Changing Payroll Companies Mid-Year: What to Know

Changing payroll providers can feel like something that needs to happen at the beginning of the year. After all, your current provider may already have months of employee wages, deductions, payroll taxes, and other records in its system.

But you do not necessarily have to wait until January to make a change. Businesses can switch payroll providers in the middle of the year. The transition simply requires some additional planning because your new provider needs accurate year-to-date payroll information to pick up where the previous provider left off.

If poor customer service, payroll errors, rising costs, or an outdated system are creating problems for your business, waiting until next year may not make sense. Understanding how a mid-year payroll conversion works can help you decide when to make the move.

Can You Switch Payroll Companies in the Middle of the Year?

Yes. You can change payroll companies at virtually any point during the year. A January 1 transition can be convenient because it coincides with the beginning of a new tax year. However, businesses change payroll providers throughout the year for many reasons.

The biggest difference with a mid-year switch is the amount of information that needs to move from one payroll system to another. For example, suppose you switch providers in July. Your new payroll company needs to know how much each employee has already earned during the year, how much has been withheld for taxes, what deductions have been taken, and other year-to-date information.

These records allow the new payroll system to continue calculating payroll accurately and help ensure year-end reporting reflects the entire year.

Why Do Businesses Change Payroll Providers Mid-Year?

Most businesses do not change payroll companies simply because they want something different. There is usually a specific problem that makes them start looking at other options.

Payroll Errors Are Becoming Too Common

Employees expect their paychecks to be correct and arrive on time. Repeated errors can quickly create frustration for employees and additional work for managers. You might consider another provider if you regularly deal with incorrect deductions, inaccurate paychecks, tax problems, or other payroll errors.

Customer Support Is Falling Short

Payroll questions sometimes need immediate answers. Waiting days for a response can be frustrating when payday is approaching or you are trying to resolve an issue with an employee's paycheck. Access to knowledgeable payroll support can be an important consideration when comparing providers.

Payroll Costs Have Increased

Payroll pricing can change as your business grows or adds services. You may also discover additional fees that were not obvious when you initially selected the provider. If your payroll costs have increased considerably, comparing providers can help you determine whether you are still receiving appropriate value for what you are paying.

Your Business Has Outgrown Its Payroll System

The payroll system that worked when you had 10 employees may not work as well when you have 50, 100, or several hundred. Growing businesses may need more sophisticated reporting, multiple payroll schedules, multi-location capabilities, employee self-service tools, timekeeping, benefits administration, and HR support.

Horizon Payroll Solutions provides payroll and tax processing services for businesses ranging from one employee to 1,000 employees or more.

Your Payroll and HR Systems Don't Work Well Together

Payroll is closely connected to many other workforce management functions. Employee hours need to flow into payroll. New hires need to be added to the system. Benefit elections can affect deductions. Employee information needs to remain accurate across different systems.

Integrated payroll, time and attendance, hiring and onboarding, benefits, and HR solutions can reduce the amount of information your team has to enter manually. Horizon offers solutions across these areas, including integrated timekeeping and payroll capabilities.

Is It Better to Switch Payroll Providers at the Beginning of the Year?

January 1 can be a convenient time to change payroll companies. There is no previous payroll activity for the new calendar year that needs to be transferred into the new system. This can simplify year-to-date payroll records and year-end reporting. But convenience does not necessarily mean you should spend several months dealing with a payroll provider that no longer meets your needs.

Another logical transition point may be the beginning of a quarter or immediately after completing a payroll. The appropriate timing depends on your payroll schedule, tax obligations, workforce, existing provider, and how quickly your new provider can complete the conversion.

What Information Do You Need to Switch Payroll Providers Mid-Year?

Your new payroll provider needs enough information to recreate your company's current payroll position accurately. The exact requirements depend on your business and payroll setup, but you should generally expect to provide information in several categories.

Company and Tax Information

Your new payroll provider will need basic information about the business, which may include:

Employer Identification Number (EIN)

• State and local tax identification numbers
• Company addresses
• Bank account information
• Payroll frequency and pay schedules
• State unemployment information

Businesses operating in several states or local tax jurisdictions may need to provide additional information.

Employee Information

Employee records need to be transferred or entered into the new payroll system. Information may include:

• Employee names and addresses
• Social Security numbers
• Pay rates or salaries
• Federal, state, and local tax withholding elections
• Direct deposit information
• Benefit elections
• Payroll deductions
• PTO balances

Take time to verify these records during the transition rather than assuming every piece of information in your previous system is correct.

Year-to-Date Payroll Records

Year-to-date information is especially important when changing providers mid-year. Your new provider may need records covering:

• Gross wages
• Taxable wages
• Federal income tax withholding
• State and local tax withholding
• Social Security and Medicare taxes
• Pre-tax deductions
• Post-tax deductions
• Employer contributions
• Bonuses and commissions
• Other taxable compensation

The IRS requires employers to maintain payroll records that include information such as employee identifying information, wage payments, withholding certificates, tax deposits, filed returns, and certain benefits and reimbursements.

Payroll Tax Records

You may also need records showing what payroll taxes have already been deposited and which tax returns have been filed. These records become particularly important if you switch near the end of a quarter. Your old and new payroll providers should clearly establish which filings and payments each will handle so something does not accidentally get filed twice, or not at all.

What Happens to Payroll Taxes When You Switch Providers?

Your payroll tax responsibilities do not disappear because you change payroll companies. Your business still needs to account for wages paid before and after the transition and ensure the appropriate federal, state, and local taxes are deposited and reported. This is one reason accurate year-to-date information is so important.

The new payroll system needs to know what has already happened during the year so that future calculations and reporting can be handled correctly. Employers should also understand that outsourcing payroll does not automatically transfer all tax liability to the payroll company. The IRS states that employers using payroll service providers generally remain responsible for federal employment tax obligations.

Before changing providers, establish who is responsible for any outstanding deposits, quarterly filings, amendments, and other tax-related tasks.

What Happens to W-2s After a Mid-Year Payroll Switch?

Changing providers does not change the requirement to report employees' annual wages and withholding accurately. Your year-end reporting needs to account for payroll from the entire year, including wages processed through your previous payroll company.

The IRS requires employers to use Form W-2 to report wages paid to employees. Before making a mid-year transition, ask your new provider how W-2 preparation will be handled. You should also verify that all necessary year-to-date wage and tax information has been transferred correctly.

Do not wait until December or January to discover that several months of payroll history are missing.

Switch Payroll Providers With Horizon Payroll Solutions

You should not have to wait until January to start looking for a payroll solution that better fits your business. Horizon Payroll Solutions combines payroll technology with personalized support to help businesses manage payroll and related workforce responsibilities. Horizon works with businesses ranging from one employee to 1,000 employees or more and serves customers across 40 states.

Our services extend beyond processing paychecks. Horizon offers payroll management, time and attendance tracking, HR support, hiring and onboarding, benefits management, and additional workforce solutions.

If you are thinking about leaving your current payroll provider, contact Horizon Payroll Solutions. Our team can learn more about your current payroll setup, discuss the solutions available for your business, and help you understand what will be involved in making the switch.

This content is for general information purposes and does not constitute tax or legal advice, nor does it address federal, state, or local law.  Employers should consult qualified legal and tax counsel regarding their specific obligations.