There are a lot of options available when choosing a payroll service. You may be researching everything from payroll software to bookkeepers. When selecting a provider, consider the size of your business and the complexity of payroll operations. In our list, we explain the different types of payroll services available, so you can make the right decision for your business.
While you research the various payroll services for your business, you can also take payroll software for a spin. Sign up for Gusto’s 30-day free trial. It’ll give you the opportunity to see how automatic payroll, tax filing and payments, and even benefits work in a software solution. It’s affordable at $39 monthly (lowest plan) for one employee and provides set up support.
1. Learn What Different Payroll Providers Do
To make the best choice for payroll, you’ll need first to understand the different types of payroll outsourcing services that are out there. This list defines payroll software, bookkeepers, PEOs, and local payroll services.
Payroll software are systems that you can use to help manage your payroll or some aspects of it—paychecks and payroll taxes (payments and filing). There are both online options and those you can install on your PC; please note, many employers today prefer online providers for the convenience and ability to access it from anywhere. Some of the more quality software has a team of professionals who will assist you with setup, compliance questions, and one-off issues.
Another characteristic of payroll software that you should consider is that some are full-service, meaning they have staff who will help you manage your payroll process from beginning to end (hire to fire) while others are more DIY style. With DIY payroll software, you’ll do much of the work yourself, possibly even calling in tax payments on your own and preparing end of year tax reports.
Bookkeepers are the obvious choice for some employers when they already have one keeping their financial records in order. The important thing to consider is the bookkeeper’s level of payroll knowledge. Some are experts in compliance and stay abreast of federal and state laws governing how employees and taxes should be paid; they may offer a guarantee to cover any penalties that arise. Others are more accustomed to the financial side of payroll, calculations, payments, and maintaining records; these bookkeepers can ensure your employees are paid but may run into some legal snags along the way.
Professional Employment Organizations
Professional employment organizations (PEO) are companies that partner with you on employing your workers. While you manage day-to-day operations, the PEO handles payments, taxes, deductions, and makes sure you don’t break any payroll laws.
PEOs tend to be more expensive than other options like software or bookkeeping services but offer more benefits. And speaking of benefits—like insurance—employers can secure much better rates for employees by using a PEO.
Local Payroll Services
Local payroll services specialize in payroll and usually handle it all for you. Since they’re local, you can usually meet with their payroll experts face to face and might even be assigned one point of contact. The services they offer differ depending on the company. Still, you should have the option of removing the majority of payroll responsibilities from your plate completely, aside from maybe submitting timesheets (if you’re not using a time and attendance system).
2. Evaluate Your Business
Once you understand your payroll options, you will be ready to take a step back and assess your business needs. Start by figuring out:
- The number of employees you have, how you pay them, and where they are located
- Whether you have HR staff or an employee dedicated to running payroll, or will be running payroll yourself
- Your budget
- What other services or software you want to integrate with your payroll service (time and attendance, accounting, employee scheduling)
Size of Your Business
Regardless of which payroll solution you decide to adopt, the size of your business matters. You will run across payroll companies that claim they can handle payroll for any size company, from one employee to 100,000. And while this is true for some, it doesn’t mean they’re right for you.
Some general guidelines are:
- 0-5 employees—you’re considered a very small business and subject to little regulation, so you won’t need to worry about compliance issues. All of the payroll options we mention should work for you. However, if you go with your accountant or bank, you will need to make sure you have workers’ compensation insurance and have the right paperwork filed with the state.
- 6-50 employees—you’re considered a small business, and you may have certain requirements in some states on things like sick leave. HR and payroll software like Gusto can help make sure you are compliant with your state laws.
- 50-100 employees—still a small business, but you will want a payroll solution that can comply with all federal requirements, including the Family and Medical Leave Act (FMLA). All-in-one HR software or a payroll software/service are your best options.
