Once you’ve hired your first employee, finding the right payroll processing service is a must. Along with saving you invaluable time, a third-party payroll company will help you stay legally compliant, especially in terms of payroll taxes and employment laws, and can help you find and administer employee benefits that keep your business competitive in any economy.

Keep reading to learn more about payroll services, including what they are, how they help and how you can find the best payroll company for your business.

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What is a payroll service provider?

A payroll service provider is a company that focuses solely on processing payroll on behalf of other companies. At its most basic, a payroll service calculates and deposits employee paychecks. However, actually paying employees is a much more rigorous process than writing a check, so most payroll providers also offer some combination of the following key payroll and HR services:

  • Payroll tax calculation, withholding and remittance.
  • Time and attendance tracking for accurate payroll calculations.
  • Optional employee benefits, such as insurance and retirement plans.
  • End-of-year tax form filing, including Form W-2 and 1099 distribution.
  • State new-hire reporting.
  • Accounting software integration for accurate expense tracking.

Some combined payroll and HR service providers may also offer more in-depth hiring, onboarding and personnel management tools. Generally speaking, human capital management solutions like Paycom and ADP Workforce Now also include payroll services as an essential part of their overall package.

What are the main types of payroll service providers?

Cloud-based payroll software, which is typically offered by a third-party company and used by your company in house, is the most common (and cheapest) payroll service solution for most small businesses. Desktop-based payroll software is also an option, though one that’s rapidly disappearing in favor of cloud-based options.

Some businesses may consider outsourcing payroll processing to an accounting or bookkeeping company. Virtual bookkeeping businesses also use payroll software to process payroll for other companies.

Other small businesses work with professional employer organizations (PEOs) to process payroll. PEOs become co-owners of your business to directly handle your company’s payroll and HR tasks while leaving day-to-day employee management and business operations in your hands.

What are the benefits of using a payroll service?

Less time spent on payroll

Running payroll by hand is a tricky, time-consuming process. To start with, it requires you to transform hours worked into financial compensation for your employees. Along with calculating the correct gross pay for your employers and contractors, you’ll need to make certain deductions from your employees’ paychecks, including federal income taxes, payroll taxes, state taxes, benefits, retirement plans and wage garnishments.

From there, you need to remit paycheck deductions to the correct bureaus and agencies, including the IRS, which requires businesses to deposit payroll taxes on a strict schedule. You’ll distribute your employees’ net pay along with legally mandated documents like payslips. At the end of the tax year, you need to assemble the correct paperwork to file your business’s taxes and distribute tax forms like Form W-2 and Form 1099 to your employees and contractors.

Naturally, tackling a process as complicated as payroll eats up hours of time every pay period. If you’re running payroll by hand, you’ll also log additional hours during tax season to ensure both your workers and the IRS get the appropriate tax forms on time. The process only gets more complicated and time-consuming the more employees you hire.

SEE: The Best International Payroll Services (TechRepublic)

Payroll providers automate most — if not all — of these mandatory payroll tasks. They can sync with your time-tracking software to automatically calculate hourly workers’ wages so you don’t have to enter time worked by hand. They make automatic deductions and remit cash to the IRS or other tax agencies on the right schedule, and they can send out pre-filled tax forms to both the IRS and your workers.

You can devote that saved time to other essential business processes, like managing daily operations, increasing profits, training employees, cutting costs and keeping customers happy.

Less stress surrounding payroll tax compliance

Payroll taxes are among the most essential — and the most confusing — aspects of payroll processing. On top of deducting the right amount of payroll taxes from each employee’s paycheck, employers must hold that money in trust and remit it to the IRS on either a monthly or semi-weekly basis.

You’ll also need to calculate and contribute the employer portion of FICA taxes (the Medicare and Social Security tax) and the employer-only FUTA tax (federal unemployment tax paid solely by employers).

If you’d rather not calculate, deduct and file taxes by hand, a payroll service can take the task off your hands. Self-service payroll software will calculate taxes but leave the actual filing up to you, while full-service payroll software calculates, withholds and deposits federal (and usually state and local) taxes on your behalf.

