This payroll engagement letter template is a free sample engagement letter for payroll services: copy it below, or download it as an editable Word file that also opens in Google Docs. It’s written for a US firm running recurring payroll for small business clients, and it puts the parts of payroll that cause disputes in writing: what you file, when the client’s hours are due, and who pays the penalty when they aren’t.
Payroll is the one recurring service where a late email from the client can become an IRS notice. That’s why it gets its own letter rather than a line in your bookkeeping scope. It follows the same structure as our general engagement letter template, with payroll deadlines, cut-offs, and authorizations added.
Sample engagement letter for payroll services
[Your firm letterhead]
[Date]
[Client name] [Client address]
Re: Engagement letter for payroll services
Dear [Client name],
Thank you for engaging [Your Firm Name] to provide payroll services to [Client / entity name]. This letter sets out the payroll services we will provide, the information we need from you and when, our fees, and what we each take responsibility for. Please read it carefully and sign below to confirm your agreement.
Scope of Services. Beginning with the pay period starting [start date], we will provide the following services for up to [X] employees:
- Processing [weekly / biweekly / semimonthly / monthly] payroll from the hours, pay rates, and other pay information you approve
- Calculating gross pay, federal and state income tax withholding, Social Security and Medicare taxes, and the deductions you authorize
- Issuing direct deposits [and paper checks] and pay stubs on each pay date
- Calculating each federal payroll tax deposit and [making the deposit through EFTPS on your behalf / telling you the amount and due date so you can make it]
- Preparing and filing Form 941 each quarter and Form 940 each year
- Preparing Forms W-2 and W-3, delivering Forms W-2 to employees, and filing them with the Social Security Administration by January 31
- Preparing and filing state withholding and unemployment insurance returns, and making the related deposits, for [list states]
- [Reporting new hires to the [state] new hire registry. Delete this line if you will report them yourself.]
- [Preparing Forms 1099-NEC for the contractors you identify to us. Delete this line if not applicable.]
- A payroll register and tax liability summary after each pay run[, and a payroll journal entry for your books]
Services Not Included. This engagement does not include deciding whether a worker is an employee or an independent contractor, benefits or retirement plan administration beyond processing the deductions you authorize, workers’ compensation audits, local tax filings or filings for states not listed above, employment law or HR advice, or correcting payroll filings for periods before [start date]. If you need any of these, we are happy to quote them separately.
Authorizations. Before we file returns or make deposits for you, you will sign [IRS Form 8655, Reporting Agent Authorization,] and any state authorizations we need to file and pay on your behalf. You authorize us to debit [your payroll account] for net pay, payroll taxes, and our fees on each debit date.
Pay Schedule and Cut-offs. Your pay dates are [schedule, e.g. every other Friday]. To pay employees on time, we need approved hours, new hires, terminations, pay rate changes, and any bonus or commission amounts by [12:00 p.m. local time, two business days] before each pay date. Anything received after the cut-off will be processed in the next regular pay run, or in an off-cycle payroll at the fee below if you ask for one. Funds for net pay and payroll taxes must be in [your payroll account] by [time and day] before each pay date.
Your Responsibilities. You remain the employer and remain responsible for your payroll and payroll taxes. You agree to:
- Provide accurate, approved hours and pay information by the cut-off for each pay run
- Send us each new hire’s completed Form W-4, state withholding certificate, start date, pay rate, and direct deposit details before their first pay date
- Tell us about terminations, pay rate changes, and changes to benefits or deductions before the cut-off
- Review and approve each payroll before we finalize it, and review the reports and filings we send you
- Keep enough funds available to cover net pay, payroll taxes, and our fees on each debit date
- Forward any notice you receive from the IRS or a state agency to us within [5] business days
Penalties and Interest. The IRS holds the employer ultimately responsible for depositing and paying federal payroll taxes, even when a payroll provider makes the deposits. If information or funds reach us after the cut-off, or a deposit cannot be made because funds were not available, any resulting penalties and interest are your responsibility. If a penalty results from our error, and you provided complete information and funds on time, we will [pay the penalty and interest / reimburse the penalty, excluding the underlying tax]. We recommend that you enroll in EFTPS with your own PIN so you can check the deposits made for you.