- 100+ employees—you’re moving toward a medium-sized business and need to consider the cost of volume (i.e., a solution that charges per employee will not be appropriate). You will need to comply with all federal and state laws. With these many employees, all-in-one HR software is a must here since you have over 100 moving people in your organization as well as benefits.
Size & Feature Considerations
Payroll services that can handle a range of different size businesses tend to be costlier than others and provide more features (like responding to garnishment notices). Companies that only have a handful of employees will sometimes opt for simpler services that address their needs of just paying employees and taxes.
For instance, a business that pays four part-time employees would not need to pay a premium for payroll services that provide top-notch insurance rates. The law doesn’t require benefits until you reach 50 full-time equivalent employees, so in most cases, a small operation wouldn’t need that option.
Some services and software just aren’t built to handle large companies. If you have 50 employees today but project you’ll have 150 within the next year, you wouldn’t need to sign up for software that doesn’t do a good job handling payroll for more than 100 employees. Always consider how many employees you have today and how many you plan to have in the future. Also, when researching payroll providers, look for online reviews from similar-sized companies that have used them.
Your Business Location
The city and state locations of your business and remote or overseas employees is important to consider in your payroll selection:
- Just one location or locations all in the same state—you have the simplest payroll situation. Most options are available to you.
- More than one location in more than one state or remote employees in more than one state (or country)—you’ll have to meet more regulations. You’re better off opting for HR software or payroll software in order to ensure compliance with federal, state, and city requirements.
Hourly vs Salaried Employees
Next, what kind of compensation you give your employees should be considered when looking at payroll solutions. Are they truly employees, or are some considered independent contractors?
If you have mostly part-time or full-time employees, then most payroll solutions can work for you since they will require the standard tax reporting. If you use a lot of independent contractors, “1099 employees,” you will want to check that your payroll solution can also pay them without an additional fee.
If your business includes:
- All hourly employees—you will most likely want to look at payroll software that includes a time-tracking feature like TSheets with QuickBooks Payroll or a payroll software that can integrate with a time and attendance software or time-tracking software.
- All salary employees—this is the simplest situation for payroll solutions and we recommend payroll or HR software unless you have only one to four employees, and then you could consider any payroll option, including DIY style plans.
- A combination of hourly and salary—you will most likely want to look at payroll software that includes an ability to pay both sets of employees on separate pay schedules (i.e., salaried might be monthly or 2x per month, whereas hourly might be biweekly).
- Only independent contractors—you should look for providers that have packages designed solely for that purpose. They’re usually cheaper, especially online payroll software. You can get away with only paying $5 or $6 per contractor monthly, and some won’t charge you a dime during the months you don’t pay anyone.
Payroll and HR Expertise Within the Company
You may wonder why you would need to have any payroll or HR expertise within your company at all, considering that you’re looking for a new payroll service. The truth is that although you will be paying a company to help do your payroll, your business is still ultimately responsible for any mishaps that may occur. You’ll need to consider this before selecting a provider.
Opting for a DIY payroll software isn’t the best idea if nobody has any payroll or HR knowledge. You may be able to ensure your employees are paid but may not understand how much in taxes to withhold or how/when to report to the IRS and other tax agencies.
Budget is a driving factor behind most business decisions, and you should consider it when selecting a payroll provider. Most services charge you monthly, so take the time to figure out how much you can afford. I recommend looking at it on an annual basis as well; some services charge extra for handling year-end tax reports.
Keep in mind that having more employees usually drives up payroll service costs. However, some services charge the same rate if your employee count falls within the same pricing level. Let’s say you have 20 employees, and the provider charges $40 per employee for companies with 20 to 30 workers. You can maximize value and lock in the rate by getting as close to 30 employees as possible (without going over, of course.)
Lastly, be mindful of add-ons. These are features that aren’t built-in the package you sign up for. They cost extra money and can drive up your costs quickly. Be sure to total all costs, by month and year, so you can do a reasonable comparison across the providers.
