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.

What is payroll software?

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

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

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.

What are the key features of payroll software?

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.

Time and attendance tracking

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.

Payroll tax administration

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.

Direct deposit

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.

Employee benefits administration

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.

Employee self-service portals

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

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.

Compliance audits

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.

Third-party integrations

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.

Optional features

  • International payroll. If you pay employees in more than one country (or if you hope to grow your business internationally in the future), prioritize payroll software that operates in more than one country. Providers like Gusto offer international contractor payroll while companies like Rippling include international payroll for contractors and employees alike.
  • Employee benefits. Some payroll providers have in-house brokerages or partner with insurance companies to help you offer competitive benefits that attract top talent.
  • Onboarding and hiring tools. HR-focused payroll companies often include features like job board posting, background checks and self-directed employee onboarding.
  • Expense management. While most payroll software integrates with third-party expense trackers, some payroll companies build employee expense tracking and reimbursement directly into their payroll software.

How much does payroll software cost?

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.

Starting price per month1 employee5 employees10 employees25 employees50 employees100 employees
Patriot Payroll$21$37$57$117$217$417
SurePayroll by Paychex$23.99$39.99$59.99$119.99$219.99$419.99
Square Payroll$40$60$80$160$285$535
QuickBooks Payroll$50$75$95$170$250$545

Plan and pricing data up to date as of 7/5/2023.

Common add-on fees

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:

  • Time-and-attendance, scheduling and shift-tracking software.
  • Employee benefits integration and administration.
  • Workers’ compensation insurance integration and administration.
  • End-of-year W-2 and 1099 filing.
  • Wage garnishment.
  • General ledger reports or integration.
  • Multi-state payroll processing.

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.

Are there alternatives to payroll software?

Payroll spreadsheet templates

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.

Fully outsourced payroll

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.

What are the pros and cons of payroll software?

Payroll software pros

  • Less expensive than outsourcing payroll or hiring a full-time team.
  • Time-saving automations free up business owners’ time.
  • Payroll processes are streamlined and simplified for non-accountant business owners.
  • Useful insights into payroll trends, cash flow and business management.
  • Less opportunity for user error compared to manual payroll runs.

Payroll software cons

  • More expensive than no-cost alternatives like free payroll spreadsheet templates.
  • Frustrating add-on fees for essential payroll services.
  • Steep learning curve for first-time payroll software users.
  • Upfront investment of time and money for software setup and launch.

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:

  • You want to keep payroll in house while keeping costs low.
  • You want to automate as many aspects of payroll as possible.
  • You don’t want to tackle payroll taxes on your own.
  • You want an easy way to offer employee benefits.
  • You want to empower your employees to access their payroll information.

On the other hand, you might want to avoid payroll software if:

  • You’re part of a massive organization with complicated financial and HR needs.
  • You don’t want to deal with payroll in house in any fashion.

SEE: Choosing a payroll service: A guide for business leaders (TechRepublic Premium)

How do you know which payroll software is right for you?

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:

  • How much can we afford to spend on payroll software?
  • How many employees do we currently have? How many do we plan to have a year down the road? Five years? Ten?
  • Which payroll features are absolutely necessary to our organization? Which features can we live without?
  • Which other software applications are we currently using to run our business? How crucial is it to us that all of our software applications integrate with each other?

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 by Paychex). A hands-on testing experience will give you the most accurate answers to the questions above.

SEE: How to Choose Payroll Software

Read next: Best Payroll Software for Your Small Business in 2023

1 Deel

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Run payroll in 100+ countries and 200+ currencies from a single place. Deel’s comprehensive global platform eliminates the ongoing admin of local compliance, taxes, and benefits. With in-house experts across 100+ countries, dedicated CSM’s, visa and PTO support, and more, Deel provides unmatched payroll expertise and service. Plus, with a single point of contact, we eliminate handovers, providing you with faster support and compliance, so your entire global team gets paid quickly and securely.

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2 Paycor

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Paycor’s HR software modernizes every aspect of people management, which saves leaders time and gives them the powerful analytics they need to build winning teams. Paycor provides a full suite of HCM solutions with a single source of truth for employee data, so users never have to switch platforms, log-in to multiple systems, re-key data or open multiple spreadsheets. Everyday processes become simplified, allowing organizations to focus on their most important work.

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3 Multiplier Technologies

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With Multiplier, pay any number of global employees easily in multiple currencies. Eliminate the hassle of maintaining individual providers per country. Generate a single invoice and pay international teams in minutes. Have a consolidated dashboard to manage global payroll from a single window.

Learn more about Multiplier Technologies

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Stay up to date on the latest in technology with Daily Tech Insider. We bring you news on industry-leading companies, products, and people, as well as highlighted articles, downloads, and top resources. You’ll receive primers on hot tech topics that will help you stay ahead of the game. Delivered Weekdays