Shopping for Payroll Services? Here's How to Choose the Best Solution

At its best, payroll software can dramatically improve the payroll process, minimizing errors, streamlining data entry, and reducing stress for everyone involved.

But at the opposite end of the spectrum, the wrong payroll service will likely cause more headaches than it cures.One-third of small businesses with five or more employees spend more than six hours each month manually handling their own payroll taxes, an inefficiency that can lead to increased labor costs.

Additionally, making the wrong software choice can expose you to unnecessary and costly regulatory compliance risks.

In 2019 alone, the IRS levied $13.7 billion in payroll tax penalties. This doesn’t even begin to cover the disruption to your culture, employer brand, and employee initiatives, along with the laborious, time-wasting, growth-stunting cycle that bad payroll practices can trap you in.

Whether you’re upgrading from a manual bookkeeping process or on the lookout for a new payroll software that better meets your company’s needs, you’re in the right place.

Read on to learn how to:

• Investigate what your current solution may be missing.
• Identify the most important features to look for.
• Choose a payroll service that will provide the best experience for your organization.

The Top 8 Reasons to Choose New Payroll Services

In a recent BambooHR survey, we asked respondents to rank the main points of their dissatisfaction with their current payroll solution:

• Poor customer service: 78% cited sub-par customer support as the reason for their dissatisfaction.
• Lack of integrations: 68% were frustrated that their payroll wasn’t integrated with their HRIS.
• Clunky interface: 64% wished their current service was more user-friendly.
• Poor employee experience: 61% wanted a better experience for their employees.
• Missing functionality: 50% said their current service lacked functionality.
• Time-consuming processes: 43% wished the process of running payroll took less time.
• Too expensive: 36% thought they were spending too much on their payroll service.
• Inaccuracies: 18% were concerned about the frequency of inaccuracies in payroll.

What to Look for in a Payroll Service

At a minimum, payroll software should dependably handle three basic functions:

• Paying employees on time and accurately
• Paying payroll taxes on time and accurately
• Filing payroll tax forms

While many payroll solutions can offer these bare minimum functions, there are plenty of other factors to consider before investing in a payroll solution. After all, as business consultant Rhonda Abrams writes in Hire Your First Employee, “the penalties for screwing up are so much more expensive than the cost for payroll.”

Will It Be Easy to Switch?

The ease of switching will depend on a number of things, including the time of year and the complexity of your payroll needs.

For example, trying to switch payroll providers mid-quarter is a recipe for tax complications you wouldn’t have if you waited to start at the beginning of a new fiscal year. And a company of fifty local, full-time employees will likely have fewer boxes to check off during the transition than a company with hundreds of employees across different states and with different pay rates and employment statuses.

However, switching payroll services can be a smooth, stress-free experience no matter what when the provider you choose has a robust implementation process in place. This process should include:

• Making sure all your payroll information is correctly collected and set up from the beginning
• Planning for all levels of complexity and timing needs
• Fully educating you on the product and best practices
• Assigning a dedicated specialist to see you through the entire process

As an example, here’s what the BambooHR^® Payroll implementation process includes:

• We have a registration process that guarantees customers get the right data into the system from the beginning, whether they’re coming from a previous provider or running their own payroll for their first time. We’ll also double-check all the data for the customer to ensure accuracy.
• We offer learning courses to help customers understand the ins and outs of the system before their very first payroll run.
• And most importantly, we assign a dedicated Payroll Project Manager who walks the customer through a structured implementation timeline and helps tailor BambooHR Payroll to their unique needs.

How Much Do Payroll Services Cost?

In 2023, expect payroll services to cost $29 to $150 monthly, with a per-employee fee of $2 to $12 each pay period.

Here's how that compares to other solutions: An accountant will charge roughly $100 per hour for full-service or after-fact payroll services. Or, if you’re developing your own in-house solution, you may spend anywhere from $50,000 to $250,000 to get it up and running.

