# How Paychex makes money

CXProWealth Business Lens · Paychex (PAYX) · Q1 FY2027

Read from the 10-Q for the period 2026-06-01 to 2026-08-31, filed 2026-09-24 with the SEC (accession 0000723531-26-000006): https://www.sec.gov/Archives/edgar/data/723531/000072353126000006/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $1.6B (+5.9% on the year)
- Operating income: $619.2M (operating margin 38.0%)
- Net income: $429.7M (net margin 26.4%)
- Gross margin: 73.6%
- Free cash flow: $357.4M (21.9% of revenue)
- Cash conversion (operating cash flow / net income): 0.96x
- Capital expenditure: 3.4% of revenue

## Where the money goes (Q1 FY2027)

- Total revenue → Total expenses: $1.0B
- Total expenses → Cost of service revenue: $430.1M
- Total expenses → Selling, general and administrative expenses: $581.2M
- Total revenue → Operating income: $619.2M
- Operating income → Interest expense: $65.1M
- Operating income → Income before income taxes: $554.1M
- Other income, net → Income before income taxes: $10.9M
- Income before income taxes → Income taxes: $135.3M
- Income before income taxes → Net income: $429.7M

## Income statement, as filed

| Line | Q1 FY2027 | Of revenue |
|---|---:|---:|
| Total service revenue | $1.6B | 96.9% |
|   Management Solutions | $1.2B | 74.4% |
|   PEO and Insurance Solutions | $367.6M | 22.5% |
| Interest on funds held for clients | $49.8M | 3.1% |
| **Total revenue** | $1.6B | 100% |
| Cost of service revenue | $430.1M | 26.4% |
| Selling, general and administrative expenses | $581.2M | 35.6% |
| **Total expenses** | $1.0B | 62.0% |
| **Operating income** | $619.2M | 38.0% |
| Interest expense | ($65.1M) | 4.0% |
| Other income, net | $10.9M | 0.7% |
| **Income before income taxes** | $565.0M | 34.7% |
| Income taxes | $135.3M | 8.3% |
| **Net income** | $429.7M | 26.4% |
| Other comprehensive (loss)/income, net of tax | -$31.4M | 1.9% |
| **Comprehensive income** | $398.3M | 24.4% |
| Basic earnings per share | $1 | 0.0% |
| Diluted earnings per share | $1 | 0.0% |
| Weighted-average common shares outstanding | 355,800,000 |  |
| Weighted-average common shares outstanding, assuming dilution | 356,600,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2008 | $2.1B | $828.3M | $576.1M | $724.7M | $82.3M | $642.4M |
| FY2009 | $2.1B | $805.2M | $533.5M | $688.8M | $64.7M | $624.1M |
| FY2010 | $2.0B | $724.8M | $477.0M | $610.9M | $61.3M | $549.6M |
| FY2011 | $2.1B | $786.4M | $515.3M | $715.3M | $100.5M | $614.8M |
| FY2012 | $2.2B | $853.9M | $548.0M | $706.6M | $89.6M | $617.0M |
| FY2013 | $2.3B | $904.8M | $569.0M | $675.3M | $98.7M | $576.6M |
| FY2014 | $2.5B | $982.7M | $627.5M | $880.9M | $84.1M | $796.8M |
| FY2015 | $2.7B | $1.1B | $674.9M | $895.2M | $102.8M | $792.4M |
| FY2016 | $3.0B | $1.1B | $756.8M | $1.0B | $97.7M | $920.5M |
| FY2017 | $3.2B | $1.3B | $826.3M | $960.4M | $94.3M | $866.1M |
| FY2018 | $3.4B | $1.3B | $994.1M | $1.3B | $154.0M | $1.1B |
| FY2019 | $3.8B | $1.4B | $1.0B | $1.3B | $123.8M | $1.1B |
| FY2020 | $4.0B | $1.5B | $1.1B | $1.4B | $127.0M | $1.3B |
| FY2021 | $4.1B | $1.5B | $1.1B | $1.3B | $118.4M | $1.1B |
| FY2022 | $4.6B | $1.8B | $1.4B | $1.6B | $133.8M | $1.5B |
| FY2023 | $5.0B | $2.0B | $1.6B | $1.7B | $143.0M | $1.6B |
| FY2024 | $5.3B | $2.2B | $1.7B | $1.9B | $161.4M | $1.7B |
| FY2025 | $5.6B | $2.2B | $1.7B | $1.9B | $191.8M | $1.7B |
| FY2026 | $6.5B | $2.5B | $1.8B | $2.6B | $234.9M | $2.3B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +16.9% (year before +5.6%): accelerating
- Operating income: +13.7% (year before +1.5%): accelerating
- Net income: +6.2% (year before -2.0%): accelerating
- Free cash flow: +35.8% (year before -1.6%): accelerating

