Switching Payroll Companies: An 8-Step Checklist

Switching payroll companies feels risky because payroll is one of the few back-office tasks where mistakes directly and immediately affect people.

Nearly half of workers say a late paycheck makes it “very difficult” to meet financial obligations, according to the National Association of Women Business Owners. And 49% of employees say they’ll look for a new job after just two payroll errors.

You’re right to be cautious, but switching payroll companies is really more of a data transfer than a rebuild. You already have the employee records, pay history, and tax details. You just need to move them from one provider to another.

With a plan and the right timing, you can make the change without a single late or incorrect paycheck.

🌟 KEY TAKEAWAYS

Two things tend to go wrong when switching payroll companies: year-to-date totals that don’t carry over correctly and confusion over who files taxes around the switch.

Start on the first day of a new calendar quarter or year, and on the first day of a pay period, to make the transition easier.

Run a parallel payroll on both systems and make sure the totals match before your first live paycheck on the new system.

Is it hard to switch payroll companies?

Switching payroll companies is manageable when you understand the risks, and those tend to come from two places:

Year-to-date (YTD) totals don’t carry over correctly

YTD totals are the running sums of each employee’s wages and withheld taxes since January 1. Your new payroll provider uses them to calculate tax limits and produce accurate W-2s at year-end. Subsequent paychecks and tax forms can have errors if the totals are wrong.

Confusion over who files taxes around the switch

Your old payroll company typically files for the pay periods it processed, and your new provider handles the rest. This can cause confusion when you switch mid-quarter.

Payroll providers handle a split quarter differently. Some may hand the full quarter to the new provider, and others may file a partial quarter themselves.

When you make a switch, confirm the following in writing with both providers:

A filing can slip through the cracks or go out twice if the hand-off date is unclear.

The 8 steps to switch payroll companies

Here are eight steps to fix both problems that tend to pop up when switching payroll companies. Work through these steps in order, because each one feeds the next.

1. Review your current contract

Your contract should spell out any required notice period, fees for leaving, and the date your access to old records ends. Also check for auto-renewal, since that can lock you in for another term.

Take note of the access date. You’ll need it for step 4.

2. Pick your switch date

The best time to switch payroll providers is the start of a new year. You begin the new year with zero YTD totals, so you don’t have to move information between systems, and each provider issues a whole year of W-2s.

The next best time is the start of a new quarter, so each provider files whole quarterly payroll tax returns. Your new provider will need accurate YTD totals from your prior provider to apply yearly wage limits on Social Security and unemployment taxes and issue W-2s for the whole year.

Never switch in the middle of a pay period. Otherwise, two systems will process paychecks for the same pay period.

Give yourself 4 to 6 weeks to sign up with your new payroll provider, enter payroll data, and test the new system before your first live payroll. It could take longer if you have a large team or have employees in several states, since each state adds tax accounts and rules. The timing also depends on your old payroll provider. If they’re slow to respond to requests, late records can hold up setup.

3. Choose your new provider

Look at four factors when comparing potential payroll companies:

FreshBooks Payroll powered by Gusto covers all four. It files and pays your federal and state payroll taxes and issues W-2s and 1099s. Our support team can help if you get stuck, and because payroll lives inside your FreshBooks account, every pay run posts to your books automatically.

FreshBooks Payroll costs $40 per month plus $6 per month for each employee, and is in addition to the cost of your FreshBooks subscription.

4. Gather your payroll data

Split this step into three parts:

Part 1: Data you already have

Part 2: Data you have to request from your old provider

Ask for the following information in writing before your access to old records ends:

Part 3: Contractors

For any 1099 contractors, collect a W-9 form and this year’s payment history. Contractors aren’t on your payroll, but you still report what you paid them to the IRS at year-end.

5. Set up the new system

Enter your tax accounts, direct deposit details, deductions, and pay schedule. Double-check the following before your first pay run on the new platform:

6. Tell your team

Let employees know two or three weeks before they receive their first paycheck from the new system. Focus on what changes, such as a new login, and what stays the same, such as their pay rate, deductions, and pay date.

Here’s a sample message you can tweak to fit your company:

Hi team, starting with the pay period ending [date], we’re moving to a new payroll provider. Your pay rate, withholding, and pay date stay the same. You should receive an email from [New Provider] with instructions for setting up your login and confirming your direct deposit. Please respond by [date]. Your old pay stubs will still be available from [Old Provider] until [access date], so download any you want to keep.

7. Run a parallel payroll

A parallel payroll means you run the same pay period through both systems and compare the results before you trust the new one. Your old system still pays employees. The new system is a dress rehearsal.

For example, say you have one employee who earns $2,000 per pay period. Here’s what your parallel pay run might look like:

Every line matches, so the new system is ready. If it shows $206 in federal income tax withheld and $1,571 in net pay, stop and investigate. Keep in mind that a one- or two-cent rounding difference, or slightly different labels for the same deduction, is normal. Look into dollar differences in gross pay, withholding, net pay, or YTD totals, and any missing deductions.

If the numbers don’t match:

If your provider can’t run one, ask how to preview a pay run without paying anyone.

8. Go live and close the old account

Before you cancel, confirm your old provider filed the final returns and made the final tax deposits. Then download all records you might need later, such as payroll registers, tax filings, pay stubs, and W-2s. The IRS requires you to keep employment tax records for at least four years.

Done looks like:

Your payroll switch checklist in 8 easy steps

Here’s the whole process in one checklist:

Before you switch

Move your data

Go live

Ready for a change?

Switching payroll companies takes a few hours of prep spread over a few weeks. That’s a manageable project, especially when you have a plan. So choose your new payroll provider carefully, take care moving your data, and compare totals before you trust the new system.

If you’re ready to handle payroll right from the comfort of your FreshBooks account, talk to a specialist about FreshBooks Payroll powered by Gusto.

Frequently asked questions

Restate the question in the first sentence of each answer. Two sentences each. Do not re-explain what the body already covered.

How do I switch payroll companies?

Choose a new provider and start date, then move your records over. Test the new system before your first live payroll so you can work out any kinks. The 8-step checklist above walks you through each move in order.

What data do I need to switch payroll providers?

To switch payroll providers, you need each employee’s details and year-to-date totals, your tax account numbers, and your deduction and pay schedule information. FreshBooks Payroll also handles 1099s, so gather W-9s from your independent contractors, too.

Do I need to notify employees when switching payroll?

Yes, you should notify employees when switching payroll providers, because they need to set up a new login and confirm their direct deposit details. Some states also require advance notice for pay changes, so check with your state labor department.

Will switching payroll providers mess up my W-2s?

Switching payroll providers shouldn’t mess up your W-2s. If you move mid-year, make sure you load accurate YTD numbers in the new system.

Does it cost anything to switch payroll providers?

Yes, switching payroll providers can cost money. Some payroll providers charge an exit fee if you cancel before your contract term ends. They may also charge for the reports or data exports you’ll need to get your historical wage and tax records when you leave. Ask both your new and old payroll providers for a full fee list in writing before you give notice.