Paychex (PAYX) 10-K risk factor changes: FY2014 vs FY2013

Additional factors not presently known to us or that we currently deem to be immaterial also may adversely affect, [added: possibly] to a material extent, our business, cash flows, financial condition, or results of operations in future periods.

Our clients and our business could be adversely impacted by health care reform: The [removed: PPACA] [added: Act] was enacted [removed: on] [added: in] March [removed: 23,] 2010 and [removed: was subsequently modified by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010 (together] [added: entails sweeping health care reforms] with [removed: PPACA hereafter referred to as the “Act”).][added: staggered effective dates from 2010 through 2018.]

[removed: 2010 through 2018, and many] [added: Many] provisions of the Act require the issuance of additional guidance from the U.S. Departments of Labor and [removed: Heath] [added: Health] & Human Services, the Internal Revenue Service (the “IRS”), and the [removed: states.][added: States.]

The complexity of federal and state regulations facing employers has continued to [removed: increase] [added: increase,] over time, including the enactment of the Act.

As a service provider, we have a responsibility to our clients to help them understand [removed: these] [added: their] increased [added: obligations under such] regulations.

Refer to the discussion [removed: below] [added: on the next page] regarding changes in health insurance and workers' compensation insurance rates and underlying claims trends for discussion of health care reform as it impacts our PEO.

These service providers include, but are not limited to, couriers used to deliver client payroll checks and banks used to electronically transfer funds from clients to their [added: employees.]

Although our agreements with [removed: the] clients provide that [removed: the client] [added: they] will indemnify us for any liability attributable to [removed: its] [added: their] own or [removed: its] [added: their] employees’ conduct, we may not be able to effectively enforce or collect such contractual obligations.

The insurance costs are impacted by claims experience and are a significant portion of our PEO [removed: direct] costs.

A change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to applicable tax or regulatory agencies [removed: would] [added: could] adversely impact this interest income.

[removed: We historically] [added: Historically, we] have [removed: not] [added: rarely] borrowed against available credit arrangements to meet liquidity needs.

Quantitative and qualitative disclosures about market risk: Refer to Item 7A of this Form 10-K for a discussion on Market Risk Factors, which [removed: would] could have a material adverse effect on our business and results of operations.

The Act entails sweeping health care reforms with staggered effective dates from

employees.

Management’s Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc. and its wholly owned subsidiaries (“Paychex,” “we,” “our,” or “us”) for each of the three fiscal years ended May 31, [removed: 2013] [added: 2014] (“fiscal [removed: 2013”),] [added: 2014”),] May 31, [removed: 2012] [added: 2013] (“fiscal [removed: 2012”),] [added: 2013”),] and May 31, [removed: 2011] [added: 2012] (“fiscal [removed: 2011”),] [added: 2012”),] and our financial condition as of May 31, [removed: 2013.][added: 2014.]

We are a leading provider of [added: integrated] payroll, human resource, insurance, and benefits outsourcing solutions for small- to medium-sized businesses.

Our [removed: Payroll] [added: payroll services] and Human Resource Services (“HRS”) offer a portfolio of services and products that allow our clients to meet their diverse payroll and human resource needs.

We support [removed: small market] [added: small-market] companies through our core payroll and [added: our software-as-a-service (“SaaS”)] SurePayroll, Inc. (“SurePayroll”) product lines.

Our [removed: software-as-a-service (“SaaS”)] [added: SaaS] solution through our MMS platform provides human resource management, employee benefits management, time and attendance systems, online expense reporting, and applicant tracking.

| • | Paychex HR [removed: Solutions,] [added: Services,] under which we offer [added: Paychex HR Solutions,] our administrative services organization [removed: (“ASO”)] [added: (“ASO”),] and [added: Paychex PEO,] our professional employer organization (“PEO”). We also offer Paychex HR Essentials, an ASO product that provides support to our clients over the phone or online to help manage employee-related topics; |

Our financial results for fiscal [removed: 2013] [added: 2014] reflected sustained growth in our business.

[removed: Checks] [added: Revenue] per [removed: payroll] [added: check, client base,] and [removed: revenue] [added: checks] per [removed: check] [added: payroll] continued to show improvement.

Our service execution was strong as we achieved [removed: our highest levels of customer satisfaction in our history and] record levels of client [removed: retention.][added: retention, at approximately 82% of the beginning of the year client base.]

Our financial results continue to be [removed: adversely] impacted by the interest rate environment as interest rates available on high quality financial instruments remain low.

Our combined funds held for clients and corporate investment portfolios earned an average rate of return of 1.0% for [added: both] fiscal [removed: 2013, compared to 1.1% for] [added: 2014 and] fiscal [removed: 2012] [added: 2013,] and [removed: 1.3%] [added: 1.1%] for fiscal [removed: 2011.][added: 2012.]

Highlights of our financial results for fiscal [removed: 2013,] [added: 2014,] compared to fiscal [removed: 2012,] [added: 2013,] are as follows:

| [removed: •] [added: ◦] | Payroll service revenue increased [removed: 2%] [added: 4%] to [removed: $1.5] [added: $1.6] billion. |

| • | Interest on funds held for clients decreased [removed: 6%] [added: 1%] to [removed: $41.0] [added: $40.7] million. |

| • | Operating income increased [removed: 6%] [added: 9%] to [removed: $904.8] [added: $982.7] million, and operating income, net of certain items, increased [removed: 7%] [added: 9%] to [removed: $863.8] [added: $942.0] million. Refer to the “Non-GAAP Financial Measure” discussion below for further information on operating income, net of certain items. |

[removed: | • | Net income increased 4% to $569.0 million and diluted earnings per share increased 3% to $1.56 per share. Net income and diluted earnings per share were impacted by the] [added: The] settlement of a state income tax [removed: matter, which] [added: matter] reduced diluted earnings per share by approximately $0.04 per [removed: share. |][added: share for fiscal 2013.]

| • | Dividends of [removed: $476.7] [added: $510.6] million were paid to stockholders, representing [removed: 84%] [added: 81%] of net income. |

Operating income, net of certain items, is not calculated through the application of GAAP and is not the required form of disclosure by the Securities and Exchange [removed: Commission.][added: Commission (“SEC”).]

Our client base totaled approximately [removed: 570,000] [added: 580,000] clients as of May 31, [removed: 2013,] [added: 2014,] compared to approximately [removed: 567,000] [added: 570,000] clients as of May 31, [removed: 2012,] [added: 2013,] and approximately [removed: 564,000] [added: 567,000] clients as of May 31, [removed: 2011.][added: 2012.]

Our client base increased approximately [removed: 1%] [added: 2%] for fiscal [removed: 2013,] [added: 2014,] compared to approximately 1% for [added: both] fiscal [removed: 2012] [added: 2013] and [removed: approximately 5% (1% decline on an organic basis) for] fiscal [removed: 2011.][added: 2012.]

For fiscal [removed: 2013,] [added: 2014,] payroll services client retention was at [added: a] record [removed: levels, exceeding 81%] [added: level] of [added: approximately 82% of] our beginning [added: of the year] client base.

[removed: We received the highest] [added: Our] client satisfaction results [removed: in our history,] [added: remained high,] which we believe is a result of our focus on providing [removed: high-quality] [added: innovative technology solutions and outstanding personal] service to our [removed: customers utilizing leading-edge technology] [added: clients] to maximize client retention.

[removed: eServices ancillary] [added: Our online HR administration] services are often included as part of the SaaS solutions for mid-market clients.

The following statistics demonstrate the growth in [removed: certain of our] [added: selected] HRS ancillary service offerings:

| | | Balance at May 31, [removed: 2013] [added: 2014] | | | Growth rates for fiscal year | | | | | | | | [removed: |]

| | | [removed: 2013 |] [added: 2014] | | [removed: 2012] | [added: 2013] | | | [removed: 2011] [added: 2012] | | | | |

| Paychex HR [removed: Solutions] [added: Services] client employees served | | [removed: 672,000] [added: 766,000] | | | [removed: 9] | [added: 14 |] % | | [removed: 8] [added: 672,000] | [removed: %] | | | [removed: 12] [added: 9] | % | [added: | 615,000 | | |]

| Paychex HR [removed: Solutions] [added: Services] clients | | [removed: 25,000] [added: 28,000] | | | [removed: 10] [added: 13] | % | | [removed: 8] [added: 10] | % | | [removed: |] 8 | % |

| [removed: Insurance services clients(1)] [added: Paychex HR Services clients] | | [removed: 108,000] [added: 28,000] | | | [removed: 1] | [added: 13 |] % | | [removed: 6] [added: 25,000] | [removed: %] | | | [removed: 8] [added: 10] | % | [added: | 23,000 | | |]

| Health and benefits services applicants | | [removed: 131,000] [added: 134,000] | | | [removed: 8] | [added: 3 |] % | | [removed: 23] [added: 131,000] | [removed: %] | | | [removed: 23] [added: 8] | % | [added: | 121,000 | | |]

| Retirement services plans [removed: (2)] | | [removed: 62,000] [added: 65,000] | | | [removed: 4] [added: 5] | % | | 4 | % | [removed: 568,000] | [removed: | 12] [added: 4] | % |

We [removed: have strengthened] [added: continue to strengthen] our position as an expert in our industry by serving as a source of education and information to clients, small businesses, and other interested parties.

[removed: In addition, we] [added: We] provide free webinars, white papers, and other information on our website to aid existing and prospective clients with the impact of regulatory changes.

[removed: Despite this macroeconomic environment, our] [added: Our] financial position as of May 31, [removed: 2013] [added: 2014] remained strong with cash and total corporate investments of [removed: $874.6] [added: $936.8] million and no debt.

During fiscal [removed: 2013,] [added: 2014,] our primary short-term investment vehicles were high quality variable rate demand notes (“VRDNs”) and bank demand deposit accounts.

We believe that our investments as of May 31, [removed: 2013] [added: 2014] were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

Cash flow from operations was [removed: $675.3] [added: $880.9] million for fiscal [removed: 2013.][added: 2014.]

Historically, we have funded our operations, capital purchases, business acquisitions, [added: share repurchases,] and dividend payments from our operating activities.

Our positive cash flows in fiscal [removed: 2013] [added: 2014] allowed us to support our business growth and to pay substantial dividends to our stockholders.

During fiscal [removed: 2013,] [added: 2014,] dividends paid to stockholders were [removed: 84%] [added: 81%] of net income.

| • | online HR administration services, including time and attendance and benefit enrollment; and |

Our primary goal is to support the success of our clients and their businesses through innovative technology solutions and outstanding personal service.

