The End of Days: Terminating Your Payroll Provider

October 26, 2023
Jim Kohl

Head of Payroll Operations

by 
Jim Kohl

Okay–“End of Days” might be a little dramatic, but when an employer decides to leave their payroll provider, it is a sad situation. In the payroll world, we refer to this process as “termination.” There are many reasons an employer decides to leave a payroll provider, ranging from pricing to service.  

While folks cancel all kinds of services all the time, switching payroll providers and canceling your current payroll is not as simple as it sounds. Let’s take a look at this process, some of the complexities, and how a payroll provider approaches being terminated. 

Authority

As you well know, almost all employers use a payroll service to file their employment taxes, pay their employees, and file their quarterly and annual taxes. In order to do this, payroll providers must be authorized as the reporting agent for the employer. Payroll providers receive this authorization through Power of Attorney forms (POA) or Third Party Administrator forms (TPA). When a payroll service is canceled, the employer will sign these forms with their new provider, granting them authorization. 

Records 

When leaving a payroll provider, there is also a lot of information that needs to be moved. This includes all quarterly and annual reports and even employee withholding forms and paystubs if not already stored elsewhere. You’re not just leaving a payroll provider–you’re also leaving your system of payroll records. 

If an employer is making the decision to leave, it’s important for them to be upfront about this decision. In many cases, the payroll provider can ensure you are pulling the correct forms and are set up for success at the new provider. They may try to retain your business in the process, but at least they will ensure a smooth transition. 

Timing

Timing of leaving a service is really important to get right. Since payroll taxes are filed quarterly, leaving a service in the middle of a quarter could result in an additional collection of unpaid liabilities. There could be a lapse of time between your two payroll providers and information might get lost along the way. Additionally, the timing of leaving a service between pay periods can be tricky. Running payroll on system A for a Friday check date and then ensuring all data is ready to go on system B by the following Friday can be a tight turnaround. And at the end of the day, the most important thing we can do is make sure people are paid correctly and on time.

The beginning of a new year can be a great time to plan to switch payroll providers because it’s a clean start. The migration of wages is no longer needed and you just need to ensure the demographic data is set up. 

Notification 

When leaving a payroll provider, it’s very important to let your current provider know that you are leaving–not just to obtain accurate records but also to ensure your service is correctly shut down. You’ll need to let them know at the very least the type of payroll provider you are going to. If an employer is leaving for another payroll service, the original payroll service will want to completely shut them down and will no longer file on the employer's behalf. However, if the employer is leaving and going to a professional employer organization (PEO), then it is likely that the employer WILL want the original payroll service to file through the end of the year. 

Leaving one payroll provider to go to another payroll provider without notification can lead to some serious issues. This can include duplicate (quarterly or annual) filings depending on the time of the switch. Employers who are considering switching payroll providers should always weigh the pros and cons carefully before making a decision.

I’ll be back. 

Even when an employer terminates with their payroll service, that doesn’t always mean it’s the end. It’s not uncommon to switch payroll providers for a deal that is too good to be true. But inevitably, some employers will return to their previous payroll service. The reinstatement process also has a few complexities, so let’s save that for another time. 

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