Small-business owners don’t have time to spend on the tedious, time-consuming task of doing payroll by hand. Instead of entering payroll data manually, many business owners use cloud-based payroll software that automates every aspect of payroll from paying employees via direct deposit to remitting payroll taxes to the IRS.
Find out how payroll software works, what key features to look for and whether payroll software is right for you in our piece below.
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Payroll software is a primarily cloud-based software application that automatically calculates paycheck amounts for salaried and hourly employees, including gross paycheck amounts, payroll deductions (like healthcare premiums and payroll taxes) and net paycheck amounts.
Payroll software can be a standalone software solution that integrates with other business software systems like accounting or HR programs. Alternatively, it can be one component of a wider human capital management system or all-in-one payroll and HR software platform that lets businesses manage every aspect of the employee life cycle on an integrated platform.
While some businesses use desktop-based or on-site payroll software, desktop-based applications are becoming much rarer. Cloud-based payroll software is closer to the norm for many small and midsize businesses. Whether you use a cloud-based or desktop-based payroll software solution, though, the software’s main function will still be to organize and automate the process of paying employees. (Some businesses use desktop-based or on-site payroll software, but desktop applications are becoming rarer and rarer.)
Self-service payroll software calculates paycheck amounts, including paycheck deductions. However, while self-service software typically pays your employees via direct deposit or other pay methods, the software won’t remit payroll taxes to the IRS (or other tax agency) on your behalf. The software can calculate how much to deduct, draw up pre-filled tax forms and remind you about quarterly tax-filing deadlines — but it can’t remit taxes or paperwork for you.
Full-service payroll software includes comprehensive tax administration, meaning the software company will calculate payroll taxes based on the employee information you input. The software will then automatically deduct tax payments from your employees’ paychecks and remit those taxes to the appropriate tax bureau on a quarterly basis.
At its most basic, payroll software calculates the amount of money you owe your employees for their time and labor each pay period. It should also keep accurate payroll records that ensure you meet your legal and tax obligations as an employer. (For instance, employers are required to provide their employees with pay stubs and to submit payroll tax forms to the federal government once per quarter.)
Of course, many businesses are looking for more than just the stripped-down basics from their payroll software provider. The following features are fairly typical of most payroll software systems, though it’s worth noting that the more features your payroll software has, the more expensive it’s likely to be.
If you have hourly employees, you need a reliable way to track their work hours and correctly compensate them for their time and labor each pay period. Most payroll software either syncs with third-party time and attendance software or includes a built-in time tracking tool to make paying hourly employees as straightforward as possible.
Full-service payroll software calculates, deducts and remits each employee’s income, Social Security and Medicare taxes to the appropriate tax agency. Most payroll companies offer at least federal and state tax administration, though some also offer local payroll tax management (often at an additional fee).
Employers are legally required to match their employees’ Social Security and Medicare tax (collectively called FICA tax) contributions. Employers must also pay a federal unemployment tax (or FUTA tax) based on the number of employees they have.
At the very least, your payroll software should generate financial reports showing how much you owe in taxes based on your employees’ contributions. However, the best software automatically deducts employer FICA and FUTA tax payments from your company’s bank account to remit to the federal government along with your employees’ payroll taxes.
Additionally, the best full-service payroll software companies will generate and file end-of-year tax forms for you and your employees, including Form W-2 and Form 1099. However, some providers charge a fee for end-of-year tax form preparation. Most payroll software tools also charge you an extra fee if you want to print and mail hard copies of tax forms to your employees and contractors.
Most payroll software, including self-service software, calculates employee paychecks and then automatically pays employees on your behalf via direct deposit. Some payroll software offers direct deposit only, but paper check, prepaid debit cards, app-based payments (for instance, Venmo or Square’s Cash App) and other on-demand pay options are all common alternatives to direct deposit.
Some employee benefits are deducted directly from employees’ paychecks, including employee contributions to employer-sponsored healthcare plans. If you offer benefits like health insurance and retirement plans, find payroll software that deducts benefits contributions from employees’ paychecks and automatically distributes those funds to the appropriate parties.
Most payroll software should include an employee-facing platform where employees can view their pay stubs and tax information. The most fleshed-out employee self-service portals include features that let employees upload their own tax documents, choose benefits, request time off and clock in or out.