Greater employee satisfaction

One missed or incorrect paycheck can be a hassle for you, but it can spell disaster for your employees. Payroll software usually includes employee self-service portals through which your workers can see their payslips, view their benefits, manage their direct deposit information and download crucial tax forms — which is much easier and more convenient than having to reach out to HR to get answers to every question.

Additionally, most payroll software will flag potential mistakes well before each payroll run, which ensures you can fix errors before they impact employees’ wallets. Some payroll software, such as Gusto and QuickBooks Payroll, include an autopilot feature, which means you don’t even have to worry about accidentally forgetting to run payroll on time.

All-in-one payroll and HR management

Many (though not all) payroll providers consolidate payroll-adjacent HR tasks into one convenient platform. Instead of having to find different tools for hiring, training, onboarding and offboarding employees, payroll services like Rippling or ADP can automate these tasks for you within the same system. Other payroll providers match employers with benefits by acting as an insurance brokerage or partnering with workers’ compensation insurance providers for direct coverage.

In other words, the right payroll processing company saves you time, energy and anxiety — not just on payroll but on all of your most pivotal human resource tasks.

What are the drawbacks of using a payroll service?

All the data involved in processing payroll, from your employees’ Social Security numbers to their tax-filing statuses, is incredibly sensitive. Entrusting that data to a third party — including a payroll company that sells software you use in house — can introduce an additional opportunity for data leaks to occur.

Plus, while there are certainly cheap payroll processing options for small businesses, most payroll providers charge a monthly base fee along with a per-employee fee. Paying employees already takes up a good chunk of your budget, so it can be frustrating to add another payroll-related fee to your list of expenses.

How to choose the right payroll processing service

Our in-depth piece on how to choose payroll software can give you more information on what to look for in a payroll service, including how to assess your payroll needs and evaluate features. Here, we offer a quick overview of how to choose a payroll provider to give you a jumping-off point as you start your research:

  1. Consult your budget to figure out how much you can afford to spend on payroll software.
  2. Consider your workforce’s size and unique human resource needs.
  3. Read reviews of the best payroll software to find payroll services that match your business’s expectations.
  4. Sign up for a free trial to get hands-on experience with payroll software before purchasing a plan.
  5. If no free trial is available, contact any payroll services you’re interested in to schedule a demo or request a customized quote.
  6. Process payroll.
  7. Reevaluate your current payroll processing service as needed and consider scaling up to a heftier, potentially enterprise-level payroll solution as your business grows.

Frequently asked questions

Why would a company outsource payroll?

Companies typically outsource payroll to free up internal resources, including both human resources and financial resources. Companies may also outsource payroll because the cost of paying for another company to run payroll is worth the reduced stress surrounding payroll tax compliance and employment laws.

What are the pros and cons of using a payroll service provider?

Payroll services generally cost more than running payroll by hand using a free spreadsheet software and a paycheck calculator. However, they can save you money in the long run by reducing the risk of payroll tax compliance errors and minimizing expensive payroll mistakes.

Additionally, payroll processing services automate payroll tasks like calculating paychecks, making deductions and depositing employee paychecks, which frees business owners up to focus on improving other business processes and growing profits.

Choosing the wrong payroll provider for your business can have negative consequences, such as wasted money and employee dissatisfaction. But when you find the right payroll software for your unique organization, the pros of using a payroll service provider should far outweigh the cons.

How much does a payroll service cost?

Payroll services can cost as little as $0 to several hundred dollars a month. Free payroll services like Payroll4Free include free paycheck calculation, payslip access and direct deposit for up to 25 employees, but companies with more employees should plan on allocating some of their payroll budget toward a payroll software service.

Most payroll software costs both a monthly base fee and a monthly per-employee fee. In most cases, then, your company will spend more on payroll the more employees you hire. Typically, contractor-only payroll software (such as Square Payroll’s contractor plan) costs less than payroll plans for both employees and contractors. Similarly, self-service payroll software, which calculates paychecks but doesn’t deposit payroll taxes, costs less than full-service payroll, which includes tax administration.

Read next: How to Integrate Your Payroll and Accounting Software (TechRepublic)

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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