what you were paying with your existing company. 

Increased compliance: Payroll regulations and tax laws change frequently, making it challenging for businesses to stay current. A new payroll provider can help ensure compliance with all relevant laws and regulations, reducing the risk of penalties or fines. Usually, as you make a transition, your new payroll company will review your salary, hourly, and overtime rules and make sure that you comply with federal and state pay regulations.  

Customization and flexibility: A new payroll provider may offer more customization options or flexibility to meet your business's specific needs and requirements. For example, maybe at the end of last year, you only had 25 employees, but you landed a big contract, and you’ve hired 25 employees for a total of 50. You may not know that you now have an ACA requirement, but as you transition to a new payroll company, they will be able to help you customize a solution designed for a 50-employee company, not just a 25-employee company.  

Better data security: If a business is concerned about data security, switching to a new payroll provider may provide enhanced security features, such as encryption or two-factor authentication, to protect sensitive employee data. 

Overall, switching payroll providers can provide a range of benefits, including access to new technology, improved customer service, cost savings, increased compliance, customization options, and enhanced data security. 

What are some mistakes to avoid when switching payroll companies during the middle of the year? 

Payroll is a critical function of any small business, and choosing the right payroll provider is crucial for smooth and accurate payroll processing. While businesses typically stick with their current payroll provider for a calendar year out of convenience, sometimes switching providers is a necessity. 

With the right planning and execution, switching payroll providers in the middle of the year can be smart for small businesses looking to improve their payroll operations. 

Changing payroll service providers in the middle of a quarter can be a complex process, and there are potential risks and mistakes that businesses should be aware of. Some potential mistakes that could happen during a payroll transition include the following: 

Common mistakes that happen during mid-year payroll transitions

Errors in employee data transfer: When switching to a new payroll provider, employee data, such as Social Security numbers and bank account information must be accurately transferred. Mistakes during this process can result in incorrect paychecks or even security breaches. 

Tax Compliance issues: Businesses must comply with federal and state tax laws, employee benefit regulations, and labor laws. During a transition, businesses may experience compliance issues, such as missed tax filings, incorrect tax withholding, or benefits mismanagement, resulting in legal penalties or lawsuits. It's important that you know which payroll company will be handling your quarterly 941. Will your old or new payroll companies ensure that quarter is filed? 

Delayed paychecks: Transitioning to a new payroll provider may cause a delay in employee paychecks, causing employee morale issues and even legal repercussions. As you transition to a new payroll company, you will also introduce your employees to a new employee self-service option so they can view their pay stubs, request PTO, and make direct deposit changes. Many times though, your employees might forget to download the new app, or miss the training on how to use self-service, so you’ll want to be prepared to provide some educational opportunities for all staff so that they know about the change.  

Like Kind Transitions vs. Correcting your Issues: A new payroll company is going to start your transition to their service by making a “like/kind” conversion from your old payroll software to your new software. If you have been consistently frustrated by your PTO policy accruals, for example, because they aren’t acquiring correctly, you will need to make sure you discuss this with your new payroll company so they can build new accrual rules for you, assess how it’s working, or correct the issues of the old rules and permissions. This may sound like a small example, but the last thing you want to do if you’re frustrated by your current partner is carry that same mistake over to your new partner. Be upfront and honest about the issues you are having so that your new partner can identify them. 

Cost overruns: Transitioning to a new payroll provider may incur unexpected costs such as software upgrades, implementation fees, or employee training. You will also want to consider any insurance policies or other tools you are using besides payroll services with your old payroll company. Do you have workers’ compensation insurance coverage through your company? Be sure to check with your new partner to ensure they can take over your policy or help you find a new policy at a cheaper price.  

To mitigate these risks, you should plan the transition carefully, ensuring that employee data is accurately transferred, the new payroll provider is compliant with all regulations, and employees are informed and trained. Additionally, you should allocate enough time and resources for the transition and work with the new provider to minimize any potential issues. 

How would mid-year implementation work if I wanted to change? 