Payroll reports give business owners a quick overview of key payroll-related financial data points. At bare minimum, your payroll software should generate reports overviewing your workers’ compensation premium amounts and your payroll tax contributions. The best payroll software either integrates with popular accounting software options or includes a general ledger report business owners can use to sync their payroll and accounting numbers.
Strict rules and regulations govern workplace employment and employee pay. Penalties for issues like miscategorizing employees as contractors or failing to pay the employer portion of FICA taxes can be severe. Businesses can catch clerical errors and make crucial payroll updates by performing compliance audits, or internally reviewing payroll records on a regular basis to catch and correct errors.
Some, though not all, payroll software providers make compliance audits easier by automatically flagging potential issues with each payroll run. Typically, the software will prompt you to double-check and approve potential issues before processing payroll, which saves you the hassle of having to repair a costly mistake after it’s been made.
Ideally, your payroll software should integrate seamlessly with any other software applications you use to manage your business, especially your accounting software. Unless your payroll software integrates with your accounting program, you’ll have to reenter payroll data into your general ledger — which wastes time and introduces opportunities for clerical errors.
Depending on your business’s size (as well as which payroll software you choose), your monthly payroll costs could be as low as $0 or higher than $1,000. Most payroll software tools cost a monthly base fee as well as a monthly per-employee fee — so for the most part, the more employees you have, the more expensive your payroll software solution becomes.
Free payroll software like Payroll4Free or open-source options like Odoo can keep payroll costs low for startups and other small businesses on a budget. However, most free payroll solutions aren’t practical for businesses with more than 25 employees (at the very most). Since they don’t have the same tax guarantees, customer service options and features as most paid payroll software, they aren’t robust enough to meet the needs of most businesses.
Below, we list the monthly starting fee you can expect to pay for the most common payroll software solutions based on the number of employees you have. Note that the prices below don’t account for add-on features like time and attendance software, HR tools or third-party integrations.
Plan and pricing data up to date as of 7/5/2023.
While determining which payroll software is best for your budget, pay attention to the fine print that spells out which, if any, payroll features cost extra. Some of the most common additional fees include the following:
Not all payroll software providers charge extra for the features above. Some, like OnPay, include most of them in their base price. Others, like Paychex, charge an extra fee for each feature or include them in their higher-tier payroll plans only.
If you have only a few employees and top-notch organizational skills, you could consider using a spreadsheet software template to calculate paychecks instead of using payroll software. You can create your own payroll template or download one directly from Microsoft Excel or a third party like Simple Sheets.
Running payroll with spreadsheets is generally cheaper than buying payroll software, but it requires more manual data entry, eating up valuable time and introducing opportunities for user error. Plus, the IRS requires business owners to store payroll tax data for three to four years. Spreadsheets can be useful data trackers, but if you don’t have in-depth recordkeeping experience, you might struggle to keep years of payroll data organized, up to date and IRS-friendly.
Outsourcing payroll to a third party is a more expensive payroll software alternative than spreadsheet templates, but it almost always saves business owners more time compared to the other options.
Many small-business owners minimize the time they spend on HR and payroll processes by partnering with a professional employer organization, or PEO, that handles personnel management. Others work with virtual bookkeeping companies that handle payroll without tackling wider HR tasks.
No matter which option you choose, it’s worth noting that outsourcing payroll isn’t a software-free solution. The company you hire for payroll will either use its own in-house, proprietary payroll software or a popular payroll software provider like Gusto to process your payroll.
Since you won’t be directly responsible for managing payroll, you’ll have minimal interactions with the payroll software and won’t be responsible for choosing the software yourself.
Payroll software is a solid solution for businesses that want in-house payroll management at a middle-of-the-road price point. Generally speaking, then, payroll software might be the right choice for your business if:
On the other hand, you might want to avoid payroll software if:
SEE: Choosing a payroll service: A guide for business leaders (TechRepublic Premium)
Deciding payroll software is right for your business is just the first step. Now the hard work begins: Figuring out which of the many payroll software services on the market will work best for you. As you start to sort through the best payroll systems for businesses like yours, ask the following questions about your business’s needs:
Whenever possible, sign up for a free trial instead of buying payroll software after a short demo. Most payroll software providers offer free trials that range from 30 days (like OnPay) to six months (like SurePayroll). A hands-on testing experience will give you the most accurate answers to the questions above.
Read next: Best Payroll Software for Your Small Business in 2023
