Discover if and why you should hire a payroll service provider for your business.
Hiring new employees can be exciting milestones for any business. It means your company is growing, but it also means you have to do payroll. Whether you have only a couple of employees or an entire team, staying on top of payroll can take time and add more complexity to your already busy work schedule.
Getting payroll wrong can also be costly. If you get gross pay wrong, your business could end up paying more in FICA taxes. A mistake in payroll can also mean you have to pay a penalty to the IRS. The IRS collected nearly $7 billion in penalties in 2021 alone[1]. Not all of these penalties had to do with payroll, but the IRS estimates that around a third of employers make a payroll mistake each year.
Hiring a payroll service could be a solution for your business. If you are wondering what a payroll provider can do for your business and what the benefits of hiring one are, this article is for you.
Find providers that can help with your business needs by using our lists of payroll services by location.
What is a payroll service?
A payroll service provider is a business that processes payroll calculations, payroll taxes, year-end taxes, and more for other businesses. Many employers use payroll providers to streamline business operations and ensure that their employees and taxes are paid accurately and on time.
Which services a payroll service provides depends on the provider and pricing tiers they have available. Here are some common services that payroll services offer:
Payroll processing: A payroll service calculates gross pay, taxable income, and net pay for your employees, and cuts checks for them or deposits their paychecks into their bank accounts.
Tax withholding: A payroll service ensures that every employee's taxable income is correct and withholds income and FICA taxes. Some services may offer an error-free guarantee and pay fines that result from a mistake.
Wage garnishment: If employees have court orders that require their wages to be garnished, a payroll provider can handle this.
New hire reporting: The federal government requires information on any hires or rehires within 20 days of their hire date, and this is something a payroll service can do for you.
PTO management: Many payroll providers have human resources features built into their software that track employee attendance. These systems allow employees to request days off and managers to approve them.
Payroll reporting: Many payroll services provide clients with detailed reports or reporting features that allow business leaders to dig deeper into payroll details.
Integrations: Most payroll systems connect to other systems you use, like your accounting software, so that data can flow freely between them for accurate, up-to-date financial reporting and insights.
Self-service: Most payroll services provide an online portal where managers can view reports and employees can view their pay stubs or update information on their own.
Modern payroll services operate in the cloud and don't require you or your employees to download and install software, which means you can run payroll, and employees can view and update their details from anywhere and from any device.
Do I need a payroll service?
If you already have an accountant or bookkeeper on your team that has the bandwidth, or you have financial skills and the time, the answer may be no. But before you decide, make sure that you are adding enough time for this task. According to Bloomberg, this is something that many companies misjudge, and even though 80% of employers think they are most qualified to handle their own payroll, 65% said they would rather outsource it[2].
This is why many businesses choose to outsource their payroll from the time they hire their first employee. They don't have to worry about inaccurate payroll and taxes or the time it will take to get it right. When deciding if going with a payroll service is right for you, ask yourself these questions:
Do you want to calculate employee paychecks accurately?
Do you want calculating and paying payroll taxes to be simpler because you don't have to do it?
Do you want to be compliant with new hire paperwork regulations?
Do you want payroll to be free of mistakes?
Yes, you could do all of this yourself, but be sure you know what you are getting yourself into. You could hire an accountant, but that will cost you. Let's look at some benefits of outsourcing payroll before you decide.
Benefits of outsourcing payroll
There are some benefits to handling payroll in-house, but there are many reasons more than half of business leaders choose to outsource payroll[3]. Here are the top benefits of using payroll services if you are still wondering why you should use a payroll service:
Time savings
Handling payroll is not easy, and it takes time—even for people who do it every day. Tracking benefit deductions, garnishments, new hires, terminations, and paid time off, while ensuring that your business complies with federal and state regulations, is a juggling act that few people find enjoyable.
Also, if handling payroll is something you or someone on your team doesn't do every day, it will take longer than it would take a professional to finish payroll accurately. And while your team is working on payroll, they most likely will have to balance other tasks they still need to complete efficiently.
Outsourcing payroll to a payroll service means everyone is doing something they are good at. Your team can focus on tasks that build your business, and the payroll professionals you hire can complete payroll quickly and accurately. It also helps to remember that payroll is not a one-time thing. Once you take on the task, you have to settle it every pay period.
Minimized liability
Every year businesses of all sizes have to pay hefty penalties to the IRS because of delayed or incorrect filings. Imprecise payroll will not make your employees happy and could result in filing your taxes incorrectly. This can lead to a penalty and, in the worst-case scenario, an audit.
Employers must pay federal, state, and local income taxes, FICA taxes, and federal and state unemployment taxes. Payroll returns must also be filed monthly, quarterly, and annually and withholding annually. That is a lot to keep track of, and if you have employees from more than one state, payroll is even more complicated. The IRS and state governments also have been known to change the rules from one year to another.
Why risk the penalties and track all the rules and regulations yourself when it could be left to professionals who do this daily? A payroll service can ensure that your payroll is accurate without worrying about the details, penalties, or audits. Some providers even guarantee accuracy and will pay the penalties if they get payroll wrong.
Cost reduction
For small and medium-sized businesses, payroll outsourcing can save money. Large, established companies can afford to have their own payroll department, or payroll may be something the team of accountants they already have can handle. But if your business has limited resources, hiring even one accountant or bookkeeper may not be in the budget.
Some small business owners think they save money by doing payroll themselves. If you are one, there is an easy way to determine if you actually are saving. Estimate the time your team spends running payroll annually. Then calculate how much they get paid to complete this one task. If you have to purchase payroll software to do it, add that cost as well. Then compare this cost to what a payroll service will charge you.
Most likely, you will save money. One thing that isn't in that calculation is how much delay in other important tasks running payroll yourself costs your business.
Access to professional experts
Outsourcing your payroll accounting means that you have experts to handle it. These experts spend a lot of their time keeping up to date on government regulations to ensure their clients' payroll and tax calculations are right.
You can task yourself or a team member to do the same, but how much time will they have to do it? Will they know about edge cases? It takes time for someone to get used to all the ins and outs of any task and learn when something is off. What happens when they make a mistake that isn't discovered until the end of the year?
Improved technology and scalability
Unless you do payroll manually using paper and only pay employees by check, you will need payroll software. This means a large investment upfront and regular payments for upgrades or a monthly subscription for software your business not only has to use but configure and manage.
Many small businesses can't afford pricey software or have staff with the technical expertise to manage it. With a payroll service, you get the latest payroll software that will scale with your business growth as part of the package. When you have issues with it or need to make a change, payroll professionals will be there to help.
Find out more about payroll services
If you've decided that outsourcing your payroll will work for your business, you are not alone. It is a non-core function that is essential to your business. This makes it an excellent candidate for outsourcing and is why more than half of businesses do it[3]. To help you find the right one, check out our payroll service provider directory, where you narrow down your choices to fit your budget and needs. Read more in Capterra’s payroll service company hiring guide.
If you want to investigate more details about payroll services or outsourcing other business tasks, check out How to Choose the Right Accountant.