Choosing a Payroll Service: A Buying Guide for Businesses

A look at payroll services and what they do

A payroll company is a service provider that automatically processes payroll calculations, payroll tax statements, year-end taxes and more for your company. A full-service payroll provider also handles deposits and withdrawals for your employees, withholding and pay garnishments, and new-hire reporting. Using a payroll system makes it easier to pay any type of employee, such as full time, part time and freelancers. It allows experts to handle your payroll while you focus on your business.

Other types of payroll options

• In-house: If you’re a large company with many employees, hiring an in-house accounting department to handle your payroll is a good option. Your accounting employees will know the ins and outs of your company and its culture, so they’ll be equipped to scale and change with your company. They’re also immediately available in case of an emergency or a last-minute change.
• Bookkeepers: A bookkeeper is a person who prepares your account and keeps track of your finances. This is a solution for small businesses that don’t have many employees. Your bookkeeper can be an in-house employee, or your company can be just one of their many clients.
• Online payroll: If you choose to do your payroll yourself, there are many online services you can use. This option requires more of your time, as you’ll be inputting all of the data and processing the payroll yourself, but it will save you money.
• Software: Like an online payroll service, payroll software requires your time to input all the data. There are automated options through the software that save you more time than processing everything yourself through an online service; however, you have to maintain the software and double-check its results to ensure there are no mistakes.

What payroll services offer

Online payroll services operate in the cloud. They don’t require you to install or maintain any software, and you can manage and run your payroll from anywhere. You can use this kind of program to pay full-time and part-time employees as well as contract and freelance workers.

Online payroll typically includes a variety of services:

• Payroll processing: Online payroll services automatically calculate how much employees should be paid each pay period. The systems account for wage rates, shift differentials, overtime, holiday pay, taxes, and Social Security and benefit deductions. They then make payments to employees by direct deposit, prepaid debit cards or paper check.
• Filing and paying payroll taxes: These services can withhold employee taxes, file your quarterly payroll tax reports and pay your employees’ tax withholdings to the proper local, state and federal agencies. They also issue employee W-2 and 1099 forms at the end of the year. Some services offer an error-free guarantee. If a mistake is made, these payroll companies will correct the error and pay any fines or interest you incur.
• New-hire reporting: Many payroll services report your new hires to the government on your behalf.
• Integrations: Online payroll services integrate with a variety of payroll-related programs businesses already use, such as accounting software, time and attendance systems, and human resources software.
• PTO management: Many of these services manage paid time off by tracking how many vacation and sick hours your employees have earned and used. Some payroll solutions even facilitate the time-off request and approval process.
• Employee self-service: Typically, employees can access the online system to view their pay stubs, PTO balances and year-end tax forms.
• Mobile access: Many systems offer mobile apps or mobile-friendly websites that let you manage and run payroll from smartphones or tablets.
• Payroll reports: Detailed wage and labor reports from your service can give you a deeper look into how your business operates.

The biggest benefit of online payroll services is that they complete all the related work for you – payroll calculations, payroll tax payments, year-end tax forms, etc. With these systems, your payroll can typically be run in just minutes. [Read related article: Can SMBs Balance Payroll Burden and Labor Demand?]

One downside of using an online payroll service is that it’s more expensive than handling payroll on your own. You are also entrusting your payroll provider to get everything right. If the provider makes a mistake, you may face a rash of angry employees or a fine from the government (some companies offer an error-free guarantee to offset the latter).

What online payroll services cost

The cost of payroll services varies, but most follow a standard pricing structure: a flat base fee per month or per pay period. The per-pay-period providers charge you each time you run payroll, while per-month providers allow for unlimited payroll runs each month.

Some providers offer multiple pricing plans for different levels of service. For example, a basic plan might include only the running of payroll, while more advanced and expensive plans might also pay your payroll taxes and print W-2 forms for your employees.

Base fees range from $20 to $100, depending on the plan and provider. Most services also charge $1 to $15 for each paid employee or contract worker per month or pay period.

Some services have added costs to use direct deposit, complete year-end tax services and set up the system.

What to look for in a payroll service

Not all payroll providers offer the same level of service. Here are some specific things small businesses should look for from a payroll provider:

• Features: Besides payroll processing and the handling of all tax obligations, you should consider whether the service offers multiple payment options, like direct deposit, paper checks and prepaid debit cards. You’ll also want to see if it offers multiple wage rates, garnishment payments, PTO management, workers’ compensation administration, unemployment insurance and detailed payroll reports.
• Ease of use: The payroll service should not be too complex to understand. It should have an easy-to-use interface that allows you to run payroll and add employees into the system in a matter of minutes.
• Cost: Naturally, businesses want to find a service that they can afford. In addition to the cost, you need to determine if a contract is required. Many services operate on a month-to-month basis with no long-term contracts, while others require yearly commitments. It is also important to factor in whether you’ll pay by the month or pay period. Depending on how often you run payroll, the pricing structure you choose could have big cost implications.
• Reputation: Find a provider with a strong track record and good online reviews; you’ll feel more secure knowing the company has dealt with the payroll issues you may face.
• Integrations: Whether the integrations are built in or can be created via open API, you want a payroll service that syncs with the programs you already use, like time and attendance systems and accounting software.
• Support: Look for a payroll service that provides help when you need it. You should ask whether you will have a dedicated support representative to be your main point of contact.
• Outages: Online payroll services are cloud-based, which puts businesses at the mercy of the payroll provider to keep the system up and running. Ask the provider whether the system has many outages and how often it is down for maintenance.
• Employee self-service: Your payroll service should allow employees to log in on their own to view their digital pay stubs and year-end tax forms.
• Added services: Some payroll providers offer various other services – human resources, benefits and retirement plan administration, etc. – that you can add to your plan.