## Operating figures stated in the filing

- Average interest rate earned on client funds and corporate investments: 3.6% (as of 2026-08-31). "During the first quarter, the average interest rate earned on our combined funds held for clients and corporate cash equivalents and investment portfolios was 3.6% compared to 3.7% for the prior year period." (Item 2. M anagement's Discussion and Analysis of Financial Condition and Results of Operations)
- Average interest rate earned on client funds and corporate investments: 3.7% (as of 2025-08-31). "During the first quarter, the average interest rate earned on our combined funds held for clients and corporate cash equivalents and investment portfolios was 3.6% compared to 3.7% for the prior year period." (Item 2. M anagement's Discussion and Analysis of Financial Condition and Results of Operations)

## Key insights

### Flat costs turned 5.88% revenue growth into 14.26% operating growth

Total expenses rose only 1.32% and selling and administrative costs fell 0.53%, so operating margin widened 2.79 points to 37.98%.

Total revenue rose 5.88% to $1,630.5M while total expenses rose 1.32% to $1,011.3M. Cost of service revenue grew 3.94%. Selling, general and administrative expenses fell 0.53% to $581.2M, and their share of revenue dropped 2.3 points to 35.65%. Operating income rose to $619.2M from $541.9M, a margin of 37.98% against 35.19% a year earlier. _(from the filing)_
The filing attributes much of the restraint to lower acquisition-related costs from the Paycor acquisition: less amortization of intangibles acquired with Paycor, and less spent on integration compensation, severance and retention bonuses. Compensation-related expenses edged down, while PEO direct insurance costs, depreciation and other expenses rose with growth. _(from the filing)_
Over the longer run, the annual operating margin narrowed as Paycor was absorbed: from 41.2% in FY2024 ($2,174.1M on $5,278.3M) to 38.6% in FY2026 ($2,510.5M on $6,512.0M). This quarter's 37.98% compares with 35.19% in the same quarter a year earlier. _(from the filing)_
Analysis: part of this gain is a cost that is fading away rather than a business that is earning more per client. Once integration costs and acquired-intangible amortization stop falling, margin growth has to come from revenue outrunning ordinary operating costs. The filing's own adjusted measure, which excludes acquisition-related costs, grew more slowly than reported operating income. _(analysis)_

### Profit rose, but operating cash flow came in below net income

Operating cash flow was $413.5M, 96.2% of net income of $429.7M, down from $718.4M a year earlier; the filing attributes the gap to timing.

Net cash from operating activities was $413.5M, 57.6% of the $718.4M a year earlier, while net income rose to $429.7M from $383.8M. Capital spending barely moved, $56.1M against $55.9M, so free cash flow fell to $357.4M from $662.5M: 21.9% of revenue, against 43.0% a year earlier. _(from the filing)_
The filing attributes the swing to timing: net changes in PEO assets and liabilities as payroll taxes were settled, a decrease in refunds owed to clients under the CARES Act (a year earlier those refunds owed had increased, which lifted that quarter's cash), and the payment of the prior year's year-end bonuses. Higher accrued interest on the corporate bonds, payable in October, worked the other way. _(from the filing)_
Across a full year the pattern is different. In FY2026 operating cash flow was $2,556.7M, well above net income of $1,760.1M. Quarters swing widely: in Q2 FY2026 operating cash flow of $444.9M was 112.5% of net income of $395.4M. _(from the filing)_
Analysis: the timing explanation can be checked in the quarters that follow. If cash from operations catches up over the rest of the year, this quarter was a calendar effect. If it keeps trailing net income, money is being tied up in the PEO or in receivables, and earnings growth would be converting into cash more slowly than before. _(analysis)_

### Client float covers 76.5% of the interest on debt

Interest earned on client funds, $49.8M, falls short of $65.1M of interest expense, so the float does not pay for the borrowing on its own.

