Whether you have one employee or hundreds, you must follow the formal procedures that go into paying them and dealing with payroll taxes. You can perform these payroll tasks yourself, or you can outsource the process by turning it over to a payroll service provider.
Payroll Processing Options
Here are two options that business owners have for managing payroll.
Online Payroll Software
You can use payroll software, providing the input yourself and having the software do the calculations. Online payroll software applications work in a similar way to business accounting software. They give you a handful of prompts and information, but you—or someone in your business—must enter the information.
Payroll services are individual businesses that are sometimes connected to accounting or bookkeeping firms. You can outsource your process by giving a local or online payroll service the basic information on employees and letting them run payroll, send out paychecks, and send in payroll tax reports and payments.
Outsourcing payroll doesn’t take away your responsibility for paying and reporting all payroll taxes on time and in full and to pay employees exactly what they are owed. The IRS charges penalties for failure to deposit payroll taxes.
Reasons To Outsource Payroll
Consider the Cost of Your Time
Your job as a business owner is to run your business, not to process payroll. Trying to do payroll yourself means taking your time away from other key tasks, like acquiring customers, making products, or performing services.
Payroll Taxes Are Complicated
Payroll taxes are complex because there are several different types of taxes you must collect and pay and many complicated forms to fill out. These include federal income tax, state income tax, FICA tax for Social Security and Medicare, and federal and state unemployment tax.
Here's an example; The amounts you withhold from employee paychecks for federal income taxes and FICA tax must be paid to the IRS either monthly or semiweekly (twice a week), depending on the size of the deposit. Making these deposits can take a lot of your time.
All federal payroll tax deposits must be made online. The best option for making deposits is to enroll in the IRS Electronic Federal Tax Payment System (EFTPS). Then give your payroll provider your login information so they can make deposits for you.
Tax Laws Change All the Time
Each year, there can be changes to tax laws, tax rates, or deadlines for submitting reports. It's difficult for an individual business to stay on top of all these changes. A payroll service or software application deals with these changes for many companies and they can make these changes quickly and easily.
What Do Payroll Processing Services Do?
You can find payroll software or a payroll service that can help you with some or all of these payroll and payroll tax tasks.
Payroll software or a payroll service can calculate employee pay, withholding and deductions to create paychecks. Most will also calculate and pay independent contractors (non-employees) too. Both can also send out paychecks, usually through direct deposit.
Payroll Tax Tasks
Depending on the level of service you pay for, payroll software and services will:
- Collect and report the payroll taxes due
- Calculate annual wage and tax reports, Form W-2 for employees and Form 1099-MISC for non-employees
- Submit payroll tax reports—like Form 941
- Report and pay unemployment taxes
How Much Does a Payroll Service Cost?
Online payroll processors and payroll services charge different rates based on the number of employees paid. They also have different levels of services, including support.
Online Payroll Processing Services
Most online payroll services charge on a monthly basis, and the most common pricing is a base monthly price with an additional amount per employee per month.
Several software companies have tiered pricing, with a higher monthly amount and per-employee costs based on the level and types of service.
For example, Patriot Payroll Software charges $10 a month plus $4 per employee for basic service where the company runs its own payroll and taxes with Patriot's help. For $30 a month plus $4 per employee, Patriot's full-service payroll option files and deposits local, state, and federal payroll taxes and year-end filings.
Intuit's QuickBooks offers three levels of service. Currently, the basic level is $22.50 per month plus $4 per employee. The second level offers auto payroll, same-day direct deposit, time tracking on the go, and human resources support for $37.50 per month plus $8 per month per employee. Meanwhile, the highest level includes tax penalty protection and a personal human resources (HR) advisor for $62.50 a month plus $10 a month per employee.
Offline Payroll Processing Services
Teresa Ray, the owner of The Payroll Department, explained in an email to The Balance how her company's payroll services work. According to Ray, her company charges a base fee per payroll period (weekly, bi-weekly, semi-monthly, or monthly) of $54 plus $2 for each employee paid. So if there were 10 employees paid during that pay period, the charge would be $74 ($54 plus $20). That fee includes processing payroll, collecting and paying all payroll taxes due, and preparing and filing all the monthly, quarterly, and annual payroll tax reports.
Questions To Ask Before Outsourcing Payroll
As you talk to potential payroll services and evaluate payroll software applications, read reviews and ask for references. Here are some questions to ask:
- How secure is your system? Have you ever had a data breach?
- How often do you update your system? Do you have backups in case of data loss or system crash?
- How do you keep up with changes in tax laws? How often do you update your data for tax changes?
- How long have you been in business?
- How do you handle customer service? Can I call and talk to a real person? How quickly do you respond to urgent requests?
- If I have to make corrections, how quickly can you make these?
- How do I know you are submitting reports and making payments before they are due? What confirmations do you send me?
If you are just starting out with payroll, take some time to read this overview of how to set up a payroll tax system. Then make a list of what you are willing to do yourself and what you want a payroll service to do.
Frequently Asked Questions (FAQs)
Does the number of employees affect the choice of a payroll processing option?
Most payroll processing services base their pricing on the number of employees, so you won't be charged much for just a few employees at the lowest-priced option. Then, you can add services like direct deposit when your business grows. Local payroll service providers also price based on the amount of work such as the number of employee paychecks processed.
How does support work for different types of payroll services?
Online payroll companies offer different levels of support; the higher the level, the more direct in-person support included. The lowest level of support is usually videos, FAQs, or chat, while the highest is VIP service with help from a live person. Prompt support is essential, especially when you are getting started, so look for the service that has the best support at the lowest level, or be willing to pay extra.
What are some common applications that work with payroll software and services?
The most common payroll software integration is with accounting or bookkeeping software, like QuickBooks. HR software can also be linked to your payroll system for health insurance, paid time off management, and employee document management.
Payroll services also have additional applications. Teresa Ray said that her company offers a service called Web Employee that allows employees to log in, get paycheck stubs and W-2 forms, and change their withholding allowances.
I have employees working remotely in several states. How does a payroll service handle this situation?
All of the payroll software services run state taxes for employees. Teresa Ray said that her service processes payments for employers doing business in about 18 states other than Indiana, where her company is located. Payroll and payroll tax processing for states after the home state carry additional fees.