As you’re determining what the appropriate investment should be, be sure to do the following:

• Set your acceptable price range at the outset.
• Decide what you’d be willing to pay premium pricing for.
• Be cautious of bundled packages that charge for more than you need.
• Consider the cost of running payroll (in both dollars and employee hours) for your current employee headcount. Extrapolate that cost based on your company’s growth projections and goals for the next few years.

This will give you a benchmark price point as you run the numbers on potential solutions.

Does It Have the Features and Services You Need Most?

As you evaluate prospective payroll services, you'll need to determine whether they will meet a variety of complex needs—now and as your organization grows.

At a minimum, you should gather information about:

• Features and functionality: The right service will deliver everything you need with the option to add features as you grow, rather than a bare-bones service or a bundled package that includes too much. Ask yourself what type of features you need now and what you’ll need to have in the future, such as:
  • Robust reporting
  • Mobile accessibility
  • Pay schedule flexibility
  • Different types of pay (hourly, by unit, independent contractors, etc.)
  • Methods of payment (direct deposit, checks, pay cards)
  • Garnishment, collection, and remittance
  • Pay adjustments (bonuses, recurring and one-time reimbursements)
• Services: Payroll software worth your time should provide automatic tax filing. Find out if the software takes care of quarterly and year-end tax deadlines and if it distributes employee W2s and contractor 1099s.
• Data engine: Data flow between systems (e.g., time tracking, payroll, accounting) is an essential time-saver that also prevents double-entry errors. You want your payroll to have a strong integration component that allows you to connect to a robust HRIS and other applications as you grow and refine your processes.
• International payroll: If you have employees in multiple states or outside the US, you need to know right off the bat if the software is compatible with processing payroll for every separate location.
• Security: What are the provider’s security protocols and credentials? Is your payroll data safe with them? They should be SOC 2 compliant and conduct regular security audits.
• Compliance: It’s the employer’s responsibility to know and meet state law requirements regarding wage, hours, etc., wherever their employees reside. Make sure the provider can give you the reporting, formats, and calculations you need to stay compliant.

Will You Have a User-Friendly Experience?

When evaluating payroll services, customer service and ease-of-use are as important as the system's other capabilities.

Be sure to consider:

• Admin experience: A hands-on demo or trial account is a must to thoroughly explore the software on your own terms. How easy is it to navigate the system, update information, or train other admins to use it? Our research found that payroll admins were spending up to 9 hours per pay period on preparing, processing, and posting payroll, as well as fielding employee payroll questions. Choose a software that lets you put those hours to work elsewhere.
• Employee experience: A clean employee interface allows your people to easily retrieve pay stubs, update their own information, and more, maximizing the role of payroll in employee satisfaction. Even better if employees have the option to access data from their mobile devices.
• Customer support: When it comes to payroll questions, nothing is more important than getting a knowledgeable, friendly expert on the line as quickly as possible. Quiz the provider on their support model and availability.

The 4 Most Common Payroll Solutions

You generally have four options for payroll solutions: third-party software, custom in-house software, hiring a professional employer organization (PEO), or working with an accounting firm.

Investing in any payroll service is an investment in risk mitigation and time-savings, but which type of payroll solution should you choose?

Weigh the pros and cons of each payroll option carefully and consider these questions:

• Are you willing to pay more for a better experience, or are you looking to cut costs overall?
• What size is your HR team, and how experienced are they?
• How much control do you want to have over the software?
• How complex are your payroll needs, and how customizable does your payroll solution need to be to accommodate them?

It’s important to keep in mind that full-service PEOs, local and national accounting firms, and in-house software solutions are expensive undertakings. Third-party payroll services are typically the most cost-effective option, which lets you offload the costs of updates and infrastructure.

Additionally, many business owners can use the software to reduce mismanagement errors, which in turn keeps their companies out of legal trouble. All of this saves time and money—a critical benefit for many business owners.

