Payroll Software for Small Business Owners: How to Find the Right Fit

Payroll Software for Small Business Owners: How to Find the Right Fit


Your employees are your business’s most valuable asset. Thanking them on a daily basis, honoring an Employee of the Month, and hosting team events are just a few ways to show how much you appreciate them. But do you want to know the number one way to express your gratitude for their hard work? Make sure you always pay them on time. Payroll software for small business operations can help you accomplish that task.

When you’re trying to handle payroll manually on top of all the other tasks involved in running a growing business, a few cracks in the system might creep in. While you’re busy serving customers, building new business leads, chasing invoice payments, and keeping the lights on, it’s not easy to find the time do payroll, too. Payroll software allows you to process payroll efficiently and cost-effectively, freeing up your time so you can focus on the activities that create revenue for your business.

We created this guide to help you find the best payroll software for small business operations. You’ll learn how payroll software can benefit your business operations, what you can expect to spend on payroll software, how to make it affordable, and how to choose the right payroll software features for your business.

What Does Small Business Payroll Software Do?

Small business payroll software should make it easier to manage your payroll and keep track of your employee records. You input information like your personnel data, pay structure and payment schedule, and the system automatically calculates the amount owed to employees for each pay period using their time and attendance records. The program also calculates and withholds the appropriate amount of taxes and deductions from each payment. When payday comes, the system automatically draws checks for distributing to your employees or deposits the funds directly into their bank accounts.

In addition to handling employee payments, a payroll software program will also automatically generate the numerous tax forms you need to file as an employer. Depending on the type of business you own, these documents may include the W-2 Wage and Tax Statement; Form 940 for reporting unemployment taxes paid on behalf of your employees; Form 941 for reporting income taxes, Social Security taxes or Medicare taxes withheld from workers’ pay; Form 943 for payments to farmers that are subject to withholding; and the W-3 that’s sent annually to the Social Security Administration to report the total earnings, Social Security and Medicare taxable wages, and the amount of taxes withheld in the previous year.

Payroll software for small business operations can be hosted in the cloud or stored on your company’s own servers. You will find general payroll software products on the market as well as programs that are industry-specific.

What Payroll Features Can I Find Beyond the Basics?

Some payroll software systems include advanced features, like the ability to manage employee expenses or process reimbursements and leave requests. Some solutions also provide an employee self-service portal that lets employees change their personal information, request time off and complete other routine tasks. Many payroll software products provide analytical tools for measuring the efficiency of your internal payroll system — for example, the percentage of errors among your total payments, the amount of processing time used for each pay cycle, and how quickly you address employee problems and requests.

How Is Small Business Payroll Software Sold?

Payroll software for small business owners can be purchased as a standalone product, as part of a human resources software suite, or as part of a broader enterprise system that includes accounting, bookkeeping or other functions. When deciding between a standalone system or an integrated one, one of the advantages of an integrated system is that your HR data entries and updates only need to be done once.

Benefits of the Best Payroll Software for Small Business Owners

Here are some of the most important ways that payroll software can improve the way your business operates.

Saves Valuable Time. With all the tasks that payroll software for small business operations can perform automatically, one of its biggest benefits is saving time — whether for you, your HR manager or your bookkeeper. Payroll software can free up more time to devote to improving and growing your business instead of crunching numbers and filling out paperwork.

Let’s say you’re running a health care practice. As your business grows, your staff is busy scheduling appointments, meeting with patients, responding to calls and processing insurance claims. Since you and your team’s primary focus is on patient care, payroll may not be your top concern. It can be challenging to fit in time for this task among all your other responsibilities.

Or maybe you’re a restaurateur who’s expanding your business. With new employees to hire in multiple locations, you’d love to have a way to streamline your payroll process to create a consistent and reliable experience for everyone.

Using payroll software for small business operations lets you and your staff have one less task on the to-do list.

Reduces Manual Errors. Payroll software can also drastically reduce the kinds of errors that can crop up when the process is handled manually. An employee doing payroll the old-fashioned way might forget to record a check payment or might make a miscalculation that results in an overpayment or underpayment. An incorrect date gets logged, a decimal point gets moved, or a reimbursement request gets lost, and the next thing you know you’ve got a costly accounting mistake or an unhappy employee on your hands. Of course, a software program can never guarantee the elimination of processing errors, but it will at least cut back on errors that can occur when overworked people do repetitive tasks.

Increases Compliance. By tracking employee data and generating IRS and other government agency reports, small business payroll software helps you stay compliant with government regulations and tax laws. It can also be difficult to stay current on evolving tax laws and regulations. Payroll software can take that weight off your shoulders, immediately updating your system to reflect any changes.