Payroll service revenue continued to advance with growth of 4% for fiscal 2014 as compared with fiscal 2013.

HRS revenue achieved double-digit growth, primarily due to demand for our human resource outsourcing solutions.

With the introduction of a new health insurance offering within our PEO during fiscal 2014, we began classifying PEO direct costs related to certain benefit plans where the Company retains risk as operating expenses rather than a reduction in service revenue.

This change, referred to as the "PEO direct cost adjustment" throughout this discussion, had no impact on operating income.

Refer to the Results of Operations section of this Item 7 and Note O to the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for further details on the impact to service revenue, total revenue, and operating expenses.

In evaluating HRS revenue, we historically have considered the PEO revenue net of these direct costs.

| • | Total service revenue increased 8% to $2.5 billion (6% growth excluding the PEO direct cost adjustment). |

| ◦ | HRS revenue increased 18% to $878.9 million (12% excluding the PEO direct cost adjustment). |

| • | Total revenue increased 8% to $2.5 billion (6% excluding the PEO direct costs adjustment). |

| • | |

We continue to position ourselves to capitalize on the opportunities arising from the shift to SaaS solutions as we invest heavily in product development relating to our SaaS capabilities and mobile applications.

Our Paychex Next Generation suite of innovative products and services includes a SaaS platform that combines the latest technology with superior customer service to provide human resource administrators a streamlined and integrated approach to workforce management.

With this, all Paychex services, including payroll, time and attendance, HR, benefits, training, and performance management, are accessible on a single cloud-based platform with Paychex Single Sign-On.

We believe continued investment in our technology is a key building block for future success.

In fiscal 2014, we broadened our portfolio of value-added services, offering the following new accounting and finance services:

| • | Paychex Accounting Online is a cloud-based accounting service that is being created and delivered via a strategic partnership and investment in Kashoo, a leading provider of cloud accounting services. This SaaS solution complements our industry-leading payroll and HR Solutions by expanding our suite of services for new businesses and entrepreneurs. This is a revenue sharing arrangement with Kashoo. |

| • | Biz2Credit is a leading online credit resource for small businesses we partnered with to offer the Paychex Small Business Loan Resource Center. This is an online resource that gives business owners access to more than 1,200 lenders offering a variety of loan options that fit their specific financing needs. This partnership underscores our commitment to help small businesses succeed by giving them access to funds they need to start, grow, and manage their business. We earn a referral fee from this partnership. |

| • | Paychex Payment Processing Services is a full suite of payment processing solutions, including credit and debit card processing, mobile and online payment services, and point-of-sale solutions, designed to meet the evolving needs of today’s small businesses. This service is being offered in partnership with Elavon, a leading global payments provider. This is a revenue sharing arrangement with Elavon. |

We introduced our new comprehensive solutions to help employers and employees with certain mandates under U.S. health care reform legislation.

These offerings include Paychex Employer Shared Responsibility Service designed to make it easier for business owners to determine if the Employer Shared Responsibility (“ESR”) provision applies to them, and what actions they may need to take.

We also offer our new ESR Complete Analysis and Monitoring Services for those clients that want a more robust solution.

The Paychex Benefit Account product allows employers to offer Flexible Savings Accounts, Health Savings Accounts, and Health Reimbursement Accounts on a single platform with one debit card for their flexibility.

The new health care reform section on our website is designed to provide answers, information, and solutions that employers need to prepare for and take action on health care reform.

We focused on product expansion in new markets and geographies by increasing our presence in Germany and expanding into South America.

We completed a business acquisition of a small payroll provider in Germany.

While not material to our consolidated financial results, this acquisition will increase our revenue and client base in Germany and help us gain a greater share of the payroll market in that country.

In South America, we are utilizing a joint venture arrangement in Brazil.

Brazil is a significant market with a growing economy, approximately five million small businesses, and, with recent regulatory changes, a significant opportunity for outsourcing payroll and human resource services.

The decision to expand into Brazil and further expand in Germany represents our focus on growth, specifically targeting product expansion through new markets and geographies.

HRS revenue and total service revenue growth reflect the change to classify certain PEO direct costs as operating expenses and not as a reduction in service revenue.

With the introduction of a new health insurance offering within the PEO during fiscal 2014, we began classifying PEO direct costs related to certain benefit plans where we retain risk as operating expenses rather than as a reduction in service revenue.

This had no impact on operating income.

The amounts reported for service revenue, total revenue, and combined operating and selling, general and administrative (“SG&A”) expenses reflect this gross presentation.

In addition to reporting the PEO revenue on a gross basis within HRS revenue as described above, a GAAP measure, we use an HRS net revenue presentation, which is a non-GAAP measure, to provide an additional view of our performance.

We believe HRS net revenue provides useful information as a measure of our revenue, eliminating the cost of services provided and on a consistent basis.

We use HRS net revenue in evaluating our operating results on a comparative basis, to identify trends in our business, and in evaluating the effectiveness of our business strategies.

HRS net revenue is not calculated through the application of GAAP and is not the required form of disclosure by the SEC.

As such, it should not be considered as a substitute for the GAAP measure and therefore, should not be used in isolation, but in conjunction with the GAAP measure.

| • | eServices; and |

Our primary goal is to transform the way businesses do business.

We strive to achieve this goal by leveraging our industry-leading technology to provide outstanding customer service.

Checks per payroll grew 1.6% for fiscal 2013, slightly less than the 2.0% growth experienced for fiscal 2012.

| • | HRS revenue increased 10% to $746.0 million. |

| • | Total revenue increased 4% to $2.3 billion. |

| | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| (1) | Includes workers’ compensation insurance services clients and health and benefits services clients. |

| (2) | Retirement services plans include ePlan Services, Inc. ("ePlan") plans. ePlan was acquired in May 2011. The organic growth rate for retirement services plans for fiscal 2011 would have been approximately 5%. |

Ongoing investment in our business is critical to our success.

During fiscal 2013, we continued to expand our product portfolio through internal development and acquisitions to add value for our clients.

We have positioned ourselves to capture the opportunity created by a greater interest in online SaaS solutions through both product development and recent acquisitions with SaaS-oriented business models, including our SurePayroll product, which continues to perform well.

The combination of our market-leading SaaS solutions combined with our service model allow us to offer a unique value proposition in the market.

We enhanced our online and mobile offerings, adding greater value and convenience for our clients.

These mobile applications allow our clients instant access and increased productivity.

Our single-sign-on feature provides a new and improved interface and mobility enhancer.

During fiscal 2013, we launched our mobile application for the smartphone.

We also added access to flexible spending account ("FSA") and health and benefits employer and employee information to our mobile offerings.

Early in fiscal 2013, we launched an industry-leading report center and robust report writer.

This provides a one-stop shop for standard or on-demand reporting needs, ad-hoc and customized reporting, data-extract templates and more.

We continued to enhance our Paychex Next Generation platform and its suite of innovative products, as we believe this is a key building block to our future success.

This platform allows us to leverage efficiencies in our processes and to continue to provide excellent customer service to our clients.

This technology creates a truly integrated workforce management solution for our clients, bringing together the services those clients need, including our small and mid-market payroll products and various human resource and employee benefit management services.

In our retirement services area, we have also experienced success in driving more sales through an enhanced approach to our direct relationships with financial advisors.

We recently announced a partnership with FSAStore.com, a national online store stocked exclusively with FSA-eligible products and services, to provide participants in the Paychex FSA a simple and convenient way to use their FSA funds.

During fiscal 2013, we launched a newly redesigned Paychex Accountant Knowledge Center, a free online resource available through www.paychex.com that brings valuable information and time-saving online tools to accounting professionals.

We also launched a new and improved BuildMyBiz.com that includes a number of new features that provide enhanced resources for entrepreneurs and small business owners.

The supply of high credit quality securities has been limited with the continued volatility in the global financial markets, thereby limiting our investment choices.

It is anticipated that cash and total

HRS revenue growth is expected to remain in line with our recent organic experience.

We believe that net income growth for fiscal 2014 is expected to benefit from a strong comparison mainly due to results in the fourth quarter of fiscal 2013.

In the fourth quarter of fiscal 2013, we settled a state income tax matter which reduced diluted earnings per share by approximately $0.04 per share.

Organic growth in payroll service revenue for fiscal 2012, which excludes the impact of acquisitions during fiscal 2011, was approximately 4%.

Client retention reached record levels for fiscal 2013, following a year of further improvement.

The growth rate for fiscal 2012 was impacted by the acquisition of ePlan in May 2011.

Organic growth in HRS revenue was approximately 11% for fiscal 2012.

The following factors contributed to the growth for fiscal 2013 and fiscal 2012:

| • | eServices revenue growth reflects higher client base and price increases, particularly as we continue to focus on adding SaaS-based solutions through product development and acquisitions. |

| Paychex HR Solutions clients | | 25,000 | | | | 10 | % | | 23,000 | | | | 8 | % | | 21,000 | | |

We manage the available-for-sale securities to a benchmark duration of two and one-half to three [added: and three-quarters] years.

During fiscal [removed: 2013,] [added: 2014,] our primary short-term investment vehicles were VRDNs and bank demand deposit accounts.

During fiscal [removed: 2013,] [added: 2014,] the average interest rate earned on our combined funds held for clients and corporate investment portfolios was 1.0%, compared with [removed: 1.1%] [added: 1.0%] for fiscal [removed: 2012] [added: 2013] and [removed: 1.3%] [added: 1.1%] for fiscal [removed: 2011.][added: 2012.]

Earnings from the [removed: available-for-sale-securities,] [added: available-for-sale securities,] which as of May 31, [removed: 2013] [added: 2014] had an average duration of [removed: 3.1] [added: 3.0] years, would not reflect decreases in interest rates until the investments are sold or mature and the proceeds are reinvested at lower rates.

[removed: for-sale] [added: In the next twelve months, approximately 15% of our available-for-sale] portfolio will mature, and it is currently anticipated that these proceeds will be reinvested at a lower average interest rate of approximately [removed: 1.1%.][added: 1.6%.]

