How to Choose Payroll Software

What is a payroll provider? 

A payroll service provider is a third-party company that manages payroll processing for businesses, including employee payments, tax withholdings and compliance with labor laws. The best online payroll services and software streamline and perform the following functions:

• Processing payroll
• Calculating wages and expenses
• Filing payroll taxes (federal, state and local)
• Managing direct deposits and withdrawals
• Conducting new-hire onboarding
• Handling payroll reporting 
• Resolving common payroll discrepancies
• Performing additional accounting-based tasks (often at a lower cost than hiring an accountant)

If you use one of the best human resources (HR) platforms for payroll, your provider can also handle employee benefits deductions and administration.

Perhaps most importantly, working with a payroll provider takes the guesswork out of compliance for your business, which is crucial because running payroll for a small business can be complicated. 

“Investing in payroll software eliminates compliance issues, specifically if the payroll processing tool is up to date with the latest payroll tax changes,” explained Stacy Kildal, founder of Kildal Services LLC and a QuickBooks ProAdvisor. “Overall, payroll software makes setup faster by eliminating the need to do the research as well as ensuring compliance with state tax requirements.”

Editor’s note: Looking for the right online payroll service for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Payroll services vs. online payroll software

Businesses looking to outsource their payroll needs have two options: working with a full-service payroll provider or running payroll themselves with online payroll software:

• Full-service payroll providers: With a paid payroll provider, businesses delegate payroll responsibilities to a third-party company. This process typically involves agreeing on a specific payroll plan with the provider, who then processes payroll and files any associated payroll taxes. Using a provider often includes the support of a dedicated account manager.
• Do-it-yourself payroll software: If a business runs payroll manually, payroll software helps automate and streamline payroll processing. Payroll software also organizes your financial information, managing employee forms, tax statements, recordkeeping requirements and other essential documents. While some free payroll software options are available, providers typically charge a monthly or annual subscription fee based on the number of employees or features offered.

How to choose a payroll service provider

Choosing a payroll service provider is a crucial decision. When finding the right solution for your business, consider the following eight steps and best practices. 

1. Define your business’s payroll needs.

Every business is unique and your payroll system must reflect that. Consider the following factors when defining your business’s payroll needs: 

• Company size: Do you need payroll processing for five or 500 users? If you choose a payroll provider that targets enterprise-level businesses, you may end up with more features than you need — and a high price tag. If you’re a small to medium-sized business, find a provider that works with businesses like yours.
• Working patterns: Your staff may include hourly, salaried and contract workers. Ensure your provider can handle this level of complexity.
• Working locations: You may have staff in different states or even abroad. If so, ensure your provider can handle out-of-state and international payments. 
• Additional considerations: If you offer health insurance, retirement contributions or other benefits, ensure your payroll service can accommodate your needs. [Related article: Best Business Employee Retirement Plans]
• Integrations: Consider whether your payroll must integrate with essential HR software or accounting software. Ensure your provider offers these integrations. 

2. Decide on a payroll service budget.

Determine a reasonable payroll service budget that accommodates your staff requirements and the features you need. Remember that less expensive payroll services may not have the necessary features or offer subpar customer service. Striking a balance between cost and quality is essential.

Payroll service costs depend on several factors, including the following:

• Monthly fees: While some packages are free or include free trials, most providers charge a monthly or annual fee. Base fees typically range from $10 to $150 per month, with additional per-employee costs depending on the provider and plan.
• Pricing models: Payroll vendors typically use one of the following pricing models:
  
  • Software-as-a-service model: The vendor charges a monthly subscription fee, often including a per-employee cost. Plans are tiered, with higher levels offering more features and enhanced support. 
  • Subscription plan: Some vendors offer a flat monthly subscription fee that covers payroll services for unlimited employees. 
  • Perpetual license: This model charges a one-time software fee significantly higher than monthly plans but eliminates ongoing subscription costs. However, perpetual license packages often lack upgrades or support over time.

3. Evaluate each payroll platform’s feature options.

After identifying your needs and setting a budget, it’s time to narrow your choices to providers within your price range that offer the features most relevant to your business. Features vary widely among payroll vendors and can include the following: 

• Payroll processing and management: Payroll software’s primary focus is, of course, processing and managing a company’s payroll. Payroll software ensures employees are paid accurately, on time and through their chosen payment method.
• Direct deposit: While some employees want you to hand them a physical check, many prefer direct deposit, where you deposit their paycheck into a designated bank account.
• Tax filing services: Payroll software will calculate your business taxes, saving you time and helping you avoid mistakes. The software can also file tax documents such as W-2s and 1099s.
• Compensation administration: In addition to basic payroll processing and distribution, payroll software can handle workers’ compensation, adjustments for wage changes and employee bonuses.
• Reporting: Payroll software can create business intelligence reports that give leaders insight into their payroll processes, including information on budgets, taxes, workers’ wages and any other payroll data they request.

