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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

Looking for an online payroll service? Here's everything you need to know about what an online payroll service is, what it offers and how to choose one. If you already know what you're looking for, visit our best picks page to see which ones we recommend, as well as a complete list of others that might work for you.

  • Online payroll services operate in the cloud and allow businesses to manage and run payroll from anywhere.
  • They can be used 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 take into account shift differentials, overtime, holiday pay and taxes, as well as Social Security and benefit deductions. They then make payments to employees by direct deposit or check.
    • File and pay payroll taxes: These services can 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.
    • New hire reporting: Many services report new hires to the government on your behalf.
    • Integration: Online payroll services can integrate with a variety of payroll-related programs businesses are already using, such as accounting software, time and attendance systems and human resources software.
    • Paid-time-off management: Many of these services manage paid time off by keeping track of how many vacation and sick hours employees have earned and how much they've used.
    • Employee self-service: Typically, employees are provided access to the system in order to view pay stubs, PTO balances and year-end tax forms.
    • Mobile access: Many systems offer mobile apps or mobile-friendly websites that let businesses manage and run payroll from smartphones or tablets.
    • Payroll reports: Most systems offer detailed wage and labor reports that provide a deeper look at how a business operates.

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. Payroll can typically be run in just several minutes. This saves you a ton of time and effort. 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. Also, if you are in an area with spotty internet service, an online payroll provider will likely not be a fit for you.

What the experts say: "There are several advantages to using a payroll service as opposed to doing payroll manually in house. Since the service provider completes all of the calculations and paperwork, labor time is saved and employees that would be handling these tasks are free to focus on other matters. Payroll services may also be more secure than in-house payroll management systems and may better comply with regulations." – Dave Rietsema, founder and CEO of HRISPayrollSoftware.com.

"More and more payroll providers have moved to an online payroll type of service due to the increased confidentiality and efficiency of this process." – Brenda LaMarche, president of BRL HR Consulting.

Editor's Note: Looking for information on payroll systems? Use the questionnaire below, and our vendor partners will contact you with the information you need:

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

  • There is typically a flat base fee that is charged per month or per pay period. With per-pay-period providers you are charged each time you run payroll, while per-month providers allow for unlimited payrolls each month.
  • Some providers offer multiple pricing plans for different levels of service. For example, a basic plan might only include the running of payroll, while more advanced and expensive plans might also include paying taxes and printing W-2 forms for employees.
  • Base fees can range between $20 and $100 depending on the plan and provider.
  • In addition, most services charge between $1 and $10 for each paid employee per month or pay period.
  • Some services also have added costs to use direct deposit, to complete year-end tax services and to set up the system.

Not all payroll providers offer the same level of service. The experts we spoke with said there are some specific services and tools small businesses should be looking for from a payroll provider, including

1. Features: The payroll provider you choose should offer all the services your business needs from a payroll provider. In addition to payroll processing and the handling of all tax obligations, LaMarche said businesses should inquire if the service offers direct deposit, multiple wage rates, garnishment payments, paid-time-off management and detailed payroll reports.

2. Ease to use: The payroll service should not be too complex to understand. It should have a clean and easy-to-use interface that allows you to quickly find what you need and run your payroll in a matter of minutes, as opposed to a matter of hours.

3. Cost: Businesses want to find a service that they can afford.

"Small businesses should make sure that the cost of the payroll service fits into their budget scheme before committing," Rietsema told Business News Daily.

In addition to cost, you also 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.

4. Proven provider: LaMarche said it is important to find a provider that has an established track record.

"I don't typically recommend that a business be the first user with a new payroll system," LaMarche said. "Payroll is a critical part of the business to get right. Without accurate payroll, employees won’t stay; no employees equals no business." 

5. Integrations: You want a payroll service that integrates with the programs you are already using. Ralph Matlack,director of product management for Intuit's Small Business Payroll, said there are several payroll integrations that can simplify the financial lives of small business owners.

"Some of the most popular ones include integration with accounting software, which allow payroll solutions to sync data in the accounting general ledger," Matlack said.

Another important integration is with time and attendance systems.

"With time tracking functionality, small businesses don’t have to manually enter employee hours – it's automatically updated based on the hours recorded by the employee," Matlack said.

6. Support: Regardless of how easy the system is to use,there are times when you may run into trouble. That's why you want a payroll service that provides help when you need it.