The amortized cost and fair value of available-for-sale securities that had stated maturities as of May 31, [removed: 2013] [added: 2014] are shown below by contractual maturity.

| Due in one year or less | | $ | [removed: 274.3] [added: 392.0] | | | $ | [removed: 276.2] [added: 394.3] | |

| Due after one year through three years | | [removed: 701.2] [added: 759.8] | | | | [removed: 718.6] [added: 776.0] | | |

| Due after three years through five years | | [removed: 693.4] [added: 764.1] | | | | [removed: 709.7] [added: 774.3] | | |

| Due after five years | | [removed: 1,987.8] [added: 1,441.0] | | | | [removed: 1,986.9] [added: 1,446.8] | | |

The Federal Funds rate remained at a range of zero to 0.25% throughout fiscal years [added: 2014,] 2013, [removed: 2012,] and [removed: 2011.][added: 2012.]

Under normal financial market conditions, the impact to earnings from a 25-basis-point change in short-term interest rates would be [removed: in the range of $4.0 million to] [added: approximately] $4.5 million, after taxes, for a twelve-month period.

Our total investment portfolio (funds held for clients and corporate investments) averaged approximately [removed: $4.5] [added: $4.8] billion for fiscal [removed: 2013.][added: 2014.]

Our anticipated allocation is approximately [removed: 50%] [added: 45%] invested in short-term securities and VRDNs with an average duration of less than 30 days, and [removed: 50%] [added: 55%] invested in available-for-sale securities with an average duration of two and one-half to three and [removed: one-half] [added: three-quarters] years.

The combined funds held for clients and corporate available-for-sale securities reflected a net unrealized gain of [removed: $34.7] [added: $34.5] million as of May 31, [removed: 2013,] [added: 2014,] compared with an unrealized gain of [removed: $59.5] [added: $34.7] million as of May 31, [removed: 2012.][added: 2013.]

During fiscal [removed: 2012,] [added: 2014,] the net unrealized [removed: gain] [added: gain/(loss)] on our investment portfolios ranged from [removed: $46.4] [added: an unrealized loss of $12.8] million to [removed: $72.5] [added: an unrealized gain of $42.7] million.

The net unrealized gain on our investment portfolios was approximately [removed: 2.7] [added: $26.9] million as of July [removed: 15, 2013.][added: 16, 2014.]

As of May 31, [removed: 2013] [added: 2014] and [removed: 2012,] [added: 2013,] we had [removed: $3.7] [added: $3.4] billion and [removed: $3.1] [added: $3.7] billion, respectively, invested in available-for-sale securities at fair value.

The weighted-average yield-to-maturity was [removed: 1.8%] [added: 1.6%] and [removed: 2.2%] [added: 1.8%] as of May 31, [removed: 2013] [added: 2014] and [removed: May 31, 2012,] [added: 2013,] respectively.

The weighted-average yield-to-maturity excludes available-for-sale securities tied to short-term interest rates such as the [removed: VRDNs held as of May 31, 2013 and 2012.][added: VRDNs.]

Assuming a hypothetical decrease in both short-term and longer-term interest rates of 25 basis points, the resulting potential increase in fair value for our portfolio of available-for-sale securities as of May 31, [removed: 2013,] [added: 2014,] would be [removed: in the range of $18.5 million to $19.0] [added: approximately $20.0] million.

This hypothetical increase or decrease in the fair value of the portfolio would be recorded as an adjustment [added: to the portfolio’s recorded value, with an offsetting amount recorded in stockholders’ equity.]

We believe that the investments we held as of May 31, [removed: 2013] [added: 2014] were not other-than-temporarily impaired.

While [removed: $579.7] [added: $395.2] million of our available-for-sale securities had fair values that were below amortized cost, we believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized loss of [removed: $5.7] [added: $3.0] million was due to changes in interest rates and was not due to increased credit risk or other valuation concerns.

Substantially all of the securities in an unrealized loss position as of May 31, [removed: 2013] [added: 2014] and [removed: 2012] [added: 2013] held an AA rating or better.

| | | May 31, 2014 | | | | | | |

| Total | | $ | 3,356.9 | | | $ | 3,391.4 | |

Refer to Note F of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for additional disclosures on fair value.

In the next twelve months, slightly less than 15% of our available-

| | | May 31, 2013 | | | | | | |

| Total | | $ | 3,656.7 | | | $ | 3,691.4 | |

The decrease was the result of higher market yields experienced near the end of fiscal 2013.

In determining fair value, we utilize the Interactive Data Pricing Service.

to the portfolio’s recorded value, with an offsetting amount recorded in stockholders’ equity.

We are a leading provider of [added: integrated] payroll, human resource, insurance, and benefits outsourcing solutions for small- to medium-sized businesses.

We maintain our corporate headquarters in Rochester, New York, and have more than 100 [removed: offices nationwide.][added: offices.]

| • | providing high-quality, timely, accurate, and affordable comprehensive [added: integrated] payroll and [removed: integrated] human resource services; |

| • | delivering these services utilizing a well-trained and responsive work force through a network of local and corporate offices servicing more than 100 of the largest markets in the U.S., [removed: and] [added: as well as] in [removed: Germany;] [added: Germany and Brazil;] |

| • | capitalizing on the growth opportunities within our existing client base and from new clients by increasing utilization of our payroll and human resource [removed: ancillary] services and products; |

By offering [removed: ancillary] [added: additional] services that leverage the information gathered in the base payroll processing service, we are able to provide comprehensive outsourcing services that allow employers to expand their employee benefits offerings at an affordable cost.

[removed: May 31, 2013 ("fiscal 2013"), we introduced] [added: We offer] an industry-leading, web-based report center and robust report writer.

Payroll processing is [removed: the foundation] [added: a key aspect] of our service portfolio.

We offer a SaaS [removed: solution] [added: solution, through a single, web-based portal,] to meet the payroll and human resource administrative needs of our MMS clients.

MMS clients also have the option to select from a number of á la carte payroll and human resource ancillary [removed: services or opt for our comprehensive human resource and payroll outsourcing solution, Paychex HR Solutions.][added: services.]

Employee payment services: Our employee payment services provide [removed: the] [added: an] employer [added: with] the option of paying their employees by direct deposit, payroll debit card, a check drawn on a Paychex account (Readychex®), or a check drawn on the employer’s [added: account and electronically signed by us.]

Paychex HR [removed: Solutions:] [added: Services:] We offer comprehensive human resource outsourcing solutions that provide businesses a full-service approach to the outsourcing of employer and employee administrative needs.

Our Paychex HR [removed: Solutions] [added: Services] offering is available [removed: as] [added: through Paychex HR Solutions,] an administrative services organization [removed: (“ASO”) and] [added: (“ASO”), or Paychex PEO,] a professional employer organization (“PEO”).

Our PEO differs from the ASO in that we serve as a co-employer of the clients’ employees, [added: provide health care coverage to PEO employees, and] assume the risks and rewards of workers’ compensation [removed: insurance,] [added: insurance] and [removed: provide] [added: certain] health [removed: care coverage to PEO client employees.][added: insurance offerings.]

PEO services are sold through our registered and licensed subsidiary, Paychex Business Solutions, Inc. The integration of the sales and service models of the ASO and PEO under Paychex HR [removed: Solutions] [added: Services] has reduced redundancies and created more flexible options for business owners to find the solution that best meets their needs.

As of May 31, [removed: 2013,] [added: 2014,] Paychex HR [removed: Solutions] [added: Services] was utilized by [removed: 25,000] [added: 28,000] clients with approximately [removed: 672,000] [added: 766,000] client employees.

Retirement services administration: Our retirement services product line offers a variety of options to clients, including 401(k) plans, 401(k) SIMPLE plans, SIMPLE IRAs, 401(k) plans with safe harbor provisions, [added: owner-only 401(k) plans,] profit sharing plans, and money purchase plans.

We are one of the largest 401(k) recordkeepers for small businesses in the U.S. For fiscal [removed: 2013] [added: 2014] and the fiscal year ended May 31, [removed: 2012] [added: 2013] ("fiscal [removed: 2012"),] [added: 2013"),] we earned an average fee of approximately twenty to twenty-five basis points from [removed: the] external fund managers based on the total asset value of participants' funds.

[removed: This acquisition allowed us to expand our] [added: Our] retirement services [removed: to] [added: clients include] financial advisors.

As of May 31, [removed: 2013,] [added: 2014,] retirement services covered approximately [removed: 62,000] [added: 65,000] plans and the asset value of participants' funds externally managed totaled approximately [removed: $19.3] [added: $21.9] billion.

[removed: eServices:] [added: Online HR administration services:] We offer online human resource administration software products for employee benefits management and administration and time and attendance solutions.

[added: Our time and attendance products, including our] Time and Labor [removed: Online helps] [added: Online, help] minimize the time spent compiling time sheet information.

[removed: It allows] [added: They allow] the employer to handle multiple payroll scenarios and [removed: results] [added: result] in improved productivity, accuracy, and reliability in the payroll process.

[removed: The] [added: Our] expense reporting solution is a web-based solution that provides [added: clients with tools to manage and control the expense reporting process.]

[removed: In recent years, we have increased our emphasis on the selling of] [added: We sell] ancillary services and products to both new clients and our existing client base.

[removed: In] [added: As part of certain sales force initiatives in] fiscal 2013, we added new territories and focused on market segmentation in payroll and retirement services.

Approximately [removed: 60%] [added: 50%] of our new core payroll clients (excluding business acquisitions) come from these referral sources.

[removed: We recently celebrated the] [added: For over] ten [removed: year anniversary of our] [added: years, we have had a] partnership with the American Institute of Certified Public Accountants (“AICPA”) as the preferred payroll provider for its AICPA Business SolutionsTM Program.

We [added: also] enhanced our relationships with CPAs by partnering with various state CPA society organizations.

In addition, we [removed: recently created] [added: have] a dedicated business development group to drive sales in the banking and franchise channels.

Our [removed: website] [added: website, which is] available at www.paychex.com, [removed: which] includes online payroll sales presentations and service and product [removed: information,] [added: information and] is a cost-efficient tool that serves as a source of leads and new sales, while complementing the efforts of our direct sales force.

In addition, our insurance services [removed: website] [added: website, which is] available at [removed: www.paychexinsurance.com] [added: www.paychexinsurance.com,] provides information to help small businesses navigate the insurance industry, and generates leads by allowing interested parties to get in contact with one of our professional insurance agents.

A section of both the Paychex website, www.paychex.com, and our insurance services website, www.paychexinsurance.com, is designated to the topic of health care reform to provide answers, information, and solutions that employers need to prepare for and take action relating to the Patient Protection and Affordable Care Act of 2010 [removed: ("PPACA")] [added: (“PPACA”)] and the Health Care and Education [added: Reconciliation Act of 2010 (together with the PPACA, the “Act”).]

