Switching Payroll Providers: The Small Business Checklist

When it comes to payroll, for most employers, long gone are the days of paper ledgers and physical checks. Increasingly, organizations are deploying new solutions that promise enhanced capabilities to automate and streamline payroll runs and allow growing organizations to scale quickly. 

But switching to a new payroll company from an old provider isn’t something to do on a whim. It requires thoughtful deliberations about why a change is necessary, which new provider best meets your needs, and how to ensure a smooth transition. Here are the top reasons that send employers looking for an alternative, steps for a seamless switch, and how to avoid common pitfalls. 

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Why do businesses switch payroll providers?

Relationships between organizations and their various service providers can sour for any number of reasons. Poor customer service, glitchy or aging technology, rising costs, compliance concerns, and mistakes are all common reasons that send organizations looking for a new solution.

Sometimes with current contracts, it’s simply an overpromise and underdelivery on service and quality, said Matthew Burr, founder of human resources consulting firm Burr Consulting. In other cases, a new HR leader or payroll professional may inherit a system that is no longer working, said Amy Spurling, CEO and founder of Compt, a lifestyle benefits platform. 

“Certain payroll providers are good up until a certain size of employee, and then they start breaking,” Spurling said. “It wasn’t that the platform was bad. We just got too big for it.”

Even if you’re relatively satisfied with your current provider, Sarah Ruszkowski, director of HR shared services for outdoor living company Dometic, recommended taking a look at what the market offers every three years. “It’s a good time to at least look at where you're at and compare it to what’s out there,” she said. 

Beyond improved efficiency, switching providers can offer stronger integrations with existing systems or an opportunity to consolidate multiple HR functions — such as payroll, performance management, and employee engagement — into a unified solution. Lattice Payroll, for example, provides employers with a platform, not a point solution. 

7 Steps for Switching Payroll Companies

HR professionals already have a lot on their plates, and making the switch to a new payroll software or service can be time-consuming. That’s why a well-structured process is crucial to ensure a smooth transition. Here are seven key steps to streamline the switch and avoid disruption. 

1. Assess current provider performance.

Gather the data to determine your pain points — from the annoying to the critical — that might justify a cancellation with your current provider. For example, does it take a few hours for customer service to answer a question? Does your current technology slow down or become less responsive during peak times of year? Is it regularly making mistakes, such as with time tracking, payroll tax, benefits administration, or state tax calculations? 

I want a payroll platform that is going to do the filings for me so that I don't have to worry about what my tax rate is...That is [very] high on my list.

Then, think about your organization’s business needs in the near future. Would it be helpful to integrate your payroll service with other people management solutions? Could your employees benefit from access to an app where they can log hours, double-check their paychecks, gain easy access to tax forms, and take advantage of other self-service features? Is your organization growing into new regions and states, which requires navigating more labor laws and compliance requirements? 

Spurling, who has worked with companies in many states and countries, said, “I want a payroll platform that is going to do the filings for me so that I don't have to worry about what my tax rate is.” She explained, “I don't want surprise tax bills from municipalities. And so that is very, very, very high on my list.”

2. Choose a new provider.

To evaluate the payroll providers on the market, HR professionals must do their own due diligence to consider a provider’s feature set, pricing, customer service offerings, scalability, and compliance support. In a recent search for a new software provider for his executive recruiting business, Talentscape, Burr sent a five-page list of questions that he wanted answered during a demo call with the solution, based on his particular needs. 

At the same time, ask for referrals, Burr suggested. The provider will connect you with current users, but Burr said it’s also important to reach out on your own to colleagues who’ve worked with various providers to learn more about their experiences. They can provide unfiltered reviews of the product they’re using, including what they like, what they don’t like, and how implementation went. 

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3. Set a transition timeline.

Transitioning to a new payroll provider at the beginning of the calendar year might make the most sense. Changing to a new payroll system at the start of a new year avoids splitting payroll and tax data mid-year, which can create more complicated calculations, Spurling said. 

But doing the work at the end of the year to launch a new payroll solution on day one of the next year isn’t easy either. HR and payroll professionals are already busy in the fall with open enrollment, year-end performance reviews and bonuses, and tax compliance audits. 

Once you select a new payroll provider and start thinking about the timing of the switch, be mindful of your other responsibilities. Especially for larger employers, Spurling recommended preparing for the transition during a less busy time of year, aiming for a January launch. In that scenario, you might choose your new provider in the spring, handle implementation over the summer, and go live at the start of the new year. “Give yourself time,” she said.

4. Work with the new provider.

Once you’ve selected the new vendor, it's time to coordinate data transfer and system setup. As you move forward, put together an implementation plan to ensure alignment. Key considerations include: 

• Who will be leading the implementation — both internally and on the vendor’s side? 
• What employee data does the new provider need, and by when? 
• What is the timeline for data migration and system testing? 
• When will employee training take place? 
• How can you access customer support if issues arise? 

5. Gather necessary payroll data.

Payroll data covers far more than just pay stubs and details about withholding information. It includes employee records — such as their job title, location, hire date, bank account information, and direct deposit instructions — and critical information that’s required by federal and state laws. That could include tax returns, social security data, and wage garnishment information. 