If your business wants to or already offers benefits, you’ll need to check that the payroll services you are interested in offer in-house options. Some don’t offer benefits at all but will process deductions if you sign up for them with an outside provider. Not having a benefit option can make your payroll more complicated, since you’ll have to manage each component in different systems. If you want to offer benefits, I recommend looking at providers that currently offer benefits provisions as an additional service with their payroll software.
Payroll Software Integrations
If you are or will be using software that you want to connect to your payroll software, you’ll need to keep them in mind. Start a list, so you can inquire about them with a representative or search for them on the service’s website. Many online payroll services will allow you to load data from any software if you can download it into a spreadsheet format. Still, some have automated integrations that will connect the systems with the click of a button.
Some of the most popular payroll integrations to consider are accounting, employee scheduling, time and attendance software, and point-of-sale (POS) software. The more employees and less time you have, the higher the chances are that you will benefit from some software integration.
Time and Attendance Software
While time tracking software isn’t a requirement, it can be beneficial, especially if you have more than 10 employees. If you’re paying even one employee by the hour, you’ll have to track their work time. Some services will allow you to send these hours via email or even call them in. Others have time-tracking built into their software, and all you have to do is enter the hours; however, this can become cumbersome as you grow.
If you decide you’d rather automate this process, time and attendance software would be your best bet. It’ll shift the burden of documenting work hours (via clocking in and out) to the employees, and all you have to do is review and approve them. If the time and attendance system integrate with your payroll software, all information will transfer electronically, such as employee paycheck calculations.
3. Narrow Down Your Payroll Service Options
At this point, you’ve probably got somewhat of an idea as to what will and won’t work for you. If you’re not looking to meet anyone in person or partner with a co-employer, you can cross out bookkeepers and PEOs. If you already have HR and payroll expertise on your team and just need help making the calculations, you might consider a cheap (or free–they are out there) payroll service.
4. Research & Compare Payroll Providers and Decide Which One is Right For You
The next step you should take is to research payroll service providers and compare them based on the features you need. I recommend starting a chart that lists the differences between the providers that capture your interest. This will make it easier for you to see how each provider stands up against the other.
Here’s a chart you can model yours after:
Gusto vs ADP vs Paychex at a Glance
Pricing as Reviewed*
Businesses under 100 employees wanting to offer employee perks
Businesses with over 100 employees and/or familiar with ADP
Ease of Setup
Issue W-2s and 1099s
Direct Deposit & Employee Self-service Portal
Can I Add Employee Benefits?
Benefits insurance broker
Benefits & HR solutions available
Benefits available through a third party
Other Considerations for Choosing a Payroll Service
Though the number of employees you have, where they work, and their employment types matter a lot when picking a payroll solution, we also want to give you a couple of other factors to consider.
Workers’ compensation, payroll taxes, and other compliance issues are important areas you will need to upkeep once you start to hire people. If you’re a business owner who just wants compliance done, you will want to strongly consider HR software or payroll software. For example, if you choose a payroll service like Gusto, you can purchase and set up your workers’ comp coverage right from within the software. If you would rather do it yourself to track costs, then you can buy workers’ comp on the private market or through a broker. Just remember, your accountant and your bank most likely won’t guarantee compliance, like an HR or payroll software provider would.
Paid Time Off & Leave Tracking
Similar to time tracking, if you provide paid time off, sick leave, or if you simply need to track absences, you will want a software solution that helps you do just that. This option will create less paperwork for you and provide you with insights into your workforce and potential hiring/firing decisions. Gusto includes all of this in its HR/payroll software.
Customer reviews are an essential part of shopping for payroll services. The best ones are on third party sites like in our payroll software review section. They’re usually unbiased and show both the pros and cons. I recommend giving extra weight to those that have businesses in your industry and/or a similar number of employees, so you get a better preview on the experience you are likely to have with the service.
There are numerous payroll service options for small businesses, but they’re not a one-size fits all solution. You should choose the best one for your business based on the features you need and your budget. Be sure to differentiate wants versus needs and factor in any major business changes (size, location) you anticipate happening within the next five years.