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What’s the Difference Between Payroll Software and Payroll Service Providers?

Written by:

Edited by:

Reviewed by:
Daniel Eisner and Mark Stewart

Published on September 21, 2022

Updated on November 17, 2022

What’s the Difference Between Payroll Software and Payroll Service Providers?

What’s the Difference Between Payroll Software and Payroll Service Providers?

When it comes to simplifying payroll processing, businesses have a number of options. The two most common ways business owners streamline payroll are by using either payroll software or a payroll service provider. Most choose one or the other based on the nature of their business, their needs and number of employees, while some firms choose to use both.

Payroll software tools and payroll service providers have a lot in common – and some of the latter also offer the former – but there are many key differences to be aware of. If you’re wondering which option may be right for you, this guide outlines each form of support, along with the main advantages and disadvantages. 

Payroll Software

Payroll software solutions are often the best choice for companies with dedicated accounting or human resources teams. If you already have staff running your payroll, adding the latest payroll software technology adds a ton of valuable benefits, making their job a whole lot easier. 

Payroll software is commonly used to calculate employee wages and taxes and implement a payment method, like printed paper checks or direct deposit. Today’s payroll software programs can also handle tax filing and reporting, store payroll data for financial reporting and even integrate with retirement plan providers and timekeeping tools. 

Though the benefits of payroll software are extremely helpful, it’s important to look at the potential disadvantages. Let’s review both the pros and cons. 

woman in her computer working on payroll

Advantages

Internal Control

Payroll software is typically used by an in-house accounting or human resources team, meaning all of your payroll processing is completed within company walls. This keeps your payroll data safe from third-parties and accessible whenever you need it. You’re also able to catch and fix errors in real time without having to wait for a third party payroll provider to make the changes. 

Although payroll service providers often use the latest security measures, there’s always a chance that data could wind up in the wrong hands, especially during a data breach. Having your existing teams work with payroll software not only streamlines payroll processing, but it also keeps all of your sensitive information under one roof. 

Easy to Use

Today’s payroll software technology is built with the user in mind. Many programs incorporate mobile tools so business owners and payroll processing teams can access the data from anywhere. 

Modern payroll software comes with integrations to other business applications, like your bookkeeping software and financial reporting tools. These integrations can shave even more time from payroll processing, as data is automatically imported with no need for staff entries.

Easy to Upgrade

The new normal for payroll software programs is to be web-based or perform automatic online updates, such as adding the latest tax rates or security enhancements. With online integrations, you can rest assured that your payroll software will always be up to date and your teams have access to the latest tools and resources.

Disadvantages

User Training Required

As with any new software, investing in payroll software means you’ll have to spend time training staff to use it. Fortunately, many payroll software programs come with user training resources, but getting everyone up to speed can still take a considerable amount of time. 

Many payroll software programs are built with the assumption that a seasoned payroll accounting specialist will be the primary user. If your dedicated payroll staff isn’t familiar with payroll accounting, you might need to spend even more time on training.

Tax Responsibilities

Although many of today’s payroll software programs come equipped with payroll tax calculators, online updates, and reporting tools, you and your team are ultimately responsible for entering accurate data and making tax payments to federal, state, and local authorities. 

Payroll service providers typically handle all of these tasks on behalf of an employer, as doing them in-house can be time consuming. It’s also their job to be aware of all current tax laws and communicate them to the businesses they work with.  

Fees

Even though payroll software is often less costly than full payroll outsourcing, many programs come with features an employer may pay for but never use. Paying for features you don’t need can be a waste of money, so you’ll want to make sure you’re only paying for what you need. Review the available features offered by each software tool and choose the one that best fits your needs. 

Note that you may need to pay a subscription fee for continued access to the software, so you might want to keep an eye out for that additional cost. 

Payroll Service Providers

A payroll service provider is a third-party company that handles payroll processing on your company’s behalf. They tend to be most useful for small businesses that lack in-house accounting or human resources teams. 

Payroll service providers assist with time tracking and reporting, payroll tax calculating and filing, and issuing employee paychecks. They stay up to date with the latest payroll laws and regulations, keeping you in compliance. 

Most payroll service providers come with a dedicated payroll specialist your company would work with to correct any payroll issues or turn to for guidance. 