For fiscal [removed: 2013,] [added: 2014,] client retention reached record levels, [removed: in excess of 81%] [added: rising to approximately 82%] of our beginning client base.

Competition in the payroll processing and human resource services industry is primarily based on service [removed: responsiveness;] [added: responsiveness,] product quality and reputation, including ease of use and accessibility of [removed: technology;] [added: technology,] breadth of service and product [removed: offering;] [added: offerings,] and price.

We also continue to add more capabilities to our [removed: mobility] [added: mobile] applications.

As of May 31, [removed: 2013,] [added: 2014,] we employed approximately [removed: 12,400] [added: 12,700] people.

However, during our third fiscal quarter, which ends in February, the number of new payroll clients, new retirement services clients, and new Paychex HR [removed: Solutions] [added: Services] worksite employees tends to be higher than during the rest of the fiscal year, primarily because many new clients prefer to start using our services at the beginning of a calendar year.

Historically, as a result of these factors, our total revenue has been slightly higher in our third fiscal quarter, with greater sales commission expenses also reported in [removed: the third] [added: that] quarter.

Also, copies of our Annual Report to Stockholders and Proxy Statement, to be issued in connection with our [removed: 2013] [added: 2014] Annual Meeting of Stockholders, will be made available, free of charge, upon written request submitted to Paychex, Inc., c/o Corporate Secretary, 911 Panorama Trail South, Rochester, New York 14625-2396.

As of May 31, 2014, we serviced approximately 580,000 payroll clients.

| • | Paychex HR Services; |

| • | online HR administration services, including time and attendance and benefit enrollment; and |

In the fiscal year ended May 31, 2014 ("fiscal 2014"), we also introduced additional value-added services that aid clients with certain accounting and finance needs.

Both core and MMS clients can opt for our comprehensive human resource and payroll outsourcing solution, Paychex HR Services.

PIA also offers new comprehensive solutions to help employers and employees with certain mandates under U.S. health care reform legislation.

This includes Paychex Employer Shared Responsibility Service designed to make it easier for business owners to determine if the Employer Shared Responsibility ("ESR") provision applies to them, and what actions they may need to take.

We also offer our new ESR Complete Analysis and Monitoring Service for those clients that want a more robust solution.

The Paychex Benefit Account product allows employers to offer Flexible Savings Accounts, Health Savings Accounts, and Health Reimbursement Accounts on a single platform with one debit card for their flexibility.

A section on this website is designed to provide answers, information, and solutions that employers need to prepare for and take action on health care reform.

Accounting and Finance Services

We offer various accounting and finance services to small- to medium-sized businesses.

Paychex Accounting Online is a cloud-based accounting service delivered through a partnership and investment in Kashoo, a leading provider of cloud accounting services.

Paychex Payment Processing Services provides various options for small businesses to accept payments from customers, including credit and debit card processing, ACH and eCard processing, mobile and online payments, and point-of-sale processing.

We also offer payment distribution services to help clients lower their operating costs while increasing their payroll accuracy.

Through a partnership with Biz2Credit, a leading online credit resource for small businesses, we offer the Paychex Small Business Loan Resource Center, giving business owners access to over 1,200 lenders offering a variety of loan options to meet their financing needs.

The accounting and finance services are in their infancy, but offer additional value-added services that small-business owners need.

We utilize a virtual sales force to service geographical areas where we may not have a local presence.

The BuildMyBiz website, which is available at www.BuildMyBiz.com, provides tools and resources for starting, growing, and managing a business.

We also have a joint-venture arrangement to provide payroll and human resource services in Brazil.

| < 10 | | 91% | | 65% |

| 10-19 | | 4% | | 17% |

| 50 + | | 2% | | 6% |

We believe that our excellent customer service, together with our leading-edge technology, distinguishes us from our competitors.

As of May 31, 2013, we serviced approximately 570,000 clients, including approximately 2,000 clients through four offices in Germany.

| • | Paychex HR Solutions; |

| • | eServices; and |

During the fiscal year ended

MMS clients can select Paychex One-Source Solutions, which seamlessly integrates our mid-market payroll product, Paychex Time and Labor Online, and Paychex HR Online applications through a single, web-based client portal.

account and electronically signed by us.

In May 2011, we acquired ePlan Services, Inc., a provider of recordkeeping and administrative solutions to the defined contribution marketplace.

As of May 31, 2013, approximately 108,000 clients have appointed PIA as their agent for servicing their business insurance needs.

In fiscal 2013, we expanded our eServices product line through two acquisitions in the areas of expense reporting and applicant tracking.

clients with tools to manage and control the expense reporting process.

During fiscal 2013, in an effort to help entrepreneurs and small-business owners achieve success, we launched a new and improved website, BuildMyBiz.com, that provides tools and resources for starting, growing, and managing a business.

Reconciliation Act of 2010.

| 1-4 | | 83% | | 42% |

| 5-19 | | 13% | | 40% |

| 50-99 | | 1% | | 4% |

| 100+ | | —% | | 2% |

For the fiscal year ended May 31, [removed: 2013][added: 2014]

As of November 30, [removed: 2012,] [added: 2013,] the last business day of the most recently completed second fiscal quarter, shares held by non-affiliates of the registrant had an aggregate market value of [removed: $10,580,591,534] [added: $14,236,029,018] based on the closing price reported for such date on the NASDAQ Global Select Market.

As of June 30, [removed: 2013, 365,531,897] [added: 2014, 363,099,317] shares of the registrant’s common stock, $.01 par value, were outstanding.

Portions of the registrant’s definitive proxy statement to be issued in connection with its Annual Meeting of Stockholders to be held on or about October [removed: 16, 2013,] [added: 15, 2014,] to the extent not set forth herein, are incorporated by reference into Part III, Items 10 through 14, inclusive.

Risk Factors [removed: 7][added: 8]

Unresolved Staff Comments [removed: 9][added: 10]

Properties [removed: 10][added: 11]

Legal Proceedings [removed: 10][added: 11]

Mine Safety Disclosures [removed: 10][added: 11]

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities [removed: 10][added: 11]

Selected Financial Data [removed: 12][added: 14]

Management’s Discussion and Analysis of Financial Condition and Results of Operations [removed: 13][added: 14]

Quantitative and Qualitative Disclosures About Market Risk [removed: 25][added: 28]

Financial Statements and Supplementary Data [removed: 27][added: 30]

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure [removed: 54][added: 59]

Controls and Procedures [removed: 54][added: 59]

Other Information [removed: 55][added: 60]

Directors, Executive Officers and Corporate Governance [removed: 55][added: 60]

Executive Compensation [removed: 56][added: 61]

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters [removed: 56][added: 61]

Certain Relationships and Related Transactions, and Director Independence [removed: 57][added: 62]

Principal Accounting Fees and Services [removed: 57][added: 62]

Exhibits and Financial Statement Schedules [removed: 57][added: 62]

| | Signatures | [removed: 60] [added: 65] | |

| • | changes in the laws regulating collection and payment of payroll taxes, professional employer organizations, and employee benefits, including retirement plans, workers’ compensation, health [removed: insurance,] [added: insurance (including health care reform legislation),] state unemployment, and section 125 plans; |

10-K 1 payx-053114x10k.htm 10-K

For the fiscal year ended May 31, 2014

| • | changes in the availability of skilled workers, in particular those supporting our technology and product development; |

10-K 1 payx-053113x10k.htm 10-K

| • | changes in the availability of skilled workers; |

We owned and leased the following properties as of May 31, [removed: 2013:][added: 2014:]

| Rochester, New York | [removed: 134,000] [added: 189,000] | |

| Other U.S. locations | [removed: 2,084,000] [added: 2,024,000] | |

| Germany | [removed: 1,000] [added: 28,000] | |

| Total leased facilities | [removed: 2,219,000] [added: 2,241,000] | |

Our facilities in Rochester, New York house various distribution, processing, and technology [removed: functions;] [added: functions,] certain ancillary [removed: functions;] [added: functions,] a telemarketing [removed: unit;] [added: unit,] and other back-office functions.

[added: | (1) |] In fiscal 2013, the dividends that would typically have been paid in February 2013 and May 2013 were accelerated and paid in December 2012. [added: |]

As of June 30, [removed: 2013,] [added: 2014,] there were [removed: 14,456] [added: 15,333] holders of record of our common stock, which includes registered holders and participants in the Paychex, Inc. Dividend Reinvestment and Stock Purchase Plan.

There were also [removed: 7,222] [added: 6,997] participants in the Paychex, Inc. Employee Stock Purchase Plan and [removed: 5,367] [added: 5,261] participants in the Paychex, Inc. Employee Stock Ownership Plan.

The high and low sale prices for our common stock as reported on the NASDAQ Global Select Market and dividends for fiscal [removed: 2013] [added: 2014] and fiscal [removed: 2012] [added: 2013] are as follows:

| | | Fiscal [removed: 2013 |] [added: 2014] | | | | | | Fiscal [removed: 2012] [added: 2013] | | | | | [added: |]

| | | Sales [removed: Prices] [added: prices] | | | | Cash dividends declared per share | | [removed: |] Sales prices | | | | Cash dividends declared per share [added: (1)] | [added: |]

| First quarter | | [removed: $33.44] [added: $40.84] | | [removed: $29.12] [added: $35.75] | | [removed: $0.32] [added: $0.35] | | [added: $33.44] | [removed: $32.27] | [added: $29.12] | [removed: $25.12] | [added: $0.32] | [removed: $0.31] |

| Second quarter | | [removed: $34.70] [added: $44.01] | | [removed: $31.27] [added: $36.80] | | [removed: $0.33] [added: $0.35] | | [added: $34.70] | [removed: $30.12] | [added: $31.27] | [removed: $25.20] | [added: $0.33] | [removed: $0.32] |

| Third quarter | | [removed: $34.06] [added: $45.95] | | [removed: $30.55] [added: $39.86] | | [removed: $0.66] [added: $0.35] | | [added: $34.06] | [removed: $32.73] | [added: $30.55] | [removed: $28.76] | [added: $0.66] | [removed: $0.32] |

| Fourth quarter | | [removed: $38.66] [added: $43.56] | | [removed: $32.73] [added: $39.80] | | [removed: —] [added: $0.35] | | [added: $38.66] | [removed: $32.24] | [added: $32.73] | [removed: $29.12] | [added: —] | [removed: $0.32] |

The closing price of our common stock as of May [removed: 31, 2013,] [added: 30, 2014,] as reported on the NASDAQ Global Select Market, was [removed: $37.23] [added: $41.11] per share.

