How to Choose Payroll Software

If you're a business owner with employees, it's essential to familiarize yourself with payroll and its inherent processes. Running payroll accurately is vital, but it can be tedious and time-consuming – and errors can be costly. That's why it's worth investing in payroll software to streamline your tasks and free up your time for other business duties.

Here's how to choose the best payroll software for your business and what to consider when working with a payroll provider.

​​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.

What is a payroll provider? 

A payroll service provider is a third-party company that streamlines tasks like processing payroll; calculating payroll and expenses; filing federal, state, and local payroll taxes; handling deposits and withdrawals; new-hire reporting; and other accounting-based tasks. A payroll provider can also handle benefits deductions for employees, as well as benefits administration (if payroll is included as part of an all-in-one HR service).

For businesses with basic accounting needs, working with a payroll provider is often more affordable than hiring an in-house accountant. Another option is to use a professional employer organization (PEO) as your payroll provider, which takes the legal burden of employment off your business, but that may be more costly than a traditional payroll service.

One of the primary reasons to consider working with a payroll provider is that it takes the guesswork out of compliance for your business.

"Investing in payroll software eliminates compliance issues, specifically if the payroll processing tool is up to date with the latest payroll tax changes," said Stacy Kildal, founder of Kildal Services LLC and a QuickBooks ProAdvisor. "This is especially important after all of the changes that were implemented … with the CARES Act. Overall, [payroll software] makes setup faster by eliminating the need to do the research, as well as ensuring compliance with state tax requirements."

FYI: Most payroll providers automatically calculate, deduct and withhold your state's required taxes from your employees' paychecks.

Payroll services and online payroll software

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

Paid services 

When using a paid service or payroll provider, a business turns over its payroll responsibilities to an outside company. This process typically involves working out a specified payroll plan with the provider. Then, they run your payroll and file any associated payroll taxes. Using a provider often means you'll receive the support of a dedicated account manager.

DIY payroll software

If a business is doing its payroll manually, payroll software helps speed up and streamline payroll processes. Payroll software can also keep all your financial information organized, managing employee documentation, 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.

Did you know? Free apps are a budget-friendly payroll option, but they may not come with important features like customer support, advanced data security or quality assurance checks.

Payroll software features

Payroll software boasts a variety of features. While specific features depend on the type of software, here are the most common ones:

• Payroll processing and management. Payroll software's primary focus is, of course, processing and managing a company's payroll. The software ensures that every employee gets paid on time, in the proper amount, and through their preferred payment method.
• Direct deposit. While some employees want you to hand them a physical check, many prefer that 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 any manual 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 account for nontraditional payment methods, such as workers' compensation, bonuses and adjustments for wage changes.
• 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.

Types of online payroll software providers

The best online payroll software provider for your business depends on your needs and budget. Most operate on cloud-based platforms for anytime, anywhere access to your payroll system, and many offer both desktop and mobile access for flexibility.

Payroll software providers can be stand-alone services or come as part of a larger suite of top HR software. For some providers, payroll is the core service, with add-on HR tools like paid time off (PTO) management and benefits administration. For others, you must pay for the entire software suite to use the payroll module.

If you're ready to explore your payroll provider options, here are some of our picks for the best online payroll companies and the businesses to which they're best suited.

How much does payroll software typically cost? 

The price of payroll software depends on several factors. While some packages are free or offer free trials, most are available only for a monthly or annual fee. Depending on the size of your company and what features you need, most payroll software charges a base fee of $10 to $150 per month, with an additional cost per employee.

Paid payroll software typically has a few different pricing models. Many payroll vendors use a software-as-a-service (SaaS) model, meaning they charge per month and per employee for a monthly subscription plan. These plans come in various tiers that add more features and technical support at higher levels.

Other software vendors offer a per-month subscription plan with services for an unlimited number of employees. Some vendors also offer a perpetual license fee for their software. This one-time fee is exponentially more expensive than a monthly plan; however, businesses don't have to be tied to an endless subscription. The downside to perpetual license software is that these packages usually don't include upgrades over time.

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

Elliott Brown, a spokesperson for OnPay, said the biggest advantage of using payroll software is the amount of time it saves a business owner compared to manual payroll.

"The average small business owner who does payroll themselves spends almost 18 hours a month calculating deductions, paying their team, and managing all the tax filings," Brown told business.com. "Running payroll [online] takes the average payroll software user about three hours a month."

Payroll software also offers the following benefits:

• It minimizes mistakes. Having software process your payroll means there's little to no chance of user error interfering with payroll.
• It secures data. One of the most important features businesses should look for in payroll software is data security. A secure payroll software system means your payroll files and employee information, such as addresses, birthdates, Social Security numbers and bank details are kept safe.
• It saves money. Business owners need to keep their profits high and costs low, especially if they have a small business. Payroll software is a more cost-efficient way to manage financial needs than hiring an accountant.

Cons

The disadvantages of payroll software include these factors:

• It requires training. Learning how to use payroll software and training others to use it correctly can be time-consuming, especially if the software's features and user interface are complex. Anytime a person is dealing with financial figures and tax rules, there can be a learning curve. While many payroll software versions aim for a simple, straightforward experience, some initial trial and error is possible.
  
  
• It costs more than manual payroll. While using software is more cost-effective than hiring an outside service, it's more expensive than manually processing payroll yourself. Most software charges regularly, and many providers charge an additional fee for yearly upgrades. For cash-strapped companies, this adds up quickly.
  
  
• It's not tailored to your business. Most software options are designed to have as much universal appeal as possible. The disadvantage is that they may not be tailored to your specific industry or business needs. If you have complicated payroll schedules or highly regulated compliance issues, some payroll software packages may not be able to handle all your requirements.

How to choose a payroll service provider

When researching payroll service providers, make a list of your most pressing concerns. Do you want to make sure your employees are being paid on time and through their preferred form? Do you want your employees' payroll information in one place for easier tax filings? Or are you looking for a service with payroll processing and HR features so all your administrative tasks can be handled in one place? Knowing your primary motivation for choosing a payroll service provider can help you narrow down what to look for and what features best suit your business.

Brown noted that pricing is one of the top factors to consider in payroll software.

"Some payroll providers charge per pay run, and others charge monthly fees, no matter how often you run payroll," he said. "Since most businesses pay employees two or more times per month, providers that charge per pay run often cost twice as much as those with monthly fees."

It's also important to understand any additional costs that are not included in your regular subscription fees.

"Do you have to pay for year-end W-2 forms?" Brown said. "How about direct deposit or accounting software integrations? Be on the lookout for sneaky fees."

Aside from pricing, Kildal said the most important features to look for in a payroll service provider are ease of use, ease of access, and how well it integrates with your current accounting software.

"Employee onboarding and paystub viewing is always great as well!" she added.

Tip: When you're looking for a payroll software or service provider, look up online reviews from customers and reputable review websites to fully understand the pros, cons and features of each provider you're considering.

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 up to date 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 for a smoother and less time-consuming process.
• 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 in handling sensitive employee and company information. Make sure the payroll service you choose has security measures in place to protect your data.

Bottom line: Choosing payroll software for your small business is an important decision, and there are numerous factors to keep in mind as you evaluate your options.

When you're ready to start exploring your options, determine the type of payroll provider you want to work with (full-service provider or online payroll software), understand the cost structure and features, and research your potential providers to see what other customers are saying before you make a final decision.