The Payroll Opportunity


Andrew Brown

CEO, Check

Dave Yuan

Founder and Partner, Tidemark


The average small business spends hours on payroll-related tasks each pay period. The work involves reconciling data from one system to another, munging spreadsheets, and sometimes even manually correcting time cards. It gets even more complex when there are industry-specific rules, tips, and payment schemes. Often the person toiling over this drudgery is the business owner, but it’s not uncommon for a larger merchant to have two full-time employees just to calculate payroll. 

Much of the needed data can reside within Vertical SaaS Vendors’ (VSVs) software. A payroll offering enables merchant business owners to complete this process in minutes instead of hours. In industries with complex labor practices and payment schemes (including almost any type of hourly work), the integrated offering is even more compelling. With a solution that connects to the rest of the software that merchants already use to manage their business, you’ll be positioned to give them full visibility into labor costs and provide them with clear insight into their overall business economics. 


Embedded Payroll Opportunity for Vertical SaaS 

Payroll represents an opportunity for a VSV to create a new revenue stream, increase stickiness for the overall platform, reduce the cost of acquiring new customers, and add value for its customers by solving for universal pain points. It’s also a great control point—embedded payroll removes the need ​​for customers to export employee hours, bank info, or other data to third party processors who will often try to provide competing financial services to both the merchant employer and employee. By embedding payroll, a VSV can offer additional value-add services including:

  • Instant payroll: By funding a company’s payroll using the balance they have on your platform, you can remove the need for a 2+ day ACH settlement cycle and pay employees instantly.
  • Paycards: Some employees do not want to use direct deposit, instead opting to receive their pay pushed to a card.
  • Earned wage access: Nearly three out of every four U.S. employees (72%) want access to their wages before their pay day, according to The UKG Workforce Institute.
  • Benefits: Health insurance, workers' compensation, etc.

The Financial Opportunity

The financial opportunity presented by embedded payroll is driven by several key metrics:

  • Attach rate: Toast’s acquisition of restaurant payroll provider StratEx to build out a payroll offering is a prime case study in the potential attach rate of payroll. In their S-1, they noted, “In the second quarter of 2021, over half of newly opened restaurant customers also bundled our Payroll & Team Management solutions when selecting Toast as their integrated POS and payments platform, highlighting the value proposition of our end-to-end ecosystem.”  
  • Price: Standard pricing for payroll is $35-70 per customer per month, with an additional $6-10 per employee per month. At Check, we have found that payroll can uplift ARPU by 40-50%.  
  • Retention: Legacy payroll businesses like Paycom and Paylocity see annual gross churn of 7% and 8%, respectively. This is effectively the same as the average business destruction rate of 8.5% (US Census), meaning payroll has very low voluntary customer churn. Adding a payroll offering not only adds payroll revenue to customer lifetime value, but also improves the lifetime value of a customer’s existing spend.
  • Additional cross-sell: Employer-centric benefits and financial products offer incremental upsell. For example, health insurance alone can increase payroll revenue by 50% or more. Workers’ compensation insurance, 401(k), and similar benefits provide additional monetization and customer experience opportunities. Paycards and Earned Wage Access services layered on top of payroll yield opportunities to capture interchange revenue on employee spend.

To get a sense of the impact offering embedded payroll may have on your business, we created a Payroll Opportunity Calculator that is free for you to use. 


At its core, every payroll product must be able to do three very complex—and different—tasks. Make no mistake, this is hard to get right:

  1. Calculate taxes: Conduct accurate tax calculation across 6,000+ taxes in the US while continually monitoring and updating changing rates and requirements.
  2. Move money to employees, who are regulated individually in 42 states, and honor all AML & KYC compliance obligations.
  3. File tax forms and remit tax funds: Generate forms for all federal, state, and local entities (600+ forms). Then, support remittance methods including ACH, manual website upload, paper check, etc.

Until the recent emergence of payroll-as-a-service providers, building payroll has historically only been accessible to platforms willing and able to invest $50mm+ and three or more years. 

Paths to Payroll Today

The traditional options for entering into payroll have been to build, buy, or partner:


Building payroll takes a large engineering team working closely with seasoned compliance, payroll operations, and product teams. You’ll need large compliance and tax operations teams that are knowledgeable about payroll at the federal, state, and local level. It also requires a very heavy development lift in terms of both time and money. Square is one of the few companies to have successfully pursued this path, launching its effort in 2015.


Purchasing a national payroll company involves a large outlay of upfront cash, substantial technical debt, and integration. Toast is one of the few companies to successfully pursue this strategy.


Traditional payroll partnerships function as simple referral models. While lightweight and an easy financial win, it does not provide any long-term customer experience improvement or underlying economic advantage.


There is a fourth offering that our co-author Check provides (as well as Gusto). It’s called Embedded Partnership, and you can think of it as Stripe for payroll. First, payroll infrastructure providers can operate as the payroll company on your behalf, providing a full modern payroll stack (this is known as the Reporting Agent, in IRS parlance). They can help you shoulder the heavy compliance and tax regulations and abstract away some of the challenges, including dealing with tax calculations across thousands of jurisdictions, money movement, and tax form filing and generation. 

This reduces the build time for a new payroll product from years to months, with the option to fully customize and white-label the eventual product. Given that every payroll product has a baseline set of features, white-labeled components for building payroll can further diminish the time to market. 

Be aware that the challenge for VSVs is often more GTM-driven than product-driven. Payroll as a product is fairly commoditized, so there's a heavy lift on the part of the VSV to 1) convince customers to switch over to a new payroll provider, 2) undergo the implementation of moving all the payroll information over from the old system to the new system, and 3) provide ongoing support to customers. That plus the revenue share cost with an embedded solution like Check requires highly efficient customer acquisition and cross-sell motions to make the unit economics work.

While partnership economics are subject to negotiation, you should consider an embedded partner to take about ⅓ of the direct revenues, leaving ⅔ for the VSV (as described in the calculator above).

At Tidemark, we believe that embedded payroll will prove to be an expansion opportunity on the same order of magnitude as payments. It provides merchants with compelling time savings and lower error rates, and the VSVs with significant ARPU expansion, similar or greater to that of embedded payments. Embedded payroll also offers both the merchant and the VSV a first step and conduit to deliver more value (e.g., earned wage access or insurance) to employees over time. 

Share your thoughts

Sign-up below to keep up with our coverage, including benchmarks of attach rates, payroll, and employee offerings. If you have thoughts or comments, or want to get involved, reach out to us at knowledge@tidemarkcap.com.


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The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.

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