The following graph shows a five-year comparison of the total cumulative returns of investing $100 on May 31, [removed: 2008,] [added: 2009,] in Paychex common stock, the S&P 500 Index, and a Peer Group Index.

[removed: ][added: ]

| May 31, | | [removed: 2008 | |] 2009 | | 2010 | | 2011 | | 2012 | | 2013 | [added: | 2014 |]

There can be no assurance that our stock performance will continue into the future with the same or similar trends depicted in the graph [removed: on the previous page.][added: above.]

In October 2012, our Board approved a program to repurchase up to $350 million of our common stock, with authorization expiring on May 31, 2014.

In May 2014, the Board approved a new program to repurchase up to $350 million of its common stock with authorization expiring on May 31, 2017.

Shares of stock repurchased during the three months ended May 31, 2014 were retired.

All shares of stock repurchased during the three months ended May 31, 2014 were purchased pursuant to the program.

The following table provides information relating to our repurchase of common stock during the three months ended May 31, 2014:

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| Period | | Total number of shares purchased | | | Average price paid per share | | | | Approximate dollar value of shares that may yet be purchased under the program | | |

| March 1, 2014 - March 31, 2014 | | — | | | $ | — | | | $ | 147,044,948 | |

| April 1, 2014 - April 30, 2014 | | 844,015 | | | $ | 41.08 | | | $ | 112,369,489 | |

| May 1, 2014 - May 31, 2014 | | 300,000 | | | $ | 40.37 | | | $ | 100,257,468 | |

| Total for the period | | 1,144,015 | | | $ | 40.90 | | | $ | 100,257,468 | |

| Paychex | | $100.00 | | $108.99 | | $128.64 | | $124.54 | | $160.94 | | $183.86 |

| S&P 500 | | $100.00 | | $120.99 | | $152.39 | | $151.76 | | $193.15 | | $232.64 |

| Peer Group | | $100.00 | | $105.30 | | $142.18 | | $134.51 | | $178.37 | | $221.56 |

| --- | --- |

| | |

| Paychex | | $100.00 | | $82.72 | | $90.17 | | $106.43 | | $103.05 | | $133.33 |

| S&P 500 | | $100.00 | | $67.42 | | $81.56 | | $102.72 | | $102.30 | | $130.20 |

| Peer Group | | $100.00 | | $81.72 | | $86.04 | | $116.18 | | $109.92 | | $145.76 |

Equifax, Inc. was removed from our Peer Group during fiscal 2013.

Our Peer Group is utilized primarily for analysis of executive compensation, and the Governance and Compensation Committee of the Board felt that Equifax executive compensation was an outlier in comparison to the Peer Group in its entirety.

| In millions, except per share amounts Year ended May 31, | | [removed: 2013] [added: 2014] (1) | | | | [removed: 2012] [added: 2013 (2)] | | | | [removed: 2011] [added: 2012] | | | | [removed: 2010 (2)] [added: 2011] | | | | [removed: 2009] [added: 2010 (3)] | | |

| Service revenue | | $ | [removed: 2,285.2] [added: 2,478.2] | | | $ | [removed: 2,186.2] [added: 2,285.2] | | | $ | [removed: 2,036.2] [added: 2,186.2] | | | $ | [removed: 1,945.8] [added: 2,036.2] | | | $ | [removed: 2,007.3] [added: 1,945.8] | |

| Interest on funds held for clients | | [removed: 41.0] [added: 40.7] | | | | [removed: 43.6] [added: 41.0] | | | | [removed: 48.1] [added: 43.6] | | | | [removed: 55.0] [added: 48.1] | | | | [removed: 75.5] [added: 55.0] | | |

| Total revenue | | $ | [removed: 2,326.2] [added: 2,518.9] | | | $ | [removed: 2,229.8] [added: 2,326.2] | | | $ | [removed: 2,084.3] [added: 2,229.8] | | | $ | [removed: 2,000.8] [added: 2,084.3] | | | $ | [removed: 2,082.8] [added: 2,000.8] | |

| Operating income | | $ | [removed: 904.8] [added: 982.7] | | | $ | [removed: 853.9] [added: 904.8] | | | $ | [removed: 786.4] [added: 853.9] | | | $ | [removed: 724.8] [added: 786.4] | | | $ | [removed: 805.2] [added: 724.8] | |

| Net income | | $ | [removed: 569.0] [added: 627.5] | | | $ | [removed: 548.0] [added: 569.0] | | | $ | [removed: 515.3] [added: 548.0] | | | $ | [removed: 477.0] [added: 515.3] | | | $ | [removed: 533.5] [added: 477.0] | |

| Diluted earnings per share | | $ | [removed: 1.56] [added: 1.71] | | | $ | [removed: 1.51] [added: 1.56] | | | $ | [removed: 1.42] [added: 1.51] | | | $ | [removed: 1.32] [added: 1.42] | | | $ | [removed: 1.48] [added: 1.32] | |

| Cash dividends per common share | | $ | [removed: 1.31] [added: 1.40] | | | $ | [removed: 1.27] [added: 1.31] | | | $ | [removed: 1.24] [added: 1.27] | | | $ | 1.24 | | | $ | 1.24 | |

| Purchases of property and equipment | | $ | [removed: 98.7] [added: 84.1] | | | $ | [removed: 89.6] [added: 98.7] | | | $ | [removed: 100.5] [added: 89.6] | | | $ | [removed: 61.3] [added: 100.5] | | | $ | [removed: 64.7] [added: 61.3] | |

| Cash and total corporate investments | | $ | [removed: 874.6] [added: 936.8] | | | $ | [removed: 790.0] [added: 874.6] | | | $ | [removed: 671.3] [added: 790.0] | | | $ | [removed: 656.9] [added: 671.3] | | | $ | [removed: 574.7] [added: 656.9] | |

| Total assets | | $ | [removed: 6,163.7] [added: 6,370.1] | | | $ | [removed: 6,479.6] [added: 6,163.7] | | | $ | [removed: 5,393.8] [added: 6,479.6] | | | $ | [removed: 5,226.3] [added: 5,393.8] | | | $ | [removed: 5,127.4] [added: 5,226.3] | |

| Stockholders’ equity | | $ | [removed: 1,773.7] [added: 1,777.0] | | | $ | [removed: 1,604.5] [added: 1,773.7] | | | $ | [removed: 1,496.2] [added: 1,604.5] | | | $ | [removed: 1,402.0] [added: 1,496.2] | | | $ | [removed: 1,341.5] [added: 1,402.0] | |

| Return on stockholders’ equity | | [removed: 34] [added: 35] | | % | | 34 | | % | | [removed: 35] [added: 34] | | % | | [removed: 34] [added: 35] | | % | | [removed: 41] [added: 34] | | % |

| [removed: (1)] [added: (2)] | In the fourth quarter of fiscal 2013, the Company increased its tax provision related to the settlement of a state income tax matter. This reduced diluted earnings per share by approximately $0.04 per share. |

| [removed: (2)] [added: (3)] | Includes an expense charge of $18.7 million to increase the Rapid Payroll litigation reserve. |

| (1) | With the introduction of a new health care offering within the PEO, the Company began to recognize certain PEO direct costs as operating expenses rather than as a reduction in service revenue. In the table above, this impacted service revenue and total revenue, but had no impact on operating income. Refer to the Results of Operations section of Item 7 of this Form 10-K and Note O of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for further details on the impact to service revenue, total revenue, and operating expenses. |

| --- | --- |

| | |

| Report on Management’s Assessment of Internal Control Over Financial Reporting | [removed: 28] [added: 31] | |

| Reports of Independent Registered Public Accounting [removed: Firm] [added: Firms] | [removed: 29] [added: 32] | |

| Consolidated Statements of Income and Comprehensive Income for the Years Ended May 31, [added: 2014,] 2013, [removed: 2012,] and [removed: 2011] [added: 2012] | [removed: 31] [added: 34] | |

| Consolidated Balance Sheets as of May 31, [removed: 2013] [added: 2014] and [removed: 2012] [added: 2013] | [removed: 32] [added: 35] | |

| Consolidated Statements of Stockholders’ Equity for the Years Ended May 31, [added: 2014,] 2013, [removed: 2012,] and [removed: 2011] [added: 2012] | [removed: 33] [added: 36] | |

| Consolidated Statements of Cash Flows for the Years Ended May 31, [added: 2014,] 2013, [removed: 2012,] and [removed: 2011] [added: 2012] | [removed: 34] [added: 37] | |

| Notes to Consolidated Financial Statements | [removed: 35] [added: 38] | |

| Schedule II — Valuation and Qualifying Accounts for the Years Ended May 31, [added: 2014,] 2013, [removed: 2012,] and [removed: 2011] [added: 2012] | [removed: 54] [added: 59] | |

Management of Paychex, Inc. (the “Company”) is responsible for establishing and maintaining [removed: an] adequate [removed: system of] internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the [removed: Consolidated Financial Statements.][added: financial statements for external purposes in accordance with generally accepted accounting principles.]

Because of its inherent limitations, internal control over financial reporting may not prevent or detect [removed: misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.][added: misstatements.]

Management assessed the effectiveness of the Company’s internal control over financial reporting as of May 31, [removed: 2013.][added: 2014.]

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in [removed: the Internal] [added: “Internal] Control — Integrated [removed: Framework.][added: Framework” (1992).]

Based on our assessment, management [removed: believes] [added: determined] that the Company maintained effective internal control over financial reporting as of May 31, [removed: 2013.][added: 2014.]

The Company’s independent registered public accounting firm, [removed: Ernst & Young] [added: PricewaterhouseCoopers] LLP, is appointed by the Company’s Audit Committee.

[removed: Ernst & Young] [added: PricewaterhouseCoopers] LLP has audited the Consolidated Financial Statements included in this Annual Report on Form [removed: 10-K,] [added: 10-K] and [added: the effectiveness of the Company's internal control over financial reporting] as [added: of May 31, 2014, and as] a part of their [added: integrated] audit, has issued their report, included herein, on the effectiveness of the Company’s internal control over financial reporting.

[removed: The] [added: To the] Board of Directors [added: and Stockholders of Paychex, Inc.]

[removed: We have audited Paychex, Inc.’s] [added: Also in our opinion, the Company maintained, in all material respects, effective] internal control over financial reporting as of May 31, [removed: 2013,] [added: 2014,] based on criteria established in Internal Control [removed: —] [added: -] Integrated Framework [added: (1992)] issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (the COSO criteria).][added: (COSO).]

