How to Choose the Best Payroll Service for Your Needs
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. 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. We’ll help you investigate what your current solution is missing, outline the most important features to look for, and then walk you through the process of choosing a payroll service that will provide the best fit (and experience) for you and your team as your organization grows.
Why Choose a New Payroll Service?
Switching from one established process to a new one is a chore that’s easy to postpone, especially when the function is as critical as payroll. The fear of introducing complications combined with the sheer overhead involved in making the switch is enough to make any payroll admin feel tempted to leave well enough alone. Unfortunately, by the time “well enough” becomes “enough is enough,” the inefficiencies, inaccuracies, or even IRS penalties that can arise from errors will have disrupted more than your culture, employer brand, and employee satisfaction initiatives. A broken payroll process traps admins in a laborious, time-wasting cycle that stunts individual and organizational growth.
Setting yourself free with a new, efficient process means reallocating time toward meaningful, strategic work. That’s why we’re here to help you bite the bullet, rip off the band-aid, pull the ripcord—choose your favorite metaphor—and help you identify what’s going wrong so you can find a solution that doesn’t repeat the mistakes of the past.
Top 8 Reasons to Choose a New Payroll Service
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 integration: 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.
Wondering where you fall on the spectrum of payroll discontent? The following two tasks will give you a useful foundation and context to work from as you piece together the perfect payroll service profile for your needs:
- Rank these items based on your own experience (omit any that don’t apply to your situation). Add any other relevant frustrations that aren’t on this list. This will create a checklist of items to specifically address as you select a replacement solution.
- Consider the cost of running payroll (in both dollars and employee hours) for your current employee headcount, then 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 other potential solutions.
What Are Your Payroll Solution Options?
There are four main options when it comes to payroll administration:
- Purchasing a third-party payroll software
- Hiring a professional employer organization (PEO)
- Developing a homegrown solution
- Using a local or national accounting firm
Outsourced
Professional Employer Organization
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 PEOs remove much of the overhead involved in HR, 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.
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. 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.
In-House
Homegrown Solution
Some organizations allocate resources to develop an internally managed, custom-built payroll software system. 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 on the organization, which may reduce the ROI in time, money, and risk mitigation.
Third-Party Payroll Software
This is software developed by a third-party human resources technology company and designed to be used in-house by payroll admins to store, organize, and automate payroll, tax filings, etc. Advanced payroll software should easily integrate with an HRIS, accounting software, and other existing company processes.
What’s the Most Cost-Effective Option?
The front-end investment of a homegrown solution is hard to accurately predict, but here’s a statistic for you: one in six IT projects overrun cost predictions by 200 percent. A perfect scenario sees homegrown software being cost-effective in the long-run, but ROI is always at risk with software you’re responsible for maintaining and keeping up to date. Your outsourcing options, including local and national accounting firms, are generally on the costlier end of the spectrum, with full-service PEOs coming in as the most expensive payroll solution. When an organization can develop their own HR team and initiatives in-house, a third-party payroll software is typically the most cost-effective option.
Which Payroll Solution Works Best for Your Organization Size?
Fledgling 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 percent of all U.S. 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.
Most Businesses Use Third-Party Payroll Software
BambooHR research into the state of payroll discovered that the majority of our 500 respondents manage their payroll in-house, with 48 percent 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 percent 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.
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
- And more
Which Payroll Solution Should You Choose?
In her employer guidebook Hire Your First Employee, business consultant Rhonda Abrams recommends using a payroll service instead of paper and spreadsheets from day one of your first hire, pointing out that “the penalties for screwing up are so much more expensive than the cost for payroll.”
Investing in a 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:
- Do you want to manage your own payroll or would you rather outsource the whole process?
- Do you have the bandwidth to manage payroll?
- How important is culture development to your long-term goals?
- How hands-on do you want to be with directing employee experience?
- Which payroll option would best support your mission and values?
- How much are you spending on payroll now in time and money?
- 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 custom-tailored does your payroll solution need to be?
What Should an Efficient, Well-Suited Payroll Service Include?
Investing in payroll software is a natural next step for most growing companies, but what does the perfect payroll service for your business actually look like?
At a minimum, payroll software should be a dependable resource for handling these three basic functions:
- Paying employees on time and accurately
- Paying payroll taxes on time and accurately
- Filing payroll tax forms
But there are many more factors and features that can make your life even easier, depending on your particular circumstances. Here’s what you should consider as you explore your options:
- Geographic reach: If you have employees in multiple states or outside the U.S., 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.
- 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 do you need now and what will you need to have in the future?
- Robust reporting
- Mobile accessibility
- Pay schedule flexibility
- Different types of pay (hourly, by unit, 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.
- 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.
- Price: 25 percent of our research respondents said they switched to third-party payroll software for the cost efficiency, but you’ll find payroll software at almost all price points. Set your acceptable price range at the outset, decide what you’d be willing to pay premium pricing for, and be cautious of bundled packages that charge for more than you need.
- 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? Train other admins? How efficient will it help you be? 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 via mobile devices.
- 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.
If you can collect and categorize your procedural pet peeves, your must-have features, and your long-term needs, you can better identify the software that will give you the capacity for growth without overserving you.
Switching to a New Payroll Service
Now that we’ve discussed what to look for, here’s how to get the ball rolling on making the switch.
First, make a short list of contenders. You can always start by doing a search for “best payroll software for small and medium businesses,” but that should just be a first step—and if you do a search, be sure to get your information from reputable third-party sources. It’s an even better idea to supplement your search results by requesting referrals from people you trust and similarly-sized businesses in your area and industry.
Once you have your shortlist, it’s time to do your due diligence. Organize your list into good, better, best categories and then:
- Study up on consumer reports
- Read reviews
- Make note of ratings, credentials, and accolades
- Ask to talk with current clients
- Request demos
When you’ve settled on your top three options, plan to conduct an interview with a sales representative. Consider asking about the following:
- What kind of turnaround can you expect? From implementation to getting customer service requests resolved, the provider should be able to set the appropriate expectations.
- What is the implementation process? What’s needed from you to make the transition go as smoothly and quickly as possible?
- If the service provider makes a mistake, who’s liable for the mistake? How quickly are mistakes resolved?
- Are there any additional fees, charges, or cost increases you should be aware of, such as promotional rates that expire after a certain amount of time, additional costs for filing taxes in multiple states, etc.?
- Will you have a dedicated rep or a general helpline that will direct you to someone new every time?
- What sort of customer training do they provide? How intuitive and helpful is their learning material?
- How will benefits work alongside their payroll software?
Finally, when you’ve found your golden solution, you’ll finalize a contract setting clear mutual expectations, notify your current provider of the upcoming switch, and then arrange the transfer of necessary clerical info (i.e., local and state tax ID numbers, EIN, payroll schedule, etc.). Plan on running payroll simultaneously with the old system at least once to make sure your results are matching up, and schedule the switch for the beginning of the year or at the end of a quarter to set yourself up for the smoothest transition.
The pain of starting over with a new provider may feel like it’s enough to justify prolonging the pain of a clunky payroll process. But right now, all you have to do is start looking. Whether your top condition is stellar customer support or an integration with your current HRIS, the right provider can quickly get you up and running again with your new payroll service, happier and more efficient than ever.
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Rebekah Cuevas is obsessed with empowering the “human” in human resources. As a next-gen, Latinx, and LGBTQ+ author and editor with over a decade of B2C, B2B, and creative writing experience, she connects HR pros to impactful HR solutions through research-driven narrative with a special interest in promoting DEI initiatives that build stronger, safer, and more profitable workplaces for all.