The time it takes to implement a new payroll company can vary depending on several factors, such as the size of your business, complexity of your payroll processes, and the specific process of your new company. However, the average time it takes to implement a new payroll company is between four to six weeks. Most payroll companies will want to start processing your payroll before the end of a calendar quarter so they can file your quarterly taxes. Be sure to plan for 2-3 implementation calls and 2-3 hours of live training with your new payroll company as you transition. 

Here is a general timeline for a payroll implementation: 

Pre-implementation planning: Before implementing the new payroll company, you should plan and prepare for the transition by defining your payroll requirements, gathering necessary data, and establishing clear communication with the new provider. 

Implementation kickoff: Once the pre-implementation planning is completed, the new payroll provider will initiate the implementation process. This includes setting up new payroll accounts, transferring employee data, configuring payroll settings, and testing the system. Often, during this stage you will send over a voided check from your payroll bank account, sign necessary documents like Forms 8821 and 8655, as well as provide a login to your old payroll system that your new company can access. 

Employee onboarding and training: During this phase, you must train their employees on the new payroll system, including how to use the new platform and how to access their pay stubs and other payroll information. Often, your new payroll company has great resources like welcome emails, download instructions, and even live training available for your employees. Be sure to ask your implementation manager what “employee-facing” resources they have to make transition easier.  

Go-Live: Once the new payroll system is configured and tested, the payroll provider will run your first payroll cycle. This is typically the most critical phase, as any errors or issues may cause payroll delays or incorrect paychecks. This is always a scary day for owners because if someone doesn’t get paid correctly, you might have to find alternative ways to pay them or run an off-cycle payroll to ensure they get paid. Be sure to overly communicate with your new payroll company about this date, and if something goes wrong, be sure you have a direct phone number and email for your implementation team so they can resolve the issue quickly. 

Post-implementation support: After the new payroll system is live, the payroll provider will provide ongoing support and maintenance to ensure that the system runs smoothly and any issues are resolved quickly. This is often the time where your new company will also bring on new services for you and address any of those frustrations and kinks you had with your old company. 

It's important to note that this is a general timeline, and the specific timeline for implementation will vary based on the business's specific needs and the payroll provider's capabilities. Additionally, proper planning and communication can help ensure a smooth and successful implementation with minimal disruptions to the business's payroll operations. 

Are you ready to find a new payroll partner but not sure how to get started? 

There are several resources available for companies looking to find a new payroll partner. Here are some places to start: 

Referrals & Google Reviews: Ask other business owners or industry colleagues for referrals or recommendations for payroll providers they have worked with in the past. This also might seem obvious, but you'd be surprised at how well it works: It’s also a great idea to search for the top 5 payroll companies in your area and read Google reviews.  

Industry Associations: Many industry associations offer resources and directories of service providers, including payroll companies. Be sure to go online to your business association and see what partnerships and discounts might be available to you through your membership. 

Online Directories: Several online directories can help businesses find payroll providers based on location, size, and industry. Examples include Capterra, Software Advice, G2, Better Business Bureau, Clutch.Io, and Thumbtack. 

Local Chambers of Commerce: Local chambers of commerce may have lists of payroll providers or can provide referrals to payroll companies in the area. 

Industry-specific events and conferences: Attending industry-specific events and conferences can be a great way to connect with potential payroll providers and learn more about their services. 

Businesses should consider cost, customer service, ease of use, compliance, and reputation when evaluating potential payroll partners. It's also important to request demos and talk to references to ensure the provider's services align with the business's specific needs and requirements. 

In summary, changing payroll services during the middle of the year can have both advantages and disadvantages. Some benefits include improved service, cost savings, and increased efficiency. However, there are also potential drawbacks, such as implementation costs and errors or compliance issues. 

Despite these potential downsides, if a business is experiencing issues with their current provider, it’s a good idea to make a change to avoid further frustration. Don’t let the fear of change or the status quo keep you from making a needed change.  

By carefully planning the transition and selecting a new provider that meets their specific needs, businesses can minimize the potential risks and reap the benefits of a new payroll service. If you’re ready to start exploring, check out our article, How to switch payroll smoothly