There are a lot of options available when choosing a payroll service. You may be researching everything from online payroll software to local accountants and bookkeepers. When selecting providers to review, consider the size of your business and the complexity of its payroll operations. In this article, we help you determine the questions you need to ask to find the best fit for your company in addition to giving you an overview on the types of solutions you should consider.
1. Evaluate Your Business
Start by figuring out:
- The number of employees you have, where they are located, and how you pay them
- Whether you have HR staff or an employee dedicated to running payroll, or will be running payroll yourself
- Your budget
- Whether you need benefits options and 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 the right paperwork filed with the state. Be sure you know the basics of how to do payroll so you’re not held accountable for anyone else’s mistakes.
- 6-50 employees: You’re considered a small business and may have certain requirements in some states on issues like sick leave. Your business is still small enough that free payroll software can work since you don’t need all the bells and whistles. If you opt to do this, you’ll need to make sure you are compliant with payroll laws, both federal and state.
- 50-100 employees: You’re 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 payroll software is a good option.
- 100+ employees: You’re moving toward a medium-sized business and need to consider the cost of volume (i.e., a solution that charges a high rate per employee such as PEOs can get expensive quickly). You will need to comply with all federal and state laws. A human resources information system (HRIS) is a must here since you have over 100 people in your organization as well as benefits.
Size & Feature Considerations
Payroll services that can handle a range of different-sized 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 very 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/remote employees in more than one state (or country): You’ll have to meet more regulations. You’re better off opting for HR or payroll software to ensure compliance with federal, state, and city requirements. International payroll services are essential if you have workers in other countries.
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, or 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 QuickBooks Time (formerly TSheets) with QuickBooks Payroll or a payroll software that can integrate with a time and attendance software or time-tracking software.
- All salaried 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.
- Combination of hourly and salaried: 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 twice 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. Check out our top contractor payroll service picks.
Payroll and HR Expertise Within the Company
You may wonder why you would need to have any payroll or HR expertise in 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 into 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 benefits 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.
Not sure what kind of benefits you want to offer? Check out our guide on the different types of employee benefits so you know what you’re looking for before choosing a provider.
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. 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.
Want to learn more about integrating outside software with your payroll system? Take a look at our article on payroll software integrations.
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 integrates with your payroll software, all information will transfer electronically, such as employee paycheck calculations.
Visit our time and attendance software guide to find a good fit for your business.
2. Narrow Down Your Payroll Service Options
Here is an overview of the four main solutions you may be interested in when selecting a payroll service.
Online payroll software is a system that you can use to help manage your payroll or some aspects of it—paychecks and payroll taxes (payments and filing)—completely online. The best payroll software provide full-service payroll options; they’ll process your payroll and taxes, with a promise to refund any penalties you incur due to mistakes they make. In addition, you’ll usually have access to a team of professionals that can assist you with setup, compliance questions, and one-off issues. You can find some DIY plan options that will help with calculations, but you’ll have to pay and file taxes on your own.
While you’re researching, you can take payroll software for a spin without paying a dime. 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.
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 payroll laws governing how employees and taxes should be paid; they may offer a guarantee to cover any penalties that arise, but you’ll need to verify. 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.
Did You Know?
You can hire a bookkeeper from anywhere and have access to them no matter where you are. Check out our top picks for online bookkeeping services.
Professional employment organizations (PEOs) are companies that partner with you on employing your workers. While you manage day-to-day operations, the PEO handles payments, taxes, and deductions and makes sure you don’t break any payroll laws. If you’re growing past the mom and pop stage and need to make your workplace more attractive with competitive benefit options—like insurance—and more structured processes/policies, a PEO might be a good option.
Although they tend to be more expensive than other options like software or bookkeeping services, you can secure much better rates for employees; they add your employees to a pool that houses all of their clients’ employees, so they can offer large group benefit rates you can’t get otherwise.
Think a PEO might be right for you? Check out our top PEO recommendations.
Local payroll services are companies that process payroll in a physical location that’s near 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 at no extra cost—some online payroll solutions charge a premium for that level of personalization. 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 time sheets (if you’re not using a time and attendance system).
If you decide local payroll services don’t make the cut for your business—they can be more expensive than online providers and don’t usually give as much value for your money, other than the personal experience—take a look at our best payroll services guide for other 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. Make a list of the providers that are still under consideration.
3. Research & Compare Payroll Providers & Decide Which 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.
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 keep up with 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 (read our review), you can purchase and set up your workers’ comp coverage right from 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.
Time Off & Leave Tracking
Similar to time tracking, if you provide paid time off or 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.
Customer reviews are an essential part of shopping for payroll services. The best ones are on third-party sites. 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. Expert payroll reviews are also essential.
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.