[removed: Paychex, Inc.’s] [added: The Company's] management is responsible for [added: these financial statements and financial statement schedule, for] maintaining effective internal control over financial [removed: reporting,] [added: reporting] and for its assessment of the effectiveness of internal control over financial [removed: reporting] [added: reporting,] included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting.

Our responsibility is to express [removed: an opinion] [added: opinions] on [added: these financial statements, on] the [removed: company’s] [added: financial statement schedule, and on the Company's] internal control over financial reporting based on our [added: integrated] audit.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether [added: the financial statements are free of material misstatement and whether] effective internal control over financial reporting was maintained in all material respects.

Our audit [added: of internal control over financial reporting] included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, [added: and] testing and evaluating the design and operating effectiveness of internal control based on the assessed [removed: risk, and performing such other procedures as we considered necessary in the circumstances.][added: risk.]

We believe that our audit provides a reasonable basis for our [removed: opinion.][added: opinions.]

A company’s internal control over financial reporting includes those policies and procedures that [removed: (1)] [added: (i)] pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; [removed: (2)] [added: (ii)] provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and [removed: (3)] [added: (iii)] provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

We [removed: also] have [removed: audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),] [added: audited] the [added: accompanying] consolidated balance [removed: sheets] [added: sheet] of Paychex, Inc. as of May 31, [removed: 2013 and 2012,] [added: 2013,] and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the [removed: three] [added: two] years in the period ended May 31, [removed: 2013 of Paychex, Inc., and our report dated July 22, 2013, expressed an unqualified opinion thereon.][added: 2013.]

Our audits also included the financial statement [removed: schedule] [added: schedules] listed in the Index at Item [removed: 15(a).][added: 15(a) for the years ended May 31, 2013 and 2012.]

These financial statements and [removed: schedule] [added: schedules] are the responsibility of the [removed: Company’s] [added: Company's] management.

Our responsibility is to express an opinion on these financial statements and [removed: schedule] [added: schedules] based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paychex, Inc. at May 31, [removed: 2013 and 2012,] [added: 2013,] and the consolidated results of its operations and its cash flows for each of the [removed: three] [added: two] years in the period ended May 31, 2013, in conformity with U.S. generally accepted accounting principles.

Also, in our opinion, the related financial statement [removed: schedule,] [added: schedules for the years ended May 31, 2013 and 2012,] when considered in relation to the basic financial statements taken as a whole, [removed: presents] [added: present] fairly in all material respects the information set forth therein.

| Year ended May 31, | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | |

| Service revenue | | $ | [removed: 2,285.2] [added: 2,478.2] | | | $ | [removed: 2,186.2] [added: 2,285.2] | | | $ | [removed: 2,036.2] [added: 2,186.2] | |

| Interest on funds held for clients | | [removed: 41.0] [added: 40.7] | | | | [removed: 43.6] [added: 41.0] | | | | [removed: 48.1] [added: 43.6] | | |

| Total revenue | | [removed: $] [added: 2,518.9] | [removed: 2,326.2] | | | [removed: $] [added: 2,326.2] | [removed: 2,229.8] | | | [removed: $] [added: 2,229.8] | [removed: 2,084.3] | |

| Operating expenses | | [removed: 671.3] [added: 732.5] | | | | [removed: 670.1] [added: 671.3] | | | | [removed: 651.5] [added: 670.1] | | |

| Selling, general and administrative expenses | | [removed: 750.1] [added: 803.7] | | | | [removed: 705.8] [added: 750.1] | | | | [removed: 646.4] [added: 705.8] | | |

| Total expenses | | [removed: 1,421.4] [added: 1,536.2] | | | | [removed: 1,375.9] [added: 1,421.4] | | | | [removed: 1,297.9] [added: 1,375.9] | | |

| Operating income | | [removed: 904.8] [added: 982.7] | | | | [removed: 853.9] [added: 904.8] | | | | [removed: 786.4] [added: 853.9] | | |

| Investment income, net | | [removed: 6.6] [added: 5.4] | | | | [removed: 6.4] [added: 6.6] | | | | [removed: 5.8] [added: 6.4] | | |

| Income before income taxes | | [removed: 911.4] [added: 988.1] | | | | [removed: 860.3] [added: 911.4] | | | | [removed: 792.2] [added: 860.3] | | |

| Description | Page | |

In our opinion, the accompanying consolidated balance sheet as of May 31, 2014 and the related consolidated statements of income and comprehensive income, of stockholders’ equity, and of cash flows for the year then ended present fairly, in all material respects, the financial position of Paychex, Inc. and its subsidiaries as of May 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 8 for the year ended May 31, 2014 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

July 22, 2014

| Repurchases of common shares | | (6.2 | ) | | (0.1 | | ) | | (11.2 | | ) | | (238.4 | | ) | | | | | | (249.7 | | ) |

| Stock-based award transactions | | 3.8 | | | | | | | 119.7 | | | | (9.5 | | ) | | | | | | 110.2 | | |

| Balance as of May 31, 2014 | | 363.0 | | | $ | 3.6 | | | $ | 794.4 | | | $ | 957.5 | | | $ | 21.5 | | | $ | 1,777.0 | |

| Year ended May 31, | | 2014 | | | | 2013 | | | | 2012 | | |

| Net income | | $ | 627.5 | | | $ | 569.0 | | | $ | 548.0 | |

| Repurchases of common shares | | (249.7 | | ) | | — | | | | — | | |

Software developed as part of the Company's main processing platform is depreciated over fifteen years.

For certain of the Company's service offerings, it receives advance payments for set-up fees from its clients.

The Company defers revenue associated with these advance payments and the related costs over the expected life of its clients.

In fiscal 2014, with the addition of a new health care offering within the PEO, direct costs related to certain benefit plans where the Company retains risk were classified as operating expenses rather than as a reduction in service revenue.

PEO insurance services: As part of the PEO service, the Company offers workers’ compensation insurance and health insurance to client companies for the benefit of client employees.

With respect to the PEO health insurance, the Company offers various health insurance plans that take the form of either fully insured fixed cost plans with various national insurance carriers or a fully insured minimum premium insurance arrangement with coverage provided through a single national carrier.

Under the minimum premium arrangement, the Company's health benefits insurance reserves are established to provide for the payment of claims liability charges in accordance with its service contract with the carrier.

The Company's maximum individual claims liability was $0.3 million under its fiscal 2014 minimum premium health insurance plan.

Amounts accrued related to the health benefits insurance reserves are considered immaterial as of May 31, 2014.

The Company periodically reassesses its assumptions as well as its choice of valuation model.

Recently adopted accounting pronouncements: Effective June 1, 2013, the Company adopted Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment,” issued by the Financial Accounting Standards Board (“FASB”).

Adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

Recently issued accounting pronouncements: In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).” This guidance requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition.

The current accounting standard for stock-based compensation as it applies to awards with performance conditions should be applied.

The Company is currently evaluating this guidance, but does not anticipate it will have a material impact to its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This guidance supersedes current guidance on revenue recognition in Topic 605, “Revenue Recognition.” In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition.

This guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and will be required to be applied retrospectively.

Early application of the guidance is not permitted.

This guidance is applicable to the Company's fiscal year beginning June 1, 2017.

The Company is currently evaluating this guidance and any potential impact to its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” This ASU permits a company to make an accounting policy election to account for investments in qualified affordable housing projects under a new proportional amortization method.

If such an election is not made, the ASU requires use of the equity or cost method for investments.

The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted.

The Company currently accounts for its investments in qualified affordable housing projects using the equity method for investments and does not anticipate that this ASU will have a material effect on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).” This ASU provides explicit guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when net operating losses or tax credit carryforwards exist.

It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted, and is applicable to the Company's fiscal year beginning June 1, 2014.

| | | |

Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, and careful selection and training of qualified personnel.

The Audit Committee of our Company’s Board of Directors meets with the independent registered public accounting firm, management, and internal auditors periodically to discuss internal control over financial reporting and auditing and financial reporting matters.

The Audit Committee reviews with the independent registered public accounting firm the scope and results of the audit effort.

The Audit Committee also meets periodically with the independent registered public accounting firm and the chief internal auditor without management present to ensure that the independent registered public accounting firm and the chief internal auditor has free access to the Audit Committee.

The Audit Committee’s Report can be found in the Definitive Proxy Statement to be issued in connection with the Company’s 2013 Annual Meeting of Stockholders.

and Stockholders of Paychex, Inc.

In our opinion, Paychex, Inc. maintained, in all material respects, effective internal control over financial reporting as of May 31, 2013, based on the COSO criteria.

/s/ Ernst & Young LLP

July 22, 2013

We have audited the accompanying consolidated balance sheets of Paychex, Inc. as of May 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2013.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Paychex, Inc.’s internal control over financial reporting as of May 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 22, 2013 expressed an unqualified opinion thereon.

| Balance as of May 31, 2010 | | 361.5 | | | $ | 3.6 | | | $ | 499.7 | | | $ | 856.3 | | | $ | 42.4 | | | $ | 1,402.0 | |

| Stock-based award transactions | | 0.6 | | | | | | | 10.9 | | | | (3.3 | | ) | | | | | | 7.6 | | |

2012.

The Company tests

The Company has determined that the Black-Scholes option pricing model, as well as the underlying assumptions used in its application, are appropriate in estimating the fair value of stock option grants.

Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation and had no effect on reported consolidated earnings.

Recently adopted accounting pronouncements: Effective June 1, 2012, the Company adopted the Financial Accounting Standards Board (“FASB”) authoritative guidance on the presentation of comprehensive income.

This guidance requires the Company to present components of net income and comprehensive income in one continuous statement or in two separate, but consecutive statements.

The Company elected to present net income and comprehensive income in one continuous statement, as presented in its consolidated financial statements.

Recently issued accounting pronouncements: In February 2013, the FASB issued additional guidance on reporting and disclosures surrounding comprehensive income.

In July 2012, the FASB issued updated guidance on the periodic testing of indefinite-lived intangible assets, other than goodwill, for impairment.

This guidance is applicable for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.

Note C — Business Combinations

During fiscal 2011, the Company acquired two software-as-a-service (“SaaS”) companies, opening up additional areas of the markets the Company serves.

Effective February 8, 2011, the Company acquired SurePayroll, Inc. (“SurePayroll”), a payroll processing provider for small businesses, for $114.9 million, net of cash acquired.

