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Choosing a Payroll Service: A Buying Guide for Businesses

Choosing a Payroll Service: A Buying Guide for Businesses
Credit: Krasimira Nevenova/Shutterstock

When you're running a business, you have two main choices for paying your employees: You can do it yourself, or you can hire a payroll service to do it for you. If you don't have an accounting background and aren't well versed in payroll tax laws, then a payroll service is likely your best option.

Before you choose a payroll service, it's critical to understand the tasks a payroll provider can handle, how much these services cost, the benefits they offer and what to look for when choosing one. Some small businesses choose to use local payroll services that operate in their region, while others elect to use online payroll services accessible from anywhere. This guide focuses on online payroll services only.

Online payroll services operate in the cloud and allow businesses to manage and run payroll from anywhere. Online payroll services typically offer the following services:

  • Run payroll: Online payroll services automatically calculate how much employees should be paid each pay period and deposits the funds via direct deposit or check.
  • Payroll taxes: These services withhold employee taxes, file quarterly payroll tax reports and pay tax withholdings to the proper state and federal agencies. In addition, they issue employee W-2 and 1099 forms at the end of the year.
  • Report filing: Online payroll services complete all of the required reports that must be filed with federal, state and local governments. In addition to sending those reports in on time, some services offer businesses the ability to review them online.
  • New hires: Many services report new hires to the government for you.
  • Integration: Most online payroll services integrate with accounting software. This gives businesses the ability to keep more accurate financial records.
  • Paid time off: Many of these services keep track of employees' paid time off. These features also allow employees to request time off and let employers approve or deny it.
  • Benefits administration: Some online payroll services offer tools to manage health insurance plans, flexible spending accounts and transit reimbursement plans.
  • Retirement services: Some online payroll services have systems that make it easy for businesses to set up and monitor 401(k) and IRA retirement plans, and for employees to control their contributions.

Pros and cons: The biggest benefit of online payroll services is that all of the work — payroll calculations, payroll tax payments, year-end tax forms, etc. — is completed for you. This saves you a ton of time and effort. Typically, the only task you need to complete each pay period is to provide the hours worked in each payroll period. One downside is that using an online payroll service is more expensive than handling payroll on your own. Another potential negative is that you are entrusting the payroll provider you choose to get everything right. If the provider makes a mistake, you may face a rash of angry employees or a fine from the government.

What the experts say: "The type of payroll service that works best for each company depends on the needs and circumstances of the business." — Michael Raanan, president of Landmark Tax Group and a former IRS revenue officer

Ready to choose a payroll service? Here's a breakdown of our complete coverage:

Editor’s Note: Looking for a payroll service for your business? If you’re looking for information to help you choose the one that’s right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:

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The cost of payroll services varies, but the pricing structure is pretty standard:

  • There is typically a flat monthly base fee. Some services have one base fee for all of their customers, whereas others offer different pricing plans for different levels of service. For example, a basic plan might only include the running of payroll, while more advanced plans might also include paying taxes and printing W-2 forms for employees.
  • Monthly fees can range between $20 and $100 depending on the plan.
  • In addition, most services also charge for each paid employee. This typically costs between $1 and $10 per employee.
  • Some services also have added costs to use direct deposit and to complete year-end tax services. In addition, some providers charge an initial setup fee.

The small business owners we talked to who use online payroll services say they see a variety of benefits, including the following:

  • Cost savings: Vladimir Gendelman, founder and CEO of Company Folders, said it's much cheaper to use a payroll service than to do the work himself or hire a bookkeeper to do it.
  • Saving time: Katherine Niefeld, president and founder of blink PR, said she saves several hours a week by using her payroll service.
  • Employee access: Greg Szymanski, human resources director for real estate development and home construction management company Geonerco Management LLC, said that with payroll services, his staff members can log in to their accounts on their own, view their pay stubs online and make changes, such as to addresses or tax withholding information, when necessary.
  • Mobile access: Ty McLaughlin, chief financial officer for Web-based application provider OnceLogix LLC, likes that he can log in to his payroll service from anywhere.
  • Error reduction: David Sabot, president of CheapHumidors.com, said he likes using online payroll services because it ensures no manual errors occur when he's writing out employee checks. He said using an
automated payroll service has allowed his company to navigate the often-complicated process of payroll taxes, withholdings, insurance, profit sharing and 401(k)s.

Now that you've got the basics, you might be ready to make some decisions about which online payroll service is right for you. If you want to see our recommendations, check out our best picks for online payroll services. If you still need some help knowing what to look for, keep reading.

The first step toward choosing the right payroll service is to make sure you are asking the right questions. Payroll experts suggest you ask potential payroll service providers a number of questions about their business, including the following:

  • How long have you been in business?
  • How often are your tax tables updated for compliance?
  • Do you have other clients in my industry?
  • How important will my business be to your company?
  • If I have a question or concern, whom do I go to?
  • What's the structure of your customer service department?
  • Can you integrate with my employee benefits offerings?
  • How can I monitor and track all of my payroll transactions with you?
  • How will you handle my business as my company grows?
  • What are your fees and contract policies?

You also should watch out for any potential red flags when researching potential online payroll providers. Here are some things to watch out for:

  • Make sure the company is trustworthy and dependable, so you can be sure your critical payroll information is in good hands. The company should be bonded and insured.
  • Make sure the online payroll service is properly paying the IRS on your behalf. If they aren't, your business could incur huge tax penalties.
  • Make sure your online payroll service provider is aware of your payroll tax requirements and deadlines.
  • Because this is an online service, make sure the company provides a secure connection to ensure all of your data is protected.
  • Choose a service that is very transparent and upfront with its clients. The provider should offer a way to oversee all of its payroll and tax activity.

For a summary of our best payroll service picks and to review our methodology for choosing them, visit our best picks page here.

Editor’s Note: Looking for a payroll service for your business? If you’re looking for information to help you choose the one that’s right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:

buyerzone widget
Chad  Brooks
Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.