LaMarche said it is important to find out what kind of support is available and when. Do they offer one representative who serves as your go-to contact? Or, do you have to call a main number and speak with someone who isn't familiar with your business and how it operates?

7. Outages: Online payroll services are cloud-based, which puts businesses at the mercy of the payroll provider to keep it up any running.LaMarche said you want to ask what the system's uptime is and how frequently it is down for maintenance or other reasons.

8. Scalable: Not all businesses have the same payroll needs, which is why Rietsema suggests businesses look for a service that can be tailored for its specific requirements.

"Since small businesses usually do not need the comprehensive payroll services that larger companies may need, it is important for small businesses to make sure a selected vendor offers services that can be scaled down or customized to its needs," he said.

9. Employee self-service: Your payroll service should allow employees to log in on their own in order to view digital pay stubs and year-end tax forms.

"Employers like the ability for employees to have self-service access to payroll, but this will vary with each system," LaMarche said

10. Added services: Businesses may find it beneficial to find a payroll provider that offers a variety of additional services, such as benefits and retirement plan administration. Another important one is worker's compensation, Matlack said.

"Some payroll solutions offer convenient services like pay-as-you-go workers’ compensation, helping clients manage cash flow by having them pay monthly on their actual labor force, instead of annually based on an estimated labor force," Matlack said.

Other questions to consider when choosing a payroll service include:

  • How often are their tax tables updated for compliance?
  • Do they have other clients in your industry?
  • How important will your business be to their company?
  • Can they integrate with your employee benefits offerings?
  • How will they handle your business as your company grows?
  • What type of security measures are in place to keep your company's payroll data secure?

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're still not sure if an online payroll service is a fit for you, here are several questions and answers that might help you come to a decision

Q. How do payroll services make payments to employees?

A. Payroll services can pay employees in a variety of ways, including by direct deposit, check and pay cards. For check payments, some services provide you with formatted checks and pay stubs that you print out on your own, while others allow you to write out checks. Additionally, some service will print checks out for you and mail them to your office to be hand delivered to employees.

Q. Please explain in more detail how the tax services work. 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?

A Payroll services withhold the necessary taxes from each paycheck during each pay cycle, putting the money aside for when it is time to file, Rietsema said. When it is time to file, payroll services fill out the necessary forms and even submit the payments as needed to comply with state and federal requirements.

"This can save businesses headaches, as all taxes are taken care of and properly filed on time," Rietsema said.

Many payroll providers guarantee their tax services. Should a mistake be made, they will fix it and pay any fines or interest that’s incurred.

Q. How important is it for the payroll provider you select to integrate with other services you use, such as your accounting software and 401(k) provider?

A. Matlack said integrating with other programs, like accounting software, can help save businesses a lot of time.

"Data seamlessly integrates across all platforms so small businesses have access to their business data in one platform," Matlack said. "Having payroll that is integrated with accounting software enables small businesses to assess how they’re doing and have better visibility into which jobs, products or services are most profitable."

Rietsema believes integrations with other payroll-related programs can be very beneficial.

"It helps to streamline payroll and prevent errors and hiccups," he said.

Q. What are the benefits of having employee self-service options?

A. With this option, employees can view hours worked, pay stubs, PTO balances and can access historical payroll data without asking permission from HR staff members or managers, according to Rietsema.

"This can save human resources professionals time, while empowering employees, " Rietsema said.

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

A. Businesses can switch to a new payroll provider any time; however, there are certain times of the year when it is much easier, LaMarche said.

"I typically recommend that a business try to switch on a calendar quarter, or at the beginning of the year," LaMarche said. "Switching at these times makes it much easier for the payroll transition because it ties out with quarterly tax returns and makes conversion much more streamlined."

LaMarche said there is significantly more data entry and verification that needs to be done when businesses switch in the middle of a calendar quarter because individual paychecks, instead of quarterly totals, must be entered in to ensure taxes calculate accurately. 

Q. What are the benefits of having mobile access to your payroll system?

A. With mobile apps and websites, users have access to their payroll data anytime, anywhere. This gives small businesses the ability to make decisions on the go," Matlack said.

"Whether it’s updating the number of hours worked or including a missing transaction in the books, mobile access ensures payroll is up to date," Matlack said.

 If you think an online payroll service is right for you, we encourage you to check out our best picks for various types of employers, our reasoning for picking each and a comprehensive list of online payroll services.

Editor's Note: Looking for information on payroll systems? Use the questionnaire below, and our vendor partners will contact you with the information you need: 

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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.