Even if you opt to do other bookkeeping manually, automated payroll can be a worthwhile investment for compliance assurance alone, noted Entrepreneur.

Helps You Avoid Penalties. Small business owners who don’t comply with government payroll and other employment regulations can face some severe financial and legal consequences. The Wage and Hour Division of the U.S. Department of Labor, which enforces compliance with national labor standards, recovered a record $304 million in back wages from noncompliant employers in fiscal 2018.

Willful violations of the Fair Labor Standards Act (FLSA) may be prosecuted criminally, and violators may be fined up to $10,000. Willful or repeated violators of federal minimum wage and overtime pay requirements are subject to a civil penalty of up to $1,000 for each violation, according to the U.S. Department of Labor. Small business payroll software helps you stay out of legal and financial trouble.

Makes Record Keeping Easier. There are 20 different types of payroll tax records that federal agencies require employers to maintain, Entrepreneur reported. They include records related to income tax withholding, Federal Insurance Contribution Act (FICA) tax deductions, and federal unemployment taxes.

The IRS advises small business owners to keep employee tax records for a minimum of four years after the tax was due or paid, whichever is later. You’ll need to have them on hand in case your business ever faces an IRS audit, and the statute of limitations is three years from the date you file your business tax return.

In addition, the FLSA mandates that every employer maintain certain records for each nonexempt worker. According to the U.S. Department of Labor, these documents include information that identifies the employee and reports their hours worked and wages earned. Payroll records, collective bargaining agreements, and sales and purchase records must be preserved for at least three years. Time cards, piece work tickets, wage rate tables, work and time schedules, and records of additions to or deductions from wages must be kept for two years.

Other labor laws that require diligent record keeping include the Migrant and Seasonal Agricultural Worker Protection Act and a host of statutes pertaining to contract workers.

Trying to keep track of all those records manually can be a major headache. And those are just the federal records requirements. There are also local and state tax regulations to consider, and compliance gets especially complicated if your business has locations in more than one state. The best payroll software for small business operations can be set up to store records and make tax calculations based on your company’s location(s).

Centralizes Record Storage. A payroll software program won’t just help to keep your business out of trouble by improving the way you keep records; it also will make storing and accessing those records less burdensome.

If you have to search through computer files in several locations to pull together all the data you need to process your payroll, pay employee taxes, and send out the mandated government reports, you can appreciate the advantage of using payroll software to centralize your data storage. Payroll software for small business owners usually stores other employment-related documents as well, such as offer letters, employee profiles, organizational charts, and copies of the labor, tax and occupational safety statutes that apply to your business. Moreover, you can keep contracts, time sheets, proof-of-work agreements and performance in one place, making it easier to resolve payment disputes should they arise.

Business owner fills out paperwork to be stored in payroll software for small business

Boosts Employee Morale and Engagement. No casual Friday, bring-your-dog-to-work Wednesday, or even employee bonus can match the morale-boosting effect of getting your workers paid on time, every time, without errors. On the other hand, letting this key business responsibility slip can foster employee dissatisfaction and distrust in you and your company. If it happens too often, it can push your best staff out the door.

Research underscored how often workers depend on regular pay. In the American Payroll Association’s 2018 Getting Paid in America survey, 38 percent of respondents said it would be very difficult, and nearly 32 percent said it would be somewhat difficult, for them to meet their financial obligations if their next paycheck were delayed for a week.

The survey also had some good news about workers’ confidence in their employers’ payroll processing: More than 58 percent said they were very certain that their payroll withholding and net pay were correct each payday.

With the best payroll software for small business owners, you can ensure that your workers are confident in your payroll processing system, too. That way, instead of fretting over their paychecks, your employees can concentrate on doing their best work and contributing to your company’s success.

How Much Does Small Business Payroll Software Cost?

Payroll software for small business owners can cost $20 to $100 per month or pay period, with most vendors tacking on an additional $1 to $15 for each paid employee or contract worker, according to Business News Daily.

While most vendors charge a flat subscription rate, others have different pricing methods. Some provide tiered monthly subscription plans that go up in price as you add more features, Business News Daily explained. For example, you might pay more to add tax payments and printed IRS forms to a basic plan that strictly covers payroll administration. Some vendors offer no set rates but will provide individual price quotes to cover the specific features you request.

If you purchase a program that’s integrated into your small business accounting system, the number of invoices or quotes you handle may determine the price you pay. You also may encounter additional fees for setting up the program, using direct deposit, or completing year-end tax services.

Which Costs More: Cloud-Based or On-Premise Software?

