Payroll Services vs. Payroll Software

Small and midsized companies are always looking for ways to streamline operations, improve efficiency and get the Payroll checkmost out of their overhead dollars. One area where there are a couple of options worth researching is within the back office payroll function. Many owners and managers spend far too much time managing this process, when they could be focusing their efforts on more important things like setting goals and growing their business. Therefore we thought we would help you along by providing some of the pros and cons of each option.

Payroll Services by an outside firm


  • While it can vary depending on the size of your company and the hours spent on managing payroll in-house, this is likely going to be a cost-saving endeavor. Having an outside company process your payroll for a fee allows you to budget accordingly and free up any extra dollars to other areas of your business.
  • Using a payroll services provider ensures that you will be keeping up with any regulation changes (which there are plenty of in 2011 and 2012).
  • Monthly and quarterly employment tax reports are managed and submitted correctly and on time. This can be a huge relief to owners who are not accountants.


  • It may be more difficult, and take more time to access employee data in outsourced systems.
  • There can sometimes be a difference between what you expect them to provide, and what you actually get. Be sure that you do your homework before choosing a company to handle your payroll for you.
  • Costs can vary therefore keep in mind that the cheaper the firm, the more likely you will have to do more work on your end.
  • Your employee data and records will be slightly less secure. Sending information over the internet always opens up the door to hackers and compromised information. Further, while you may have tight security in house - that does not mean all payroll service providers do. Make sure you are aware of the steps taken by any potential vendors to secure data before signing an agreement.

Payroll Software


  • Payroll Software can automate your payroll process, making it more efficient and easier to manage than doing it manually.
  • It can give you access to additional features and reporting, allowing you to gain better insight into your business.
  • Your data is in your hands, and is therefore more secure. 
  • The user will have more control of how payroll affects the income statement. For example: if a company wants to track the cost of several operations using the labor cost, this can be done with a card swipe system however that would be too much data to feed to a payroll service. Additionally, most payroll services won't support that level of detail.


  • This will likely require an investment up front.
  • Some software can be difficult to learn - so be sure to test it out first to see if it was designed with the end-user in mind.
  • You may have to continue to invest in the software as upgrades become available.
Peter Heinicke

Peter Heinicke

Chicago area ERP consultant with over 40 years of experience in Sage 300, Sage Pro, Quickbooks ERP and other systems

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