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Payroll is not easy. Even with just a few employees, you must contend with many of the same payroll regulations and filing deadlines as a bigger business. And if you’re doing payroll by hand, it’s easy to make mistakes (and who wants to owe the government more money in penalties and fines?)

Every business with employees has to settle the payroll question: Do we hire someone to handle it in-house, or outsource the whole thing? Do we figure it out by hand, or try payroll software? Even among payroll software options, there are some major differences.

Payroll software can be divided into two types: programs that you physically install on your computer or online payroll software that you access from the Internet.

Standard payroll software is sold as a standalone product or traditionally as part of a larger accounting package that you simply install to one computer.

  • Each time you run payroll or use the program, you save your data to your hard drive.
  • You will need an Internet connection to periodically download tax table updates from your payroll software provider.
  • You’ll also need to go online (probably monthly) to make payroll tax deposits in the Electronic Federal Federal Taxpayer System (EFTPS).
  • With standard payroll software, you should also periodically backup your payroll data in the event of a power surge or equipment failure.

Online payroll software is a type of Software-as-a-Service (SaaS). You don’t physically own the software; instead, you log in to the provider’s secure website and use the service.

  • When you run payroll or other tasks, your data is not saved to your computer — instead, your data is stored to the cloud (basically, servers that the software provider either owns and maintains themselves or rents from another provider.)
  • With online payroll software, you don’t have to worry about losing your data in case of a power outage or a hard drive failure. Even if your computer crashes, you can still access your data from another computer. However, a major Internet outage can cause the software to be temporarily unavailable.
  • With online payroll, the provider can make behind-the-scenes improvements to the software with no disruption. They can also update the tax tables whenever necessary.

Here are some other considerations when shopping for payroll software.

Convenience. How important is convenience to you? With off-the-shelf payroll software, you have access to your program on one computer (either at your home or office.) With online software, however, your payroll account should be available on any device with Internet access, so you can run payroll from your smartphone, laptop or tablet. Look for online payroll that uses responsive design (which makes it readable on any size computer screen.)

Ease of use. Payroll can be very complicated, but the best payroll software programs should offer an intuitive user interface. Does the company offer help articles and explainer videos to help you find answers on your own?

Accuracy. If you are using a desktop payroll software program, you will periodically download tax table changes to make sure everything is up to date. With online software, the tax tables should always be accurate. Some companies also offer a guarantee of their accuracy of their payroll tax calculations, which can be an added assurance.

Customization. Your payroll needs may vary from one month to the next, especially if you calculate payroll deductions, tips, reimbursements, or garnishments. On the other hand, you may need just the simplest of payroll programs. Look for payroll software that lets you customize your setup for your business needs.

Cost. Cost is a major consideration, as payroll companies vary greatly in pricing and billing methods. With off-the-shelf payroll software, you will most likely purchase the software and then pay an additional annual or monthly fee for a payroll update subscription. Online payroll companies also vary in their pricing methods, so make sure you are comparing apples to apples when doing your research. Some companies charge all customers the same annual or monthly fee, regardless of the size of the business. Others scale their monthly subscription costs to the number of employees.

You’ll also want to find out whether you will be paying a monthly rate or an annual cost, and examine the fine print of the contract. Does the company charge each time you run a payroll? Finally, some online payroll software companies offers payroll tax filing as an additional service, which can be a big timesaver for small business owners. Find out whether this service is offered and what the cost will be.

Security. With standard payroll software, you don’t have to worry about the security of your data (outside of prying eyes in your own organization.) However, an online payroll software company should take security of their customer data very seriously, using the same SSL encryption that banks and credit card companies use, among other security measures such as using dedicated servers to store your information. The company should also have stringent hiring methods, conducting thorough criminal background checks and bonding employees against acts of fraud or negligence.

Independent audits. The financial statements and procedures of the company should be audited by an outside certified public accountant. For companies offering payroll tax deposit services, the company should also be subject to unscheduled visits from a CPA firm to test the accuracy of their deposits and other procedures. You should be able to find these assurances somewhere on their website.

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About Mike Kappel

Mike Kappel is president of Patriot Software, Inc., a developer of online accounting software and payroll software for U.S. small businesses. Patriot Software is one of five successful small businesses he has launched in nearly 30 years. He is passionate about entrepreneurship, and shares advice for small business owners in his blog, Small Business Expert. For more information, please visit www.PatriotSoftware.com.

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