The acquisition of SurePayroll allowed the Company entry into a new area of the online market for small businesses, and resulted in $83.9 million of goodwill, which is not tax-deductible.

Effective May 3, 2011, the Company acquired ePlan Services, Inc. (“ePlan”), a provider of recordkeeping and administrative solutions to the defined contribution marketplace, for $15.2 million, net of cash acquired.

The ePlan acquisition resulted in $7.4 million of goodwill, which is not tax-deductible.

Upon their respective closing dates, both entities acquired became wholly owned subsidiaries of the Company.

The financial results of SurePayroll and ePlan are included in the Company’s consolidated financial statements from their respective dates of acquisition.

These acquisitions are not material to the Company’s results of operations, financial position, or cash flows.

| | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Date of broad-based grant | | Shares granted (millions) | | | Exercise price per share | | | | Shares outstanding as of May 31, 2013 (millions) | | |

| April 2004 | | 1.7 | | | $ | 37.72 | | | 0.6 | | |

| October 2006 | | 2.0 | | | $ | 37.32 | | | 1.0 | | |

Disclosure Controls and [removed: Procedures and Internal Control Over Financial Reporting:] [added: Procedures:] Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that as of [added: May 31, 2014,] the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting: The Company also carried out an evaluation of the internal control over financial reporting to determine whether any changes occurred during the [removed: period covered by this report.][added: quarter ended May 31, 2014.]

Based on such evaluation, there have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recently completed fiscal quarter ended May 31, [removed: 2013,] [added: 2014,] that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

[added: Internal Control Over Financial Reporting:] The Report on Management’s Assessment of Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm are incorporated herein by reference from Part II, Item 8 of this Form 10-K.

The following table shows the executive officers of the Company as of May 31, [removed: 2013,] [added: 2014,] and information regarding their positions and business experience.

| Martin Mucci | | [removed: 53] [added: 54] | | Mr. Mucci has served as President and Chief Executive Officer of the Company since September 2010. Mr. Mucci joined the Company in 2002 as Senior Vice President, Operations. Prior to joining Paychex, he held senior level positions with Frontier Telephone of Rochester, a telecommunications company, during his 20-year career. Mr. Mucci is a director of Cbeyond, Inc. He is a member of the Upstate New York Advisory Board of the Federal Reserve Bank of New York and [removed: the Board] [added: is a Trustee Emeritus] of [removed: Trustees for] St. John Fisher College. He also serves as a director of the Company and is chairman of the Executive Committee. |

| Efrain Rivera | | [removed: 56] [added: 57] | | Mr. Rivera joined Paychex in June 2011 as Senior Vice President, Chief Financial Officer, and Treasurer. Prior to joining the Company, Mr. Rivera served as Vice President of Finance and Administration for Houghton College since 2009. He previously served [removed: as Corporate Vice President and Chief Financial Officer] for [added: over twenty years with] Bausch & Lomb Incorporated, a world leader in the development, manufacture, and marketing of eye health products, [removed: from 2007 to 2009 and, prior to that,] [added: most recently] as Corporate Vice President and [removed: Treasurer] [added: Chief Financial Officer] from [removed: 2004] [added: 2007] to [removed: 2007. During his twenty years with Bausch & Lomb, Mr. Rivera held various leadership and financial management roles.] [added: 2009.] |

| Mark A. Bottini | | [removed: 52] [added: 53] | | Mr. Bottini joined Paychex in October 2011 as Senior Vice President of Sales. [removed: Prior] [added: From 2008] to [removed: joining the Company,] [added: 2011,] Mr. Bottini served as Vice President of Sales for Ricoh, North America, a provider of advanced office technology and innovative document imaging products, services, and [removed: software since 2008.] [added: software.] He assumed his most recent position with Ricoh when Ricoh acquired IKON Office Solutions, Inc. During his nearly 20 years with IKON, Mr. Bottini served in a variety of sales leadership and field management roles. |

| John B. Gibson | | [removed: 47] [added: 48] | | Mr. Gibson joined Paychex in May 2013 as Senior Vice President of Service. Prior to joining the Company, Mr. Gibson served as President and Chief Executive Officer for AlphaStaff, a national provider of human resource outsourcing services to small and medium-sized businesses. Prior to joining AlphaStaff in 2010, Mr. Gibson was President of the HR Management Division of Convergys, a global leader in technology, outsourcing, and business services. From 2004 to 2007, he served as Senior Vice President of Global Operations and Client Services of Convergys. [removed: Prior to his seven years with Convergys, Mr. Gibson held senior leadership roles in business outsourcing organizations where he had responsibility for service and operations as well as sales.] |

| Michael E. Gioja | | [removed: 55] [added: 56] | | Mr. Gioja was named Senior Vice President of Information Technology, Product Management, and Development in July 2011. Mr. Gioja has been with the Company since November 2008 as Vice President of Product Management, subsequently adding development and information technology to his responsibilities. Previously, he was Chief Information Officer and Executive Vice President of Products and Services for Workstream, Inc., a provider of on-demand enterprise talent management solutions and services. |

| Kevin N. Hill | | [removed: 54] [added: 55] | | Mr. Hill was named Vice President of Insurance and Human Resource Solutions Services in October 2011. He joined Paychex in April 2008 as Vice President of Insurance Operations, and took on the role of Vice President of Insurance Sales and Operations in 2010. Mr. Hill also serves as President of Paychex Insurance Agency, Inc., and has executive leadership responsibility for BeneTrac. In July 2011, he also took on leadership of the PEO [removed: operations] and the HR [removed: Solutions service] [added: Services operations] organizations. Prior to joining Paychex, Mr. Hill was President and Chief Operating Officer of Excellus BlueCross BlueShield. Mr. Hill held various executive positions during his ten years with Excellus BlueCross BlueShield. |

| Jennifer Vossler | | [removed: 50] [added: 51] | | Ms. Vossler joined the Company in May 2009 as Vice President and Controller. Prior to joining the Company, she served as Vice President and Corporate Controller, and held various executive and senior management positions during her eleven years at Bausch & Lomb [removed: Incorporated, a world leader in the development, manufacture, and marketing of eye health products.] [added: Incorporated.] Previously in her career, she held leadership roles with a global facilities management outsourcing company and a public accounting firm. |

| Laurie L. Zaucha | | [removed: 48] [added: 49] | | Ms. Zaucha joined the Company in March 2011 and was named Vice President of Human Resources and Organizational Development. Prior to joining the Company, she served as Senior Vice President of Human Resources for Paetec Holding Corp., a Fortune 1000 telecommunications company, from 2007 to 2011. From 2003 to 2007, she [removed: worked for] [added: held various executive positions at] Bausch & Lomb [removed: Incorporated, first as Vice President of Human Resources for the U.S., Canada, and Latin America, and then as Vice President of Global Compensation and Benefits.] [added: Incorporated.] |

The additional information required by this item is set forth in the Company’s Definitive Proxy Statement for its [removed: 2013] [added: 2014] Annual Meeting of Stockholders, anticipated to be held on or about October [removed: 16, 2013,] [added: 15, 2014,] in the sections “PROPOSAL 1 — ELECTION OF DIRECTORS FOR A ONE-YEAR TERM,” “CORPORATE GOVERNANCE,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” and “CODE OF BUSINESS ETHICS AND CONDUCT” and is incorporated herein by reference.

| Stephanie L. Schaeffer | | 44 | | Ms. Schaeffer was named Vice President and Chief Legal Officer in January 2006. In 2011, she was appointed Corporate Secretary. She joined Paychex in 2000 as Corporate Counsel and was promoted to Director of Legal Affairs in 2004. In her current role, she is responsible for overseeing all of the Company's legal functions, including litigation, corporate governance, and regulatory matters. |

The information required by this item is set forth in the Company’s Definitive Proxy Statement for its [removed: 2013] [added: 2014] Annual Meeting of Stockholders, anticipated to be held on or about October [removed: 16, 2013,] [added: 15, 2014,] in the sections “COMPENSATION DISCUSSION AND ANALYSIS,” “NAMED EXECUTIVE OFFICER COMPENSATION,” and “DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31, [removed: 2013,”] [added: 2014,”] and is incorporated herein by reference.

The information required by this item is set forth below and in the Company’s Definitive Proxy Statement for its [removed: 2013] [added: 2014] Annual Meeting of Stockholders, anticipated to be held on or about October [removed: 16, 2013,] [added: 15, 2014,] under the section “BENEFICIAL OWNERSHIP OF PAYCHEX COMMON STOCK,” and is incorporated herein by reference.

Under the Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated (the “2002 Plan”), non-qualified or incentive stock options, restricted stock, restricted stock units, performance shares, and performance stock options have been awarded to employees and the [removed: Board of Directors (the “Board”).][added: Board.]

The following table details information on securities authorized for issuance under the Company’s stock incentive plans as of May 31, [removed: 2013:][added: 2014:]

| Equity compensation plans approved by security holders (1) | | [removed: 10.7] [added: 8.2] | | [removed: $33.36] [added: $33.06] | | [removed: 22.0] [added: 20.2] |

The information required by this item is set forth in the Company’s Definitive Proxy Statement for its [removed: 2013] [added: 2014] Annual Meeting of Stockholders, anticipated to be held on or about October [removed: 16, 2013,] [added: 15, 2014,] under the sub-headings “Board Meetings and Committees” and “Policy on Transactions with Related Persons” within the section “CORPORATE GOVERNANCE,” and is incorporated herein by reference.

