How payroll service providers can grow their business beyond the W-2

Businesses are hiring more remote teams. Remote work is one of the key reasons why your customers will need to register for additional payroll taxes (including state income tax, state unemployment insurance, local income tax, family medical leave insurance, and state sponsored workers’ compensation insurance). Video conferencing and other remote work capabilities enable employers to hire employees in all 50 states now, which means more registrations.   
 
Hiring remotely helps businesses be more agile, attract top talent, and support scalability and cost efficiency, but it can also complicate tax compliance, since employers have more state entities to deal with than before. 

Other common triggers for payroll tax registrations: 

• When a customer’s employee shifts to work from home: This is especially tricky in states with separate local registrations, like Pennsylvania and Ohio.
• When onboarding a new customer: Most new customers are missing at least one tax ID during the onboarding process.
• Changes in business structure: This typically takes the form of mergers and acquisitions or corporate restructuring, which is most prevalent in larger businesses.

Registrations can be difficult and time-consuming, and oftentimes clients don’t have the in-house expertise or time to do them properly, and sometimes state rules can be difficult to parse out. This presents an opportunity for payroll service providers to step up and be the hero. 

By providing a payroll tax registration solution, you can gain a competitive edge, improve customer retention, and become a more trusted resource for your clients. And it all starts with helping your clients register for payroll taxes.

There’s opportunity beyond the full-time W-2 employees as well. If your clients are handling their W-9s and 1099s manually, they could be losing time and money. Human errors, missed deadlines, and incorrect information can lead to IRS penalties. Managing this paperwork can be a full-time job, and many businesses don’t have the extra time and staff to dedicate to these tasks.  

Manual processes can lead to errors and increased risk, including: 

• Changing IRS regulations: Shifting thresholds, deadlines, and form types can be easy to miss.
• Incomplete or inaccurate contractor data: Missing or incorrect TINs can delay filings and lead to penalties.
• Poor recordkeeping: Without centralized, accurate records, year-end reporting becomes time-consuming and stressful.
• Multistate compliance requirements: Navigating both federal and state-level rules adds complexity. 
  

Digital W-9 collection enables secure, self-service onboarding. TINs can be verified instantly against IRS databases and 1099s can be processed in bulk with centralized records. This reduces paperwork, streamlines year-end operations, and ensures compliance. With W-9 and 1099 automation, payroll providers can scale their services and reduce errors for their clients, and help them stay compliant. 

Key automation benefits include: 

• Digital W-9 collection: Enable secure, self-service onboarding for contractors and vendors.
• TIN verification: Validate contractor details in real time against IRS databases. 
• Batch processing: Simplify high-volume 1099 filings with bulk generation and e-filing.
• Audit-ready reporting: Centralized records and reporting ensure transparency and audit trail support. 

By offering automated 1099 services, payroll companies can expand into new markets and create additional revenue streams. Providers can stand out by delivering a complete compliance solution.  

• Strengthen client relationships: Help clients simplify and consolidate payroll and compliance operations. 
• Expand into new markets: Support businesses with growing contractor and vendor workforces.
• Create new revenue streams: Turn compliance complexity into a value-added service offering. 
• Gain a competitive edge: Stand out by offering integrated services that go beyond traditional payroll.
• Support compliance: Help clients stay current with evolving IRS rules and reduce the risk of audits.

Supporting W-9 collection and 1099 compliance offers significant benefits for payroll service providers. By helping clients navigate the often confusing and time-consuming process of complying with the IRS and various states, providers can reduce the risk of noncompliance for their overworked clients. Remote work and business expansion often trigger new 1099 compliance requirements, and clients often overlook or deprioritize these steps — until it’s too late. When providers step in proactively, they protect clients from audits and penalties and demonstrate their value as strategic partners. 

By offering both 1099 and W-9 automation in addition to payroll tax registration, you can offer your clients a complete compliance package. This approach reduces client risk and builds trust, positioning you as a trusted advisor, not just a service vendor.

Your clients already trust you to handle their W2 services. Adding payroll tax registration for out-of-state workers and 1099 compliance for contractors is the next logical step to turn you into a one-stop shop for your clients’ payroll compliance needs. Not adding these services is essentially leaving money on the table.

And now is the time to act. According to the Tax Policy Center, individual income taxes accounted for 19% of state tax revenues in 2021. With declining revenues from office real estate, the authorities could feel greater pressure to collect every penny due just to maintain their budgets. From the authorities’ perspective, creating lists for audits is easy. 

Technologies, like LinkedIn, can allow state auditors to search for businesses that are larger than 10 employees but with only a handful of employees in their state. Numbers that in the past may have seemed too small for state auditors to care about now matter — with ongoing budget pressure they could choose to chase every dime.    

Avalara provides cloud-based platforms that simplify both payroll tax registration for W-2 employees and automation for W-9 employees. With Avalara Payroll Tax Registrations, providers can simplify the state and local tax registration process, easing the path for their clients to consume their payroll services. 

Meanwhile, with Avalara 1099 & W-9, providers can streamline W-9 collection, automate 1099 preparation and e-filing, and manage compliance for their clients in all 50 states. Our secure, cloud-based platforms integrate with leading payroll and accounting systems, allowing you to manage tax registration and contractor tax reporting from one place.  

Whether you’re supporting a handful of clients or scaling to serve many thousands, Avalara offers the tools, support, and expertise to help you support your clients with comprehensive tax registration and 1099 service offerings. 

Workforces (whether they are full-time or contract) aren’t slowing down — and neither is the pace of IRS regulation. Payroll service providers who offer integrated, automated 1099 services can meet client needs while growing their own business with scalable, efficient solutions. At the same time, Avalara Payroll Tax Registrations can help you automate state and local payroll tax registration and deliver a complete payroll solution to your customers.

This blog has been updated. It was originally published on May 20, 2025.