Questions to consider when choosing a payroll service

Here are several questions to think about or ask the company when you’re looking for the best payroll service for your business:

• How often are its tax tables updated for compliance? It’s important to know how often your payroll service updates its tax tables, because they change as new laws are passed. Ideally, your payroll provider will update them every time a new tax law goes into effect.
• Does it have other clients in your industry? Ask your potential payroll provider if the company serves similar clients to your business. If it does, this may give the company an edge with you, as it has experience handling businesses like yours. However, lack of industry-specific experience should not automatically disqualify any services you’re considering.
• Can it integrate with your employee benefits offerings? Find out if the payroll service can integrate your employees’ benefits, such as paid time off, into the software and workflow.
• How will it handle your business as your company grows? If your company scales up and adds more employees, can your provider handle that growth? Share your expectations with your payroll provider, and learn how it will account for growth in your business.
• What security measures are in place to keep your company’s payroll data secure? Your payroll data includes all of your employees’ personal information, your business’s information and access to your business bank accounts. It’s essential that your payroll service has top-tier security that can protect your data from potential breeches.

Benefits of payroll services

The benefit of using a payroll service is that it saves you time, letting you focus on business operations and growth instead of crunching numbers and filing payroll taxes. Here are three other benefits of using a payroll service:

1. Convenience: You’ll send the provider all of your company’s information, and it will handle all the calculations and process your payroll. Many services make it easy to update any information through email or an online portal.
2. Accuracy: If you’re not a trained accountant or bookkeeper, you may struggle to handle your own payroll, and it may take much more time than you’d like to do it right. Payroll firms will process your payroll accurately, and you can rely on them to stay up to date on tax laws.
3. Compliance: Payroll firms know all of the state and federal laws and will ensure that you comply with them. This can save you the hassle of legal issues and the associated fees.

The best online payroll services

There are a number of payroll services to choose from, but not all offer the same features and benefits. Some stand out from the pack in important ways. Here are some of the best online payroll services. 

ADP

ADP is one of the largest and most trusted payroll providers and can support your business at every stage of growth. It works well for companies across all industries and is a particularly good option for businesses with complex needs. (See our ADP review.)

Gusto

You can use Gusto to manage your payroll tax responsibilities for both W-2 employees and 1099 contractors. Because it is cloud-based software, Gusto is easy to use and offers comprehensive HR services with access to HR experts. (See our Gusto review.)

OnPay

OnPay is a user-friendly payroll solution that caters to small businesses and startups. It offers straightforward pricing and allows businesses to run payroll an unlimited number of times. (See our OnPay review.)

Paychex

Paychex offers multiple payment methods for employees along with flexible payroll schedule options for companies. It’s a great option for businesses of all sizes and can accommodate all types of workers, including full-time and part-time employees, 1099 contractors, and freelancers. (See our Paychex review.)

Online payroll FAQs

If you’re still not sure whether an online payroll service is a good fit for you, here are several questions and answers that might help you come to a decision.

What is a payroll provider?

A payroll provider is a third-party company that helps businesses streamline tasks such as processing payroll, calculating payroll and expenses, filing taxes, handling deposits and withdrawals, reporting regarding new hires, and other critical accounting-related tasks. Payroll providers also can handle benefits deductions and benefit administration for employees.

Do payroll services pay taxes on your behalf, or do they just calculate what you owe and you are responsible for filling out the forms and sending in the payment?

Most payroll services handle all your payroll tax needs. Online payroll companies withhold the required taxes from your employees’ paychecks and set it aside for when your business needs to pay those taxes to local, state and federal agencies. Online payroll services also fill out the necessary forms and submit employee payments on your behalf.

Many payroll providers guarantee their tax services. If they make a mistake on your payroll taxes, they will fix it and pay any incurred fines or interest. Ask any providers you are considering what liability they are willing to accept should an error occur.

How important is it for the payroll provider you select to integrate with other services you use?

A payroll service that integrates with other programs you use, like your accounting software or time and attendance system, can save you a lot of time. These integrations allow the programs to work seamlessly together. For example, accounting data can automatically be inserted into your payroll program without you having to enter any additional information. These integrations also reduce the errors that may occur when data is manually transferred between programs.

How do I choose a new payroll provider?

As we’ve seen, there are a number of considerations to keep in mind when choosing a new payroll provider. Some of the key considerations include cost, integration with existing systems, service and support, and ease of use. Always review online ratings and testimonials, and seek referrals and recommendations.

Does it matter when you start with a new payroll service? Does it need to happen at the start of the year, or can you switch midyear?

You can switch to a new payroll provider at any time. However, switching at the end of a calendar quarter can save your business some extra work.

Choose wisely when selecting a payroll provider

Payroll services can save companies time and money, but it’s important to choose wisely. The tips and information above should provide you with a good starting point for considering which service is most likely to meet your needs. 

Linda Pophal contributed to this article.