The information required by this item is set forth in the Company’s Definitive Proxy Statement for its [removed: 2013] [added: 2014] Annual Meeting of Stockholders, anticipated to be held on or about October [removed: 16, 2013,] [added: 15, 2014,] under the section “PROPOSAL 3 — RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,” and is incorporated herein by reference.

| (a) | | [removed: |] Financial Statements, Financial Statement Schedules, and Exhibits | | |

| [removed: 1 |] [added: 1.] | | Financial Statements See Financial Statements and Supplementary Data Table of Contents at page [removed: 27.] [added: 30.] | | |

| [removed: 2 |] [added: 2.] | | Financial Statement Schedules | | |

| | | [removed: |] Financial statement schedules required to be filed by Item 8 of this Form 10-K include Schedule II — Valuation and Qualifying Accounts. See Financial Statements and Supplementary Data Table of Contents at page [removed: 27.] [added: 30.] All other schedules are omitted as the required matter is not present, the amounts are not significant, or the information is shown in the financial statements or the notes thereto. | | |

| [removed: 3 |] [added: 3.] | | Exhibits | | |

| | | [removed: |] (3)(a) | | Restated Certificate of Incorporation, incorporated herein by reference from Exhibit 3(a) to the Company’s Form 10-K filed with the Commission on July 20, 2004. |

| | | [removed: |] (3)(b) | | Bylaws, as amended, incorporated herein by reference from Exhibit 3(b) to the Company’s Form 10-K filed with the Commission on July 21, 2006. |

| # | | [removed: |] (10.1) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010), incorporated herein by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-8, No. 333-170871. |

| # | | [removed: |] (10.2) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Award Agreement for Non-Qualified Stock Options, incorporated herein by reference from Exhibit 10.3 to the Company’s Form 8-K filed with the Commission on October 17, 2005. |

| # | | [removed: |] (10.4) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) [removed: 2008 Master Restricted] [added: Form of Non-Qualified] Stock [added: Option] Award Agreement, incorporated herein by reference from Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on July [removed: 18, 2007.] [added: 16, 2008.] |

| # | | [removed: |] (10.5) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) [added: Form of] Restricted Stock [added: Unit] Award Agreement, incorporated herein by reference from Exhibit [removed: 10.3] [added: 10(n)] to the Company’s Form [removed: 8-K] [added: 10-K] filed with the Commission on July 18, [removed: 2007.] [added: 2008.] |

| # | | [removed: | (10.6)] [added: (10.3)] | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) [removed: 2007 Master] Restricted Stock [removed: Unit] Award Agreement, incorporated herein by reference from Exhibit 10.1 to the Company’s Form [removed: 10-Q] [added: 8-K] filed with the Commission on [removed: September 26, 2007.] [added: July 16, 2008.] |

| # | | [removed: |] (10.7) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) [added: Form of] Restricted Stock Award [removed: Agreement,] [added: Agreement (Officer),] incorporated herein by reference from Exhibit [removed: 10.1] [added: 10.16] to the Company’s Form [removed: 8-K] [added: 10-K] filed with the Commission on July [removed: 16, 2008.] [added: 20, 2009.] |

| # | | [removed: | (10.8)] [added: (10.6)] | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Form of Non-Qualified Stock Option [removed: Award Agreement,] [added: Agreement for Directors,] incorporated herein by reference from Exhibit [removed: 10.2] [added: 10(q)] to the Company’s Form [removed: 8-K] [added: 10-K] filed with the Commission on July [removed: 16,] [added: 18,] 2008. |

| # | | [removed: |] (10.9) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Form of Restricted Stock [removed: Unit] Award [removed: Agreement,] [added: Agreement (Officer),] incorporated herein by reference from Exhibit [removed: 10(n)] [added: 10.18] to the Company’s Form 10-K filed with the Commission on July [removed: 18, 2008.] [added: 16, 2010.] |

| # | | [removed: |] (10.10) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Form of [removed: Restricted] [added: Non-Qualified] Stock [removed: Unit (Cliff Vest)] [added: Option] Award [removed: Agreement,] [added: Agreement (Officer),] incorporated herein by reference from Exhibit [removed: 10(o)] [added: 10.19] to the Company’s Form 10-K filed with the Commission on July [removed: 18, 2008.] [added: 16, 2010.] |

| # | | [removed: |] (10.11) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Form of [removed: Restricted Stock] [added: Officer Performance Incentive] Award Agreement [removed: for Directors,] [added: (Long Term),] incorporated herein by reference from Exhibit [removed: 10(p)] [added: 10.20] to the Company’s Form 10-K filed with the Commission on July [removed: 18, 2008.] [added: 16, 2010.] |

| # | | [removed: |] (10.12) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October [removed: 12, 2005)] [added: 13, 2010)] Form of Non-Qualified Stock Option [added: Award] Agreement [removed: for Directors,] [added: (Board),] incorporated herein by reference from Exhibit [removed: 10(q)] [added: 10.20] to the Company’s Form 10-K filed with the Commission on July [removed: 18, 2008.] [added: 15, 2011.] |

| # | | [removed: |] (10.13) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October [removed: 12, 2005)] [added: 13, 2010)] Form of Restricted Stock Award Agreement [removed: (Officer),] [added: (Board),] incorporated herein by reference from Exhibit [removed: 10.16] [added: 10.21] to the Company’s Form 10-K filed with the Commission on July [removed: 20, 2009.] [added: 15, 2011.] |

| # | | [removed: | (10.14)] [added: (10.8)] | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) 2009 Non-Qualified Stock Option Award Agreement (Special Grant), incorporated herein by reference from Exhibit 10.17 to the Company’s Form 10-K filed with the Commission on July 20, 2009. |

| # | | [removed: | (10.15)] [added: (10.14)] | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October [removed: 12, 2005)] [added: 13, 2010)] Form of Restricted Stock [added: Unit (Special Retention)] Award [removed: Agreement (Board),] [added: Agreement,] incorporated herein by reference from Exhibit [removed: 10.18] [added: 10.22] to the Company’s Form 10-K filed with the Commission on July [removed: 20, 2009.] [added: 15, 2011.] |

| # | | [removed: | (10.16)] [added: (10.15)] | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October [removed: 12, 2005)] [added: 13, 2010)] Form of [removed: Restricted] [added: Non-Qualified] Stock [added: Option] Award Agreement [removed: (Officer),] [added: (Officer) Long Term Incentive Program (“LTIP”),] incorporated herein by reference from Exhibit [removed: 10.18] [added: 10.23] to the Company’s Form 10-K filed with the Commission on July [removed: 16, 2010.] [added: 15, 2011.] |

| # | | [removed: |] (10.17) | | Paychex, Inc. [removed: 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005)] Form of [removed: Non-Qualified Stock Option] [added: Performance] Award [removed: Agreement (Officer),] [added: Incentive Program,] incorporated herein by reference from Exhibit [removed: 10.19] [added: 10.25] to the Company’s Form 10-K filed with the Commission on July [removed: 16, 2010.] [added: 15, 2011.] |

| # | | [removed: | (10.18)] [added: (10.20)] | | Paychex, Inc. [removed: 2002 Stock Incentive Plan (as amended and restated effective October 12, 2005) Form of Officer Performance Incentive Award Agreement (Long Term),] [added: Employee Deferred Compensation Plan,] incorporated herein by reference from Exhibit [removed: 10.20] [added: 10.30] to the Company’s Form 10-K filed with the Commission on July [removed: 16, 2010.] [added: 20, 2009.] |

| # | | [removed: |] (10.19) | | Paychex, Inc. [removed: 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010) Form of Non-Qualified Stock Option Award Agreement (Board),] [added: Board Deferred Compensation Plan,] incorporated herein by reference from Exhibit [removed: 10.20] [added: 10.29] to the Company’s Form 10-K filed with the Commission on July [removed: 15, 2011.] [added: 20, 2009.] |

| # | | [removed: | (10.20)] [added: (10.16)] | | Paychex, Inc. [removed: 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010) Form of Restricted Stock Award Agreement (Board),] [added: Change In Control Plan,] incorporated herein by reference from Exhibit [removed: 10.21] [added: 10.24] to the Company’s Form 10-K filed with the Commission on July 15, 2011. |

| [removed: #] | | [removed: |] (10.21) | | [removed: Paychex, Inc. 2002] Stock [removed: Incentive] [added: Purchase] Plan [removed: (as amended] [added: Engagement Agreement between Paychex, Inc.] and [removed: restated effective October 13, 2010) Form] [added: JP Morgan Securities LLC, dated as] of [removed: Restricted Stock Unit (Special Retention) Award Agreement,] [added: March 26, 2013,] incorporated herein by reference from Exhibit [removed: 10.22] [added: 10.1] to the Company’s Form [removed: 10-K] [added: 8-K] filed with the Commission on [removed: July 15, 2011.] [added: March 29, 2013.] |

| # | | [removed: | (10.25)] [added: (10.18)] | | Form of Indemnity Agreement for Directors and Officers, incorporated herein by reference from Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on March 28, 2012. |

| * | | [removed: |] (21.1) | | Subsidiaries of the Registrant. |

| * | | [removed: |] (23.1) | | Consent of Independent Registered Public Accounting [removed: Firm.] [added: Firm, PricewaterhouseCoopers LLP.] |

| * | | [removed: |] (24.1) | | Power of Attorney. |

| * | | [removed: |] (31.1) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |

| * | | [removed: |] (31.2) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |

| * | | [removed: |] (32.1) | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

| * | | [removed: |] (32.2) | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

| * | | [removed: |] 101.INS | | XBRL instance document. |

| * | | [removed: |] 101.SCH | | XBRL taxonomy extension schema document. |

| * | | [removed: |] 101.CAL | | XBRL taxonomy extension calculation linkbase document. |

| * | | [removed: |] 101.LAB | | XBRL taxonomy label linkbase document. |

| * | | [removed: |] 101.PRE | | XBRL taxonomy extension presentation linkbase document. |

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| * | | (23.2) | | Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP. |

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| # | | | (10.3) | | Paychex, Inc. Non-Qualified Stock Option Agreement, incorporated herein by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-8, No. 333-129571. |

| # | | | (10.22) | | Paychex, Inc. 2002 Stock Incentive Plan (as amended and restated effective October 13, 2010) Form of Non-Qualified Stock Option Award Agreement (Officer) Long Term Incentive Program (“LTIP”), incorporated herein by reference from Exhibit 10.23 to the Company’s Form 10-K filed with the Commission on July 15, 2011. |

| # | | | (10.23) | | Paychex, Inc. Change In Control Plan, incorporated herein by reference from Exhibit 10.24 to the Company’s Form 10-K filed with the Commission on July 15, 2011. |

| # | | | (10.24) | | Paychex, Inc. Form of Performance Award Incentive Program, incorporated herein by reference from Exhibit 10.25 to the Company’s Form 10-K filed with the Commission on July 15, 2011. |

| # | | | (10.26) | | Paychex, Inc. Board Deferred Compensation Plan, incorporated herein by reference from Exhibit 10.29 to the Company’s Form 10-K filed with the Commission on July 20, 2009. |

| # | | | (10.27) | | Paychex, Inc. Employee Deferred Compensation Plan, incorporated herein by reference from Exhibit 10.30 to the Company’s Form 10-K filed with the Commission on July 20, 2009. |

| # | | | (10.28) | | Stock Purchase Plan Engagement Agreement between Paychex, Inc. and JP Morgan Securities LLC, dated as of March 26, 2013, incorporated herein by reference from Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on March 29, 2013. |