1. Third-Party Payroll Software

This is software developed by a third-party software company and designed to be used in-house by payroll admins to store, organize, and automate payroll, tax filings, etc.
A company will typically pay a flat monthly fee of about $30 to $250 to access the software, depending on the size and complexity of the organization. Then, you’ll pay a monthly fee per employee, which is typically about $4 to $12.

Advanced payroll software should easily integrate with an HRIS, accounting software, and other existing company workflows, which can increase efficiency and help you streamline processes. This solution is well-suited for growing organizations needing a platform that can scale with them. Still, you must remember that compliance will remain your responsibility, and you must be vigilant about third-party access to sensitive data.

2. Hiring a Professional Employer Organization (PEO)

Full-service PEOs essentially act like an outsourced HR department, and can often handle everything from benefits administration to talent acquisition in addition to payroll.
While some PEOs charge per employee, most take a percentage of your total wages. Expect to pay anywhere from 3% to 15%.

This solution is perfect for mid-size companies that want benefits typically reserved for larger organizations or those that need relief from overwhelming HR tasks. PEOs remove much of the overhead involved in HR, but the downsides of a PEO can be a lack of cohesive culture and the loss of security and control over your people data and processes.

3. Developing an In-House Payroll Solution

Third-party software is not your only option for payroll applications. Some organizations allocate resources to develop an internally managed, custom-built payroll software system.
The cost of this solution depends entirely on the developer you work with and the customizations you require, but you can expect to spend anywhere from $50,000 to $250,000 when all is said and done.

While a homegrown solution saves on third-party software costs and allows the organization full control of features and functionality, it puts the burden of payroll accuracy, compliance, tax filing, and software maintenance solely on the organization, which may reduce the ROI in time, money, and risk mitigation. Therefore, it’s best suited for large corporations with the resources to take on this kind of project.

4. Hiring a Local or National Accounting Firm

Standard accounting services include bookkeeping, financial planning, and filing taxes, but some accounting firms differentiate themselves by adding payroll to their suite of services.

Typically, you can expect to pay between $250 and $1,500 per month. Your investment depends on the size of your organization and how involved your payroll process needs to be.
An accounting firm doesn’t handle HR responsibilities as a PEO would, but it still saves you time and worry by combining all the organization’s financial tasks into one solution.

Like a PEO, however, outsourcing payroll to an accounting firm comes with some loss of control and visibility. It can certainly be a viable option for businesses with the capital to invest.

Which Payroll Solution Works Best for Your Organization Size?

BambooHR research into the state of payroll discovered that the majority of our 500 respondents manage their payroll in-house, with 48% using a third-party payroll software provider.

Here’s how that group of third-party software users breaks down according to company size:

• 40% were companies with 26–100 employees
• 51% were companies with 101–350 employees
• 58% were companies with 351–1000 employees

While some companies (including 24% of our respondents) choose to go all-in on a homegrown payroll software solution from day one and evolve it as they grow, the general trend seems to be to outsource payroll during the initial stages of growth and then switch to a third-party software after a certain threshold.

Small Businesses Are Most Likely to Rely on PEOs

According to data from the National Association for Professional Employer Organizations (NAPEO), the PEO industry currently serves at least 15% of all US employers with a headcount between 10 and 99 employees.

Although PEOs are a pricey option, the appeal lies in taking the weight of managing HR and payroll entirely off the shoulders of a new or small business owner who already has more than enough to do.

What Payroll Solution Works Best for Your Industry?

The unique characteristics of your industry—for example, how employees in your industry are paid or their employee type—will influence the features and functionality you need your payroll solution to have.

Depending on your industry, the payroll solution you choose should be able to handle things like:

• Hourly workers
• Union workers
• Tip-based incomes
• Commissions
• Bonuses
• Multiple pay rates
• Shift differentials

With so many options available, choosing a payroll solution isn’t always easy. But knowing what your options are and how to evaluate them can make all the difference.

When you choose a payroll system that’s robust enough to meet your needs, you’ll be able to keep your business out of the risk zone and set yourself and your staff up for success.