Outsourcing payroll to a provider can save time, allowing you and your staff to focus on other key areas of your business. However, as with payroll software programs, there are some areas of concern to consider.

Advantages

Save Time

One of the biggest reasons a business chooses to outsource payroll to a full-service provider is to save time. Making the necessary wage calculations and tax withholdings is often extremely time consuming, and many small business owners are left to handle these duties themselves, which can easily take an entire day or more. 

When payroll is outsourced, you get a ton of time back so you can spend your days generating revenue and growing your business.

Simplify Taxes

Payroll tax reporting and filing is not only cumbersome, but complicated. With tax laws constantly changing, it can be difficult for a business owner to keep up with and adhere to all of the adjustments. 

Today’s payroll providers stay on top of federal, state, and local tax laws so you’re always in compliance and never miss a deadline. They also handle all of the calculations and withholdings, making tax filing a breeze. 

Dedicated Support

When you sign up with a payroll service provider, you’ll most likely be given a dedicated contact that you can reach out to with any questions or concerns. They’ll be intimately familiar with all payroll processing functions and ready to assist you in the event you need to make any last minute payroll changes or need to correct an error. 

Keep in mind that they might not be available outside of normal business hours, though they’ll likely have a customer support hotline.

Disadvantages

Cost

Although outsourcing payroll processing to a service provider is often less costly than hiring in-house payroll staff, these services can add up. Most payroll service providers charge clients a subscription fee as well as fees for any additional services. 

Depending on the provider you choose, add-on services can accumulate quickly. Make sure to choose the plan that best fits your needs and budget.

Processing Errors

When payroll errors are made by your staff, you can make corrections as soon as you catch them. With an outsourced payroll service provider, you might not catch an error until it’s too late, or have to wait until your dedicated payroll specialist is available to assist. 

Because you’re working with a third party, you’ll lose a significant amount of transparency into the payroll process, meaning errors will be largely beyond your control. 

Delayed Access to Data and Assistance

Another downside to working with a payroll service provider is being unable to access certain data whenever you need it. Access to certain reports and employee data might not be available via an online employer portal and may require the help of the service provider. 

This could be inconvenient if you have an urgent need outside of regular business hours or need the information for an emergency situation. 

But Which is Which? 

One thing to keep in mind is that there is some overlap between payroll software programs and payroll service providers. A number of leading payroll service providers, like ADP, Paychex and Gusto, also offer their proprietary software independent of any support included in a payroll outsourcing package. 

Your business goals and staff requirements should ultimately determine which solution best fits your needs. 

How To Decide

Now that you’re aware of the pros and cons of payroll software and third-party service providers, it’s time to decide which option best fits your business. In addition to considering the advantages and disadvantages, here are some additional tips to help you make the right choice.

  • Cost: Both payroll software and payroll service providers can be costly. When determining which is right for you, consider your budget and which services matter the most. For example, if you’re trying to choose between two payroll software programs, choose one that includes the most features you need at the lowest price.
  • Level of Service: With software programs, be sure to explore the kind of support you’ll receive around set up and for troubleshooting. You should also inquire about training for new users. With payroll service providers, find out if you’ll have access to a dedicated payroll specialist and when they’ll be available. Also ask if there’s a support line for assistance outside normal business hours.
  • Reputation: Check out customer reviews for payroll software and service providers on trusted websites like the Better Business Bureau and Trustpilot. A company’s website only tells part of the story, so it’s important to find feedback from actual customers. Ask your network for recommendations and how their experience has been with the programs or providers they use.
  • Unique Business Needs: When it comes to payroll processing, there’s no one-size-fits-all solution. For example, if you have a payroll processing team, but they’re new to their jobs, you might need a combination of payroll software and hands on support from a payroll service provider. When researching payroll solutions, you may benefit from a provider who offers more flexibility and customization.

Taking all of the above into consideration should help you find the perfect payroll solution.

Summary

Whether you decide to invest in the latest payroll processing software, a fully-outsourced payroll service provider, or a little bit of both, you’ll want to make sure it’s the right fit. Running payroll is no small task and any assistance you get should ultimately give you more time and energy to focus on other aspects of your business. 

Make sure to consider your needs, budget, and business size and structure before making your choice. With the right payroll solution, running your business will be a whole lot easier.