Summary:

Company says payroll for small and medium companies is an area ripe for innovation. Current leaders ADP and Paychex are too pricey and many companies have yet to automate the process at all, says ZenPayroll CEO Joshua Reeves.

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ZenPayroll is coming out of stealth mode in style, talking up the $6.1 million in seed funding and A-list backers, including Dropbox CEO Drew Houston, Box CEO Aaron Levie, Yammer CEO David Sacks, and Yelp CEO Jeremy Stoppelman. That’s a lot of star power and that $6.1 million is the biggest seed round ever granted to a Y Combinator startup.

But it’ll need that dough: ZenPayroll is taking on a big challenge — providing payroll software-as-a-service to small and medium companies and thus taking on payroll behemoth ADP (although obliquely since ADP focuses on large companies.)

Joshua Reeves, CEO and co-founder of ZenPayroll

Joshua Reeves, CEO and co-founder of ZenPayroll

ZenPayroll CEO and co-founder Joshua Reeves cites IDC numbers to back up his contention that there’s a ton of opportunity here.  ADP along with Paychex, Ceridian and Intuit handled about $7 billion of a total $13.9 billion in US payroll in 2010. The other $7 billion is split up between lots of small local providers and companies that use error-prone manual processes.  “Small businesses have been slow to automate payroll — many of them still do it on paper and calculate taxes using spreadsheets,” Reeves told me.

The Internal Revenue Service’s own stats show that a third of US small businesses are fined for payroll tax mistakes annually to the tune of $5.3 billion. Clearly, there is a payroll problem to be solved.

ZenPayroll says its SaaS will ease that headache at a fraction of the price ADP and others charge. It will charge companies $25 per month and an additional couple of dollars per employee.  For a ten-person company, that ends up being $780 per year compared to $3822.80 for ADP Compliance with Pay Convenience or $1,428 for Paychex Small Business Paperless service. Other competitors include outsourced human resources services, but they focus on a full suite of services, not just payroll, Reeves said. And payroll is ZenPayroll’s sole focus.

Payroll is serious business

Ease of use is critical. “You go to the web site and request an invite. We respond in a few hours, you set up the account, enter employee ID numbers and send invites to your employees who add their own information,” Reeves said. The service supports direct deposit or payment by check, according to whatever pay schedule the employer prefers. It supports bonuses, reimbursements, garnishments — all options a business needs.  And it integrates with existing e-sign and e-fax technologies, Reeves said.

The service, the beta of which has already handled several millions of dollars in payroll, runs on private, dedicated servers that are backed up many times a day in multiple locations, Reeves said.

Payroll is a big, big job and no one — not company CEOs, CFOs, employees, state or federal tax authorities — has a sense of humor about mistakes. Reeves said the company has hired payroll tax experts with decades of experience from ADP and Paychex. This is important — because tech smarts is one thing — but doing payroll right also requires deep expertise in tax codes and regulations.

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