For a seamless switch, employers must ensure that the necessary historical payroll data has been gathered from the previous provider, said Jodi Brandstetter, an HR consultant. The goal is to prevent the loss of important employee financial information during the transition, which may be necessary for an internal or external audit, among other purposes. Brandstetter recommended working with an external expert who can verify data completeness. 

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6. Test and verify.

It’s never a good idea to move from your current payroll provider to the next without sufficient testing. Before full implementation of the first payroll through the new provider, always run a parallel payroll test. “It’s illegal to not pay people on time,” Spurling said. “You cannot afford to mess this up.” 

Brandstetter advises building a “sandbox” environment, a test system where HR teams can safely run payroll scenarios, such as processing bonuses and commissions, without actually sending payments to employees. 

These trial runs can ensure the system is working properly and uncover issues to fix before the new system goes live. “You're just running through those just to make sure nothing breaks,” Brandstetter said. 

7. Communicate with employees.

Any change to payroll should be clearly communicated to staff so they are aware of the transition, are properly trained to use the system, and are encouraged to raise concerns or flag issues. 

“The advice I can give people with a system change like that: Expect bumps in the road, expect frustration, and you just have to continue to hold the line and hold the company accountable,” Burr said. “Just expect that it's going to evolve and get better, but it is going to take the growing pains with any new system.” 

4 Common Challenges and How to Overcome Them

HR and payroll teams are already balancing daily responsibilities with strategic initiatives, and the work to switch to a new payroll provider takes time and care. Here are four common challenges to changing payroll providers and how to overcome them. 

1. Data Migration Issues

Depending on the age of your organization and the length of your relationship with your current payroll provider, you may have accumulated years — even decades — of employee data in your payroll system. Successfully transitioning to a new provider will require careful planning to ensure this historical data is accurately migrated. To enable that smooth handoff, HR and payroll teams should coordinate with the outgoing and incoming payroll vendors, ensuring that payroll history and tax information are accurately transferred. 

Spurling advised downloading all payroll records, including annual reports for each employee and tax filings to meet Internal Revenue Service (IRS) and state recordkeeping requirements. “I do love having old reports just sitting in a file somewhere that I hopefully never, ever, ever need,” she said. 

But you really need to have a very good plan and an understanding of exactly what the work is that's involved.

2. Timing Conflicts 

Plan your payroll migration strategically to avoid peak HR workload periods, such as the fourth quarter when HR is already overwhelmed. Trying to accomplish everything all at once — like open enrollment, annual performance reviews, and a switch to a new payroll provider — is a recipe for failure, said David Lewis, national managing director of HR and organizational effectiveness consulting at Gallagher, an insurance brokerage and consulting firm.

“There's a lot of great upgrades that you can secure by going from one platform to another,” said Lewis, who recommended working with a consultant on any payroll provider switch. “But you really need to have a very good plan and an understanding of exactly what the work is that's involved and when it has to happen in order to be able to make the migration come out the right way for you.” 

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3. Compliance Risks

Labor laws, reporting requirements, and other compliance risks vary widely across states and jurisdictions — and they can change quickly. Before officially launching a new system, verify that tax withholdings and regulatory requirements are embedded. Plus, take another opportunity to check in with the payroll provider to find out what systems they have in place to update their solutions to reflect the most up-to-date rules and laws. 

“From a legal standpoint, local and state laws change at rocket speed,” Burr said. “You want to make sure those systems stay up to speed, that it's easy to make modifications or have them make changes as laws evolve.” 

4. Employee Concerns

“No one is working for free,” Ruszkowski said. “Everybody needs their check to be able to pay their bills, and everyone needs it to happen as expected.” She continued, “We’ve never tried to shy away from the fact that there are hiccups with any implementation. We've just been very open about how we’re going to make it right.” 

Clear, proactive communication is key to a smooth payroll transition. Start informing employees months in advance, highlighting new system benefits and gradually rolling out non-critical features to build familiarity, she advised. Offer multiple communication channels — emails, mobile updates, and office hours — for employees to ask questions. 

Transparency is crucial. Acknowledge potential hiccups, reassure employees that payroll is being tested thoroughly, and provide a clear process for fixing payroll errors quickly. Employees rely on their paychecks, so over-communicating is better than leaving them in the dark, Ruszkowski said. 

How Lattice Payroll Simplifies the Transition

If you’re looking to switch payroll providers, consider Lattice Payroll. For business owners, Lattice provides a dedicated support team for onboarding and data migration to ensure a seamless transition. What’s more, users benefit from features that help employers better align their people practices — from their compensation philosophy to performance management strategies.

With automated tax compliance and payroll processing, Lattice Payroll helps companies stay compliant while reducing administrative burdens. Employee self-service tools offer easy access to payroll information, enhancing transparency and convenience.

Lattice Payroll also ensures long-term payroll success by offering a broad suite of complementary tools, including performance management, employee engagement, and growth solutions.

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