Cloud-based payroll software is less expensive upfront than hosting your software on your own equipment. One possible drawback, though, is that using a cloud-based program gives the vendor control over your data storage. If the price and convenience of a cloud-based system sounds attractive, be sure to ask vendors for details about their methods for protecting sensitive data. A reputable vendor will be ready to address this question and have strict security standards in place.

With on-premise software, you pay more upfront in licensing fees and for having your own server. You may also have to hire in-house IT specialists to help you run the program. That’s an additional cost as well. But there are no recurring subscription fees, and you maintain control of how and where your data is stored.

How Can I Afford Small Business Payroll Software?

Once you’ve assessed your company’s payroll needs and have investigated the cost of a payroll software program that would fit the bill, you can figure out whether your current business budget will cover it. You may decide that purchasing this time-saving tech tool is important enough to cut back on other expenses.

If you would like to take advantage of payroll software, but find you’re short on the funds you need to get started, you might consider financing options. A working capital loan can help you acquire a system with less out-of-pocket costs upfront, and the savings you gain from running your payroll more efficiently will more than makeup for the cost of the loan.

Choosing the Best Payroll Software for Small Business Operations

To get the highest return on your company’s investment in payroll software, you need to carefully choose the product and features that meet your needs. The best payroll software for small business owners comes down to the one that’s perfect for your specific business and your employees.

Some vendors offer payroll software with industry-specific features. You might determine that a specialty product is your best solution, or you might find that a more general payroll software program — with the right mix of add-on or customized features — is adequate. If you don’t see a mention of your business area on a vendor’s website, ask whether the company has experience in that sector.

Here are some examples of factors to consider when selecting payroll software for different types of businesses:

  • If you own a trucking business, you’ll need a payroll management system that can accommodate the way you compensate drivers, whether it’s hourly or by mileage. You may also need to set up different pay rates for driving with and without cargo. Furthermore, you may need to consider adding in a per diem for travel expenses and unavoidable delays that leave drivers stuck in one place.
  • If you have an agricultural business, you may want to look for a specialized product designed to easily administer payments to seasonal workers. In addition, you’ll probably want a vendor that won’t bill you for those workers when they’re not on duty.
  • The best payroll software for small business owners in the retail or restaurant industry needs to be adaptable to frequent employee turnover. Both kinds of businesses usually have a mix of full-time and part-time employees, which adds more complexity to managing payroll. Lastly, restaurant owners, in particular, should consider software that allows them to factor in the tax withholding from tips income.
  • Construction or contracting business owner should look for a payroll software program that offers a 1099 service for managing payments to independent contractors and subcontractors. The software should also account for all the legal and tax requirements involved in contract work. Another ideal feature, according to Construction Business Owner magazine, is tracking and reporting payroll expenses for specific divisions, departments and job codes. You might also be interested in a software firm that can produce certified payroll reports for agencies managing government contracts.
  • If you’re the proprietor of a hair salon, barbershop, nail salon or spa, you’ll want a payroll software provider that understands the laws related to qualifying workers as employees or independent contractors. This comes in handy considering the varying employment status of people who rent out your booths, give massages or shampoo hair.

What Other Factors Should I Consider?

Whether or not your business has special payroll needs, you’ll still need to conduct research to find the right payroll software product for you. Apart from industry-related considerations, there are questions that every small business owner should ask before purchasing payroll software. According to Construction Business Owner magazine, these questions include:

  • How long has the software company been in business, and is the company reputable?
  • Is the company bonded and insured?
  • Does the company have knowledge of my industry and its payroll needs?
  • Can the company provide testimonials from their clients, especially from clients in my field?
  • How well does the fee structure fit with my business’s budget and cash flow?
  • What features are included? Does the product include features that I don’t need but will have to pay for anyway?
  • Can the payroll program integrate with my existing digital accounting, human resource management, or employee benefits management system?
  • How will my payroll data be transferred or entered into the new payroll system?
  • What practices does the software seller use to ensure the security of my business data?
  • Will this vendor take ownership of any tax-filing errors that occur while I’m using the program?
  • Does the program provide the metrics and analytics my business requires?
  • Will this software program be easily scalable as my business grows?
  • What kind of service support does the software company provide? Is customer support easy to reach if I have questions?
  • Does the company provide user training?
  • Does the company offer a free trial?

As you can see, while payroll software can simplify your business operations, it’s not a simple purchase. You’ll have to consider a variety of factors before deciding whether it’s a worthy investment for your small business and including this expenditure in your budget.

After reading this primer on how to choose the best payroll software for small business operations, your next steps are to dig into some additional research and — if you decide you want to acquire this technology for your small business — create a budget and financing plan to get it done. Your employees will thank you.