Fees. Our fee is $[amount] per pay run for up to [X] employees, plus $[amount] per additional employee per pay run. Quarterly and annual filings are [included / billed at $[amount] per filing], and Forms W-2 are billed at $[amount] each. Off-cycle payrolls are $[amount] each. Corrections or amended filings needed because information was late or inaccurate are billed at $[rate] per hour. Fees are invoiced [monthly] and payable within [14] days. We will give you at least [30] days written notice of any fee change.
Term and Termination. This is an ongoing engagement that continues until either party ends it by giving [30] days written notice. We recommend ending at the close of a calendar quarter so that one provider files each quarterly return. On termination we will give you the payroll registers and copies of the filings we prepared for the current year. Unless we agree otherwise in writing, deposits and filings due after the termination date are your responsibility or your new provider’s, and fees remain payable for all work performed up to that date.
Confidentiality. Payroll records contain your employees’ Social Security numbers and bank details. We will keep your company’s and your employees’ information confidential, store it securely, and use it only to provide these services, except where disclosure is required by law or you give written consent.
Limitation of Liability. Except as set out under Penalties and Interest, our total liability arising from this engagement is limited to the total fees you have paid us in the [12] months preceding the claim. We are not liable for any loss arising from inaccurate, incomplete, or late information or funds provided by you or on your behalf.
Acceptance. If these terms reflect your understanding of the engagement, please sign and return a copy of this letter.
Signed for [Your Firm Name]:
Signature: ______________________ Name: [Name], [Title] Date: [Date]
Agreed and accepted for [Client / entity name]:
Signature: ______________________ Name: [Name], [Title] Date: [Date]
What to include in a payroll engagement letter
Whether you adapt this sample or write your own, a payroll engagement letter should cover:
- The parties, the start date, the pay frequency, and the number of employees the fee covers
- Exactly which deposits and filings you make: federal deposits, Forms 941 and 940, Forms W-2 and W-3, and each state’s returns
- Exclusions: worker classification, benefits administration, local taxes, HR and employment law advice, prior-period cleanup
- The authorizations you need before you can file or pay for the client
- The cut-off for hours and changes before each pay date, and what happens when it’s missed
- Client responsibilities for new hire information, approvals, and funding
- Who pays penalties and interest when information or funds are late, and what you cover when the error is yours
- Fees for regular runs, extra employees, off-cycle payrolls, year-end forms, and corrections
- Termination terms that say who files the returns due after you hand over
Payroll deadlines to build into the letter
Your cut-offs only work if they leave room before the federal deadlines. Per the IRS employment tax due dates:
- Form 941 is due by the last day of the month after each quarter: April 30, July 31, October 31, and January 31.
- Form 940 is due January 31.
- Forms W-2 go to employees by January 31, and Forms W-2 and W-3 are filed with the Social Security Administration by the same date.
- If every deposit was made on time, the IRS allows 10 more calendar days to file Form 941 or Form 940.
- Monthly depositors deposit each month’s taxes by the 15th of the following month. Semiweekly depositors deposit taxes for paydays on Wednesday, Thursday, or Friday by the following Wednesday, and for paydays on Saturday through Tuesday by the following Friday.
- If $100,000 or more in taxes builds up on any day, it must be deposited by the next business day.
When a due date falls on a weekend or legal holiday, the next business day applies. State deposit and filing deadlines vary, so list the states you file in and check each one.
The IRS guidance on outsourcing payroll duties is worth reading before you finalize the penalty clause: it confirms the employer stays responsible for the deposits, and suggests employers enroll in EFTPS to check the payments made for them. If you file and pay as the client’s reporting agent, the authorization is Form 8655.
How to use this template
Replace everything in [brackets], delete the optional lines that don’t apply, and set the cut-off far enough ahead of each pay date that you can process, get approval, and fund direct deposits without a scramble. List each state you file in by name. If you also keep the client’s books, send the bookkeeping engagement letter template for that work, and keep return preparation in the tax preparation engagement letter template. For a client who wants monthly accounting and annual financial statements as well, see the CPA engagement letter template.
Have the final letter reviewed under your professional standards before you send it, particularly the penalty and limitation of liability clauses.
Run payroll engagements in Tidyflow
In Tidyflow, you can save this letter as a reusable template in proposals and engagement letters, send it for electronic signature, and keep the signed copy on the client’s file. Each pay run can then repeat as a job with its own checklist and client requests for hours and new hire details: start from the US payroll job template and set it to repeat on the client’s pay schedule.