Man records information from computer
Choosing a payroll service means understanding your employees' needs. — Getty Images/ shapecharge

Payroll isn’t a straightforward task. To comply with various tax agencies, small business owners or their accountants must understand tax differences between jurisdictions while keeping up with the latest updates. Payroll software handles tax calculations and can even file forms and submit payments to local, state, and federal agencies on your behalf.

But the best payroll service for a small business does much more than run payroll. They can improve employee experiences and help administer benefits. In this guide, you’ll learn the following:

  • How payroll systems work.
  • About the payroll pricing model and how to recognize hidden fees.
  • The benefits of automated payroll services.
  • How to decide if you need payroll software.

Payroll software and service: how it works

According to the IRS, “A payroll service provider (PSP) is a third-party that can help an employer administer payroll and employment tax obligations.” Online payroll services offer cloud-based software. Companies set up their account and input employee information into the software program. Business owners or accountants enter timecard data (or integrated time-tracking tools automatically sync hours) to run payroll. With a click or two, you can review and approve payroll.

Behind the scenes, the software computes employee pay. It handles shift differentials, overtime hours, tipped wages, and holiday pay. The service calculates federal, state, and local employment taxes. In addition, full-service payroll providers file employment tax forms and make deposits on your behalf. Many online payroll systems can withhold funds for 401(k) or other benefits programs. Also, some can manage more complex tasks, like wage garnishments or child support.

After the software processes payroll, it will cut paper checks, send direct deposits, or put funds on pay cards from your business account. It typically takes two to four days, although some payroll providers offer same-day or next-day service.

Payroll system features

Along with payroll automation, most services handle independent contractor payments. Some provide portals so your freelancers can securely enter their banking and tax information. Payroll solutions have mobile apps for employee self-service. Workers can view their pay stubs, year-end tax forms, and, in some cases, their paid time off (PTO) balances.

Other standard payroll software features include the following:

  • Year-end taxes: Payroll services can autogenerate 1099-MISC, 1099-NEC, and W-2 forms. It may send digital or paper copies and e-file them with tax agencies.
  • Penalty-free guarantee: Small business owners can have peace of mind with an error-free guarantee. Many payroll providers will pay any penalties and interest if there’s a mistake with calculations, filings, or deposits.
  • Integrations: Time-tracking and accounting integrations can streamline several processes and reduce errors by syncing data between your systems.
  • Wage and labor reports: Analytics tools vary, but many payroll providers usually show your company’s tax liabilities, employee tax contributions, PTO balances, and more.

Additionally, payroll systems may offer built-in time-tracking and HR features. Often, entry-tier plans have basic onboarding tools, whereas higher-priced packages might have advanced hiring and workforce management capabilities.

[Read more: How to Choose the Right Payroll Software for Your Business]

Outsourcing payroll allows you to focus on mission-critical activities.

Payroll pricing and fees

Payroll providers charge a base monthly fee. On average, prices range from $17 for do-it-yourself tax filing to $45 for full-service plans. Many payroll vendors offer higher-priced packages that bundle extra services, like accounting tools or HR features. These can cost over $100 a month. In addition to the base fee, providers charge a fee per contractor or employee. That fee ranges from $4 to $12 per person monthly.

However, it’s important to review your plan carefully. It can cost more to integrate accounting or time-tracking software, pay employees or contractors in multiple states, or remit garnished wages.

Benefits of small business payroll services

More than 72% of respondents to the American Payroll Association’s Getting Paid in America survey said it would be somewhat or very difficult to meet their “current financial obligations” if their “next paycheck were delayed for a week.” Besides convenience and time savings, many small businesses use online payroll services to reduce errors that would prevent timely payment to their employees.

Other payroll software benefits include:

  • Tax compliance: In 2022, the IRS handed out over 4.3 million civil penalties related to employment taxes. Automatic tax payments and filings are a significant advantage of payroll software.
  • HR improvements: Online document storage, onboarding tools, and new hire reporting can increase productivity and allow seamless new hire experiences.
  • Employee satisfaction: Nearly 83% of respondents to the APA’s survey said their employer offers a self-service portal. Payroll software that gives employees control over how they get paid and allows them to quickly and easily change their data can help your company attract and retain workers.
  • Cost savings: Although a payroll service for small businesses isn’t cheap, it can cost less than hiring an accountant or payroll specialist. Payroll software is more affordable than a professional employer organization (PEO).

Does your small business need an online payroll service?

As your business expands and you hire employees, the payroll process only gets more complex. Outsourcing payroll allows you to focus on mission-critical activities, like increasing revenue.

Consider the following questions:

  • How many hours do you spend running payroll monthly? What about filing and submitting payments to local, state, and federal tax agencies?
  • Do you feel confident in your payroll and tax calculations?
  • Are you considering adding employee benefits or other perks requiring payroll deductions?
  • Do you pay monthly fees for direct deposit?
  • Will you be hiring employees or contractors soon?

[Read more: Choosing a Payroll App: 6 Main Considerations]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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