Running payroll is one of the most important and time-consuming responsibilities for small business owners. As your company grows, staying compliant with tax regulations and handling deductions or benefits can become overwhelming. Outsourcing payroll tasks can relieve these burdens.
Choosing the right payroll service for your small business can reduce costly errors and save hours each month. Payroll companies help you pay contractors and employees accurately and on time. They work as an extension of your human resources (HR) department and offer a range of payroll services, from basic to advanced.
Below, we'll discuss the following:
- Challenges of in-house payroll processing management.
- Types of payroll tasks you handle that can be outsourced.
- Benefits of using a payroll service.
- Questions to consider before outsourcing payroll.
- Comparing payroll services and alternatives.
- Understanding how providers handle payroll compliance.
- Questions to ask a payroll provider before choosing services.
Explore your payroll processing challenges
Small businesses face several barriers when calculating and processing employee payroll and managing taxes. This is especially true if your staff live in different states or countries than your company's headquarters. To understand how payroll as a service can best help your business, consider your staff size, payroll complexity, and in-house skill level.
The challenges of in-house payroll processing and tax compliance include:
- Tax compliance: The IRS assessed over $65.5 billion in civil penalties in the 2023 fiscal year. More than $8.5 billion in fines were imposed on companies for employment tax problems. Common issues involve accuracy, delinquency, failure to pay, and bad checks.
- Time and resources: According to a National Small Business Association survey, 41% of small business owners report spending three to 10 hours monthly handling payroll taxes internally. Another 10% spend over 10 hours each month.
- Cost: Handling payroll services in-house can be expensive. The U.S. Bureau of Labor Statistics lists the median pay for an accountant as $79,880 per year, not including benefits. Plus, you may still use HR software to process payroll.
The IRS assessed over $65.5 billion in civil penalties in the 2023 fiscal year. More than $8.5 billion in fines were imposed on companies for employment tax problems. Common issues involve accuracy, delinquency, failure to pay, and bad checks.
Decide which payroll tasks to outsource to a provider
There are several steps involved in the small business payroll process, and payroll services for small businesses can take over some or all of these tasks. Employers calculate the employee’s gross pay, withhold or garnish wages as necessary, and send paychecks.
You may also need to comply with federal and state regulations, such as the Family and Medical Leave Act (FMLA), depending on the size of your business.
The following payroll management tasks can be time-consuming for small business teams:
- Employee time and attendance.
- Paid time off and sick leave.
- Salary and hourly payroll records.
- Payroll tax statements.
- Workers' compensation.
- Tax forms and payroll tax filings.
- Payroll system integrations and maintenance.
- New-hire reporting.
- Federal, state, and local year-end taxes, as well as W-2s.
- Tax payments, including Social Security and state unemployment insurance.
- Employee benefits and deductions.
In addition, your staff may want direct deposit and an online self-service portal for accessing electronic payroll records and pay stubs. Payroll services for small businesses can handle basic payroll processing and offer advanced payroll features, such as new hire reporting.
Consider the potential benefits of payroll services
Outsourcing payroll and related HR tasks can help small business owners reduce payroll processing time and improve employee satisfaction. Full-service payroll systems ensure your company complies with federal and state tax requirements, which enables you to avoid costly tax errors.
The best payroll services for small companies provide the following benefits:
- Improved employee experience: Payroll providers offer employee self-service portals, direct deposit, electronic payroll records, digital W-2s, and convenient ways to update personal information.
- Cost savings: Full-service payroll services may be less expensive than hiring a professional employment organization (PEO) or hiring an accountant. Many payroll providers give a guarantee and will pay fees you incur due to an error made by the payroll provider.
- Scalability: Flexible payroll options let employers add or remove various features, making it easy to ensure compliance and track payroll tax payments, whether you have five or 100 employees.
- Data collection: Integrations with small business accounting software and time-tracking apps provide insights into benefits administration, payroll taxes, and employee use of payroll and HR features.
Assess your small business payroll needs
Once you understand your challenges, tasks, and potential benefits, it’s a good time to review your small business's payroll needs and explore affordable payroll solutions. Many payroll services charge a fee per employee per month, so you want an accurate staffing count as well.
Questions to think about include:
- How often will you process payroll?
- Do your employees work in other states or countries?
- Will you increase the number of employees next year?
- Do you have any special circumstances, such as tipped employees?
- Will your health insurance requirements change?
- Do you need to track 401(k) deductions?
- Will you pay contractors using a payroll solution?
- Will you need built-in time-tracking or time and attendance software integrations?
- Will you sync accounting software or other third-party tools?
- Do you need plug-and-play integrations, or can you use APIs?
- Do you want a personal payroll specialist or round-the-clock customer service?
Compare payroll software and services
Small business owners have several options for managing payroll responsibilities, including cloud-based payroll software, PEOs, and local accountants or bookkeepers. Paid or free payroll software works well for those with HR and payroll knowledge. You handle some or all processes internally using payroll apps.
These applications include DIY and full-service solutions for running payroll and tax filing. A full-time accountant or bookkeeper can help with payroll as well. They calculate employee pay and payroll taxes and maintain records. Likewise, PEOs manage payroll processing. But they assume the role of employer of record and cost more than payroll software and services.
However, if your small business also needs help finding lower-priced, higher-quality health insurance or wants to outsource its HR department, consider comparing PEO versus payroll service providers to understand how differences in pricing, features, and HR support affect overall value.
Why compliance is critical in choosing payroll services
Choosing a payroll provider isn't just about convenience; it can ensure payroll tax compliance and minimize your financial risks. IRS and state agencies penalize small businesses that misclassify workers, file late, or make payroll tax errors. A reputable payroll service helps you navigate labor laws and tax regulations while ensuring timely filings.
In addition to automatically calculating, filing, and paying employment taxes on your behalf, top-tier payroll services may manage wage garnishments or unemployment insurance. Some provide certified payroll reporting if you work on government contracts. The best payroll providers update their software frequently to reflect employment law changes, including rules for paid leave, overtime, and benefits eligibility. Many have built-in compliance monitoring tools and alerts for tax deadlines and labor law changes.
Look for payroll service providers that offer tax filing guarantees and dedicated support representatives or payroll tax compliance experts. When choosing payroll systems, review the fine print to see which subscriptions include audit or compliance support and accuracy guarantees. Also, see if the software offers multistate payroll management or international solutions.
Top questions to ask when selecting a payroll provider
When you meet with payroll providers for an online demo or follow-up meeting, have a list of questions ready. Check out the vendor's latest updates and current payroll trends to see if you have any new concerns.
Here are questions to help you assess functionality, integration, and compliance in a small business payroll provider:
- What is your error resolution and liability policy? See if the provider has an accuracy guarantee, if it covers fines or fees, and how quickly they resolve errors.
- Do you assist with audits or help during the tax season? Clarify what the payroll vendor includes in their year-end prep and when you can access downloadable tax documents. Ask which services cost extra.
- Can I customize pay types and deductions? Check if you can track benefits deductions, retirement contributions, and wage garnishments. If you manage tips, commissions, bonuses, or reimbursements or have irregular pay schedules, see if the software supports these options.
- What happens to my data if I leave or switch platforms? Ask the payroll provider if you get full access to your historical payroll data if you cancel service or switch platforms. Also, see which method you should use to export information for tax or legal reasons.
- How does your payroll service integrate with my software? Many payroll services list integrations on their websites, but confirming that your specific tools will sync is recommended. Ask if the connection is bidirectional, plug and play, or through APIs.
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