Payroll software vs. payroll services: How to choose?

There are three different approaches to payroll management, i.e. payroll software, outsourced payroll services and manual payroll processing. For most businesses, however, processing payroll manually isn’t an option. This leaves them to choose between using payroll software and outsourcing the entire process to a payroll service. But what’s the difference between payroll software and payroll services? And how can businesses decide which option is best for them?

Payroll services are companies that are specialized in assisting other businesses with their payroll processes. Sometimes they even handle their client’s entire payroll operations. Depending on the proposed service model, payroll services can include: 

• Time and attendance tracking

• Collection and administration of all the data needed for payroll

• Payroll calculation 

• Payroll tax management from calculation to withholding to reporting

• Funds management and employee payments

• Payslip distribution

• Payroll record keeping

• Benefits management

• Payroll compliance management

While the specific services vary from one payroll provider to the next, the overall objective remains the same: ensuring accurate and timely employee payments with every payroll run.

Payroll software assists businesses with their internal payroll management by carrying out time-consuming tasks which, otherwise, would have to be handled manually. Like calculating employee wages and salaries, taxes, and more. 

Depending on the software, the business can reach a varying level of payroll automation and make their payroll processes increasingly efficient. The most basic payroll software features include:

• Calculation of employee wages and salaries

• Generating payslips

• Direct deposit management capabilities

• Payroll and compliance calendar

• Payroll data storage and access

• Creating payroll reports

Payroll software and payroll services are two very different ways of processing and managing payroll. They notably differ in the level of responsibility, control, and involvement of the business whose payroll needs to be processed. 

Having payroll managed by a third-party provider frees up internal resources, creates more time to focus on more important tasks, and takes the compliance burden off the business’s shoulders. However, it also means having less control over data, processes, errors, and more. 

Working with payroll software, on the other hand, gives organizations full control over their payroll. But it also means being responsible for the accuracy and timeliness of employee payments as well as for payroll compliance issues. Also, using payroll software doesn’t extinguish the need to launch, manage and monitor all payroll-related processes, while respecting both the payroll schedule as well as any deadlines for tax payments, reporting, and more. 

It further takes time to familiarize with the software and have it customized to the business’s individual requirements. The need to update the software regularly to keep up with the latest standards and regulations is another downside; as is the fact that payroll providers can usually offer a wider range of services than software solutions.

On the plus side, payroll software provides for fast and easy access to payroll data, allows for modifications in the payroll process whenever needed, and can be integrated with other workforce management tools. Unfortunately, the same can’t be said about payroll services. 

Outsourced payroll processes can slow down data access, and operational changes can be difficult to execute under this model. Also, transferring payroll data from the payroll company’s system to internal systems can expose the business to data security risks.

When deciding whether to use payroll software or payroll services, businesses should take various factors into account, including:

• Budget: It’s no secret that payroll services are a lot more expensive than a payroll software license. Businesses that are on a tight budget or struggle to control their payroll costs will therefore most likely opt for payroll software.

• Headcount: The number of employees can also be a decisive factor when choosing a payroll management method. Payroll companies usually charge a fee per employee, which means that once employee count exceeds a certain number, it may be better to invest in a robust payroll software and hire a payroll specialist on a full-time basis to keep payroll in-house.

• In-house expertise: Even though the payroll software does all the calculations, generates payslips, summarizes payroll liabilities, and more, it can’t replace a lack of expertise. Whoever operates the software in the organization needs to have at least a basic understanding of the different payroll compliance requirements. With payroll services, on the other hand, the compliance burden is on the payroll company.

• Available resources: Using payroll software is a lot more efficient than processing payroll manually. But even with the help of a good payroll software, processing and managing payroll is still a lot of work. So, unless the HR, Finance or Accounting teams have sufficient capacities to handle payroll on top of their usual tasks, it might be better to outsource payroll to an external service provider. 

• Service requirements: Different businesses have different service requirements when it comes to their payroll management, depending on the available internal capacities and expertise. Those needing additional support with payroll-related tasks often find that hiring a payroll company works better for them than software. 

• Contractors: Most organizations don’t rely on full-time employees only, but also use a certain number of independent contractors and freelancers. Approving and issuing payments to these workers may not be part of the official payroll process, but it still needs to be done. To avoid spending a lot of time on managing contractor payments, businesses should look for a payroll solution that also includes contractors and freelancers.