What's the difference between a payroll service and payroll software?
What’s payroll management?
As a business owner, you’re probably familiar with payroll. At its basic level, payroll is the act of compensating your employees for the work they complete for you. Usually, a business processes payroll for a specific period of time – most often every two weeks. During payroll, an employer calculates and then distributes employees’ wages.
But payroll is not just distributing employees’ wages. Payroll also consists of tax filing, calculating and taking out deductions for federal, state and local taxes, as well as Social Security, unemployment insurance, wage garnishments, and any voluntary deductions from employees.
As you can see, payroll can become complicated pretty quickly. And as your business grows and you hire more employees, this process can get even more complicated. Small business owners spend a lot of time running payroll.
In fact, a recent study found that small business owners spend four hours and 52 minutes calculating, filing, and paying payroll taxes each pay period – which adds up to approximately 253 hours per year. This is where payroll management comes in. It’s a system that helps your business manage its payroll, making payroll more efficient and accurate. A good payroll management system not only automates the process for you, but it also substantially reduces the time you spend on payroll per month or year.
When it comes to payroll management, there are two popular sources for payroll management – a payroll software or a payroll service.
Should my business use payroll software?
The first option for payroll management is payroll software. Payroll software is an application that allows you to manage, organize, and automate your payroll. There are some distinct advantages to payroll software:
- Ease of use – Typically, payroll system software is built to be intuitive and easy to navigate. With user-friendly interfaces, payroll software makes it easy for small businesses to make simple changes to their payrolls. Not only will businesses have access to tools that make payroll much easier to deal with, but many applications also help companies track PTO and time entries. Plus, you can take payroll software anywhere you go, thanks to many software solutions having their own mobile apps.
- Record keeping – Another advantage of software is the quick access you’ll have to employee records. The IRS, Social Security Administration, and Fair Labor Standards Act all have specific record keeping requirements, and software makes it easy. In addition, software makes it easy to view other pertinent employee records – from attendance to time off to pay stubs.
- Better data management – Because the software contains all of your company’s data in one place, your small business’s data is generally more secure. When you utilize small business payroll software, you’re shielding your employees from exposing their data to a third-party payroll vendor. Another advantage of software is controlling the permissions so that only essential employees have access to the payroll data.
- Lower cost – Generally, software implementation costs less than hiring an outside payroll service. This is especially true if you’re looking for a basic solution for your small business. Pricing can vary, but typically costs increase the bigger and more complex the system gets.
Now that we’ve taken a look at some of the biggest upsides of using payroll software at your business, let’s take a look at some of the drawbacks of payroll software for your business. Here are a few of the biggest drawbacks:
- Steep learning curve – One of the hardest things about implementing payroll software is the learning curve for your employees. Many payroll software programs require onboarding or other training to operate the software efficiently. This learning curve can mean a lack of productivity for those employees who are learning the new software.
- Responsible for mistakes – Unlike hiring a third party to handle payroll, utilizing software means your business is on the hook for any clerical errors. This can add stress to your business if something is input incorrectly. These mistakes can also be costly or time consuming to readdress.
- Hiring someone to help – If your business doesn’t have a payroll specialist in-house, you may have to hire someone to either run payroll or provide software support. Even if there is someone at your company in Human Resources who can run payroll, it can be time consuming, taking them away from their other responsibilities. Make sure to consider the human costs when deciding to implement a payroll software.
Should my business use a payroll service?
- Makes payroll easy – The biggest advantage of a payroll service is outsourcing your payroll to another partner, taking it off your plate. That means you can focus on growing your business without having to worry about payroll details
- More expertise – Another advantage of hiring a payroll service is your business will get more comprehensive help and tailored customer support. From payroll to tax filings, payroll services providers can help your business navigate both payroll and tax compliance. Many payroll services offer other workforce management tools, including HR services, retirement plans, new hire onboarding, time tracking, and more.
- Accuracy guarantee – Many payroll service providers offer an accuracy guarantee, so you can have peace of mind knowing that you won’t be liable for the mistakes of the payroll service.
- Employee service – A final advantage of payroll service providers is that many provide an employee self-service portal, giving your employees direct access to their personal payroll information. There, they can change their direct deposit and bank account information, their tax withholdings, or view their employee benefit information. They can also view their year-end tax forms as well.
Of course, there are some drawbacks to using a payroll service. Here are some of the biggest disadvantages:
- Higher overall costs – Experience counts when it comes to payroll companies. For full-service solutions, the costs can exceed the costs for payroll software. However, it’s important to keep in mind that this is a hands-off solution. One way to save money is to consider a provider who can bundle multiple services, including payroll, point of sale, and payment processing.
- Less nimble – Unlike payroll software, utilizing a payroll service hinders the amount of employee data you’ll have directly at your fingertips.
Payroll software vs Payroll service: What to look for
No matter which you decide on, there are a few universal things that you should consider when you’re looking for either a payroll software or a payroll service. Asking these questions can help you make your decision as to what’s best for your small business.
- How big is my company? – Larger companies tend to have more complex payrolls, partly due to the amount of employees in the system. Also, the size of your business can also affect the rate you pay to both the software company or the payroll service provider. This is definitely a consideration when deciding on the most cost-effective solution for your business.
- How much do I like being hands on? – For small business owners or employees who like to be more hands on, payroll software solutions can give you that ownership. For those who prefer a hands-off solution, outsourcing payroll services is your best bet.
- What type of employees do I have? – The employee types at your business can play a significant role in choosing the right payroll management solution for your business. You may lean to one type of payroll if your staff is hourly, whereas you may lean to a different type if you only hire full-time employees.
- What features are available? – Each software provider or payroll services provider will offer different features. It’s important to decide which of these features is appropriate for your business and which features are non-essential. It's also important to take a look at integrations. Can it integrate with accounting software? HR software? Benefits administration? Those businesses that are looking for more robust offerings may choose to work with a payroll service instead of payroll software.
- What’s the software provider or service provider’s reputation? – No matter which solution you choose, it’s important to examine the reputation of a potential partner. This can be critical not only for the day-to-day support you’ll receive, but also for any urgent support or troubleshooting you’ll need. Also, the degree to which you’ll need support can also affect your choice of payroll software or payroll service.
The decision to go with payroll software or a payroll service can be a tough one. As you’ve seen, there are a variety of factors that should help guide your decision, including your business needs. Some small business owners may prefer payroll software so that they can save money, while others will prefer outsourcing to a payroll service that can completely handle payroll. In the end, it’s important for you to do the necessary research to find the best solution for your business.
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Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.