Interest on funds held for clients rose to $49.8M from $47.6M, 3.1% of total revenue and 8.0% of operating income. The filing attributes the rise to higher average rates on client funds. Interest expense eased to $65.1M from $68.2M on lower outstanding debt, so the float covered 76.5% of it, up from 69.8% a year earlier. _(from the filing)_
Corporate cash earned less too. Other income, net, fell 54.2% to $10.9M from $23.8M; the filing shows interest on corporate investments lower as corporate balances shrank and the rate earned on them fell. The average rate on combined client and corporate portfolios was 3.6%, against 3.7% a year earlier. _(from the filing)_
These lines, with a higher tax rate, explain why profit grew less further down the statement. Income before taxes rose 13.57% and income taxes 19.0%, lifting the effective rate to 24.0% from 22.9%. Net income grew 11.96%, against 14.26% for operating income. _(from the filing)_
Rates reach the float slowly. The filing says earnings from its longer bonds 'would not reflect increases in interest rates until the investments are sold or mature and the proceeds are reinvested at higher rates', and notes that the Federal Reserve raised its policy rate after the quarter ended. _(from the filing)_

### Competitive edge

- **Payroll data is the base for selling more per client** Management Solutions earned $1,213.1M, 74.4% of revenue, and the filing credits higher revenue per client from price realization and product penetration.
- **Delivery cost fell from 31.2% to 25.7% of revenue** From FY2019 to FY2026 cost of revenue fell from 31.2% to 25.7% of revenue, and this quarter's gross margin was 73.6%.
- **Co-employment is taking a larger share of revenue** PEO and Insurance Solutions reached $367.6M, 22.5% of total revenue against 21.4%, on more worksite employees and higher insurance volumes.

### What to watch

- **Every revenue line rides on small employers' payrolls** The filing names the economy's effect on small and mid-sized clients as a risk; their headcount drives fees, worksite employees and client fund balances.
- **Faster PEO growth brings more retained insurance risk** Where Paychex keeps health and workers' compensation risk, claims flow through its own costs and rest on actuarial reserve estimates.
- **Interest rates move float income and bond values** Unrealized bond losses turned other comprehensive income to a $31.4M loss from $28.7M of income, leaving comprehensive income below net income.

## Investor view

**Paychex grew operating income 14.3% while selling and administrative costs fell and Paycor integration costs faded**

### How it makes money

Most of the money comes from recurring fees for running payroll, HR, benefits and related software for small and mid-sized employers, sold on three platforms: SurePayroll, Paychex Flex and Paycor. This is Management Solutions, $1,213.1M of the quarter's $1,630.5M in total revenue, or 74.4%. The filing says customers buy 'on an á la carte basis or as part of various solution bundles', and that the offerings 'often leverage the information gathered in its base payroll processing service'. _(from the filing)_
The second line is PEO and Insurance Solutions, $367.6M, or 22.5% of total revenue. As a professional employer organization, Paychex becomes co-employer of its clients' staff, offers them health and benefit coverage, and 'assumes the risks and rewards of workers' compensation insurance and certain health insurance offerings'. This revenue is reported net of the wages and payroll taxes passed through, so it is a fee and insurance margin, not the payroll handled. The insurance agency earns commissions on premiums placed with carriers. _(from the filing)_
The third source is float. Clients send payroll and tax money before it is due, and Paychex invests it until it is paid to employees and tax agencies. Interest on those funds was $49.8M this quarter, 3.1% of total revenue. The average rate earned on the combined client and corporate portfolios was 3.6%, against 3.7% a year earlier. The company invests in 'highly liquid, investment-grade fixed income securities'. _(from the filing)_
Delivering the service is the smaller cost. Cost of service revenue was $430.1M, 26.4% of revenue, for a gross margin of 73.6%. Selling, general and administrative expenses were larger, $581.2M or 35.6% of revenue, and they include the amortization of intangibles acquired with Paycor. The business spends more on selling, administration and acquired assets than on running the payrolls themselves. _(from the filing)_