At a minimum, choose a payroll service that processes direct deposits and handles payroll taxes, including filing tax documents. Additionally, prioritize automation features that reduce manual tasks. If a specific business software integration is crucial, confirm that your provider supports it.

4. Compare and contrast your top payroll options. 

At this point, you’ll have a shortlist of payroll services with the features your business needs at a price you can afford. To narrow your options further, explore online review sites to see how customers rate each vendor. Look for feedback patterns about customer service issues or frequent complaints about implementation, support or responsiveness. Additionally, ask other business owners about their experiences with payroll providers for firsthand insights. 

Ensure your top candidates offer your preferred type of support. For example, if you want phone support and after-hours email or chat support, look for those offerings. 

5. Ensure your payroll provider is secure and compliant. 

Taxes and employment legislation are complex issues. One of the primary benefits of using a payroll service is having an expert partner that can keep you compliant with labor, tax and paycheck recordkeeping laws.

Regulations change frequently, so your payroll vendor must be able to update its software when necessary to reflect new and revised tax laws and rules. Your payroll service must ensure you comply with wage and hour laws, including overtime calculations.

Additionally, security is paramount in a payroll service. It’s crucial to keep sensitive employee data and financial information safe. Ensure any potential payroll service offers encryption, two-factor authentication and secure data storage. 

6. Ensure your payroll provider can scale with your business.

If you want to expand your business, ensure your payroll service can grow with you.

While many cloud-based payroll services are generally scalable, check that their features can meet more complex payroll requirements you may need in the future and that you can add employees as needed. 

7. Take advantage of payroll service free trials.

When you’ve narrowed your options to two or three contenders, test their services via a free trial. Many vendors offer 14-day or 30-day free trials, during which you can see the system in action and evaluate its usability. 

8. Decide on your payroll service. 

No solution is perfect. However, choosing a payroll service that closely matches your needs and budget will help set you up for success. If your chosen payroll service offers implementation assistance, including setup, entering employee information and creating a payroll schedule, take advantage of this help to get off on the right foot. 

Questions to consider when choosing a payroll service

Here are some questions every business owner should ask when considering a third-party payroll provider or software solution to do payroll on their own:

• How often are the software’s tax tables updated for compliance? Legal and regulatory compliance is extremely important in payroll. Choose a company that stays current on new laws that might go into effect.
• Does the software have other clients in my industry? If the answer is yes, the software likely brings industry-specific experience to the table. While this isn’t a must-have qualification for a payroll service, it can be a competitive advantage.
• Can this software integrate with our employee benefit offerings? Seamless integration with other employee benefits will make the process smoother and less time-consuming.
• How will this software handle payroll as our company grows and scales? Most businesses are constantly searching for ways to scale and it’s important that your payroll service can accommodate your projected growth.
• What security measures are in place to keep our company’s payroll data secure? Security is crucial when handling sensitive employee and company information. Ensure the payroll service you choose has security measures in place to protect your data.

Pros and cons of using payroll software

Payroll software has its upsides and downsides. Consider the needs of your business as you weigh your options.

Pros

• Payroll software saves business owners time: The biggest advantage of using payroll software is the significant time savings it offers compared to managing payroll manually. Small business owners who handle payroll manually may spend up to 18 hours a month on tasks like calculating deductions, paying employees and managing tax filings. Using payroll software can reduce this time to just a few hours each month.

• Payroll software minimizes mistakes: By automating payroll, the software greatly reduces the risk of user errors that can disrupt payroll processing.
• Payroll software secures data: Secure payroll software protects sensitive information like employee addresses, birth dates, Social Security numbers and bank details from unauthorized access.
• Payroll software saves money: Business owners must keep their profits high and costs low, especially if they have a small business. Payroll software offers a cost-effective alternative to hiring a certified public accountant.

Cons

The disadvantages of payroll software include these factors:

• Payroll software requires training: Learning to use payroll software and training others can be time-consuming, particularly if the software has a complex interface or extensive features. Anytime financial figures and tax rules are involved, there’s likely to be a learning curve. While many payroll solutions aim to be user-friendly, some initial trial and error is possible.
• Payroll software costs more than manual payroll: While payroll software is more affordable than hiring an outside service, it’s still more expensive than processing payroll manually. Most software requires ongoing fees and many providers charge extra for annual upgrades, which can quickly add up for cash-strapped companies.
• Payroll software is not tailored to your business: Most payroll software is designed for broad, universal use, which may not suit every business. If your company has complex payroll schedules or stringent compliance requirements, some software may not fully meet your needs.

Mark Fairlie contributed to this article. Source interviews were conducted for a previous version of this article.