### What shifted

Revenue rose 5.88% to $1,630.5M, but total expenses rose only 1.32%, to $1,011.3M. Cost of service revenue grew 3.94% and selling, general and administrative expenses fell 0.53%. Operating income rose 14.26% to $619.2M, from $541.9M a year earlier. The filing ties much of the restraint to lower acquisition-related costs from Paycor: less amortization of acquired intangibles, and less spent on integration, severance and retention bonuses. _(from the filing)_
The mix tilted toward PEO. PEO and Insurance Solutions reached $367.6M from $329.1M, lifting its share of total revenue to 22.5% from 21.4%. The filing credits growth in the average number of PEO worksite employees and higher PEO insurance volumes. Management Solutions rose to $1,213.1M from $1,163.3M, which the filing attributes to 'Higher revenue per client resulting from price realization and product penetration'. _(from the filing)_
Below operating income, the lines moved less well. Other income fell 54.2% to $10.9M from $23.8M, as interest on corporate investments dropped with smaller corporate balances and a lower rate earned on them. Interest expense eased 4.55% to $65.1M on lower debt. Income taxes rose 19.0% and the effective rate rose to 24.0% from 22.9%, so net income grew 11.96% to $429.7M, slower than operating income. _(from the filing)_
Diluted earnings per share rose to $1.21 from $1.06, faster than net income, because diluted shares fell to 356.6M from 361.9M. Cash went the other way: operating cash flow was $413.5M against $718.4M a year earlier, and free cash flow was $357.4M against $662.5M. The filing ties the gap to timing: settlement of PEO payroll taxes, lower refunds owed to clients under the CARES Act, and payment of the prior year's bonuses. _(from the filing)_

### Risks in the filing

Paychex's clients are small and mid-sized businesses, and the filing names the effect of the economy on them, along with inflation and interest rate changes, among the factors that could change results. Fewer hires or more closures among small employers would reduce the payrolls processed and the worksite employees in the PEO. The filing also names customers failing to reimburse payments Paychex makes on their behalf. _(from the filing)_
The client fund and corporate portfolios tie results to interest rates in both directions. Rate changes alter what new investments earn and the market value of the longer bonds, and the filing notes that higher rates reach earnings only slowly, as bonds mature and are reinvested. Other comprehensive loss, mostly unrealized losses on these securities, was $31.4M this quarter, against income of $28.7M a year earlier. _(from the filing)_
The PEO carries co-employment risk and exposure to changes in health insurance and workers' compensation rates and claim trends. Paychex keeps part of that risk through high-deductible workers' compensation policies and health plans where it retains risk. Its reserves rest on actuarial estimates that, in the filing's words, 'could materially impact the reserves as reported'. _(from the filing)_
The filing also lists keeping pace with technology, risks from its own use of AI, software defects, cyberattacks and data loss, failures of third-party providers, data privacy and AI laws, changes in tax withholding and remittance rules, debt covenants and credit ratings, and the integration and performance of acquired businesses. _(from the filing)_
Two of these risks already show in the numbers. Rate risk shows in other comprehensive income swinging from a gain to a loss. Acquisition risk shows in the interest expense and acquired-intangible amortization that sit between strong operating results and net income. The insurance risk does not show yet: the filing calls this quarter's reserve adjustments immaterial. _(analysis)_

## Founder view: mechanisms

### Client money in transit earns interest

A payroll processor collects a client's wages and taxes before payday and before the tax deadline, then pays them out. In between, the money sits with the processor, which invests it in high-grade bonds and keeps the interest. The client pays nothing extra, and almost no operating cost stands against that income, so nearly all of it reaches operating profit. _(analysis)_

### Recurring fees on a fixed platform

Payroll runs every pay period for every client on the same software and service organization. Once those exist, an added client or a price increase brings revenue with little added cost, and a lost client removes revenue without removing much cost. Margins widen when revenue grows faster than the cost of delivery and support, and narrow quickly when it does not. _(analysis)_

### Selling more to the payroll base

Payroll is the entry point. A provider that runs a company's payroll holds its employee, wage and tax data, so time tracking, HR, retirement plans, insurance and benefits can be sold into an existing relationship and fed by data already collected. Growth then comes from revenue per client as well as from new clients, and each added module raises the cost of switching away. _(analysis)_

### Co-employment bundles benefits and risk

In the PEO, Paychex becomes co-employer of a client's staff. Small employers get health plans, workers' compensation and benefits priced on a large pooled group, and hand over HR compliance. Paychex earns a fee per worksite employee and, where it retains insurance risk, the margin between premiums and claims. The relationship is deeper than payroll, with more revenue per client and more risk carried. _(analysis)_

### Buying a client base with debt

Paycor brought Paychex a larger mid-market client base and a third platform, financed largely with borrowing. That turns an operating question, whether the combined business earns more, into a financial one: whether the added operating profit outruns the interest on the debt and the amortization of acquired intangibles that the deal brings. _(analysis)_

## Member research

Signed-in members read, on the page: what Paychex's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Paychex 10-Q for the period to 2026-08-31: https://www.sec.gov/Archives/edgar/data/723531/000072353126000006/ (2026-09-24)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02