FAQ: What Is a Payroll Service?

By Indeed Editorial Team

Published February 15, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Processing payroll can be a complex and time-consuming task for any manager or human resources representative. It requires meticulous record-keeping, comprehensive tax knowledge, extreme attention to detail and efficient work habits. However, payroll services reduce the amount of manual responsibility and time needed to process payroll. In this article, we discuss what payroll services are, how payroll companies work and the benefits of payroll services.

What is a payroll service?

A payroll service is a third-party company or organization that assists with payroll processing. They simplify many things associated with timely and accurate payment, such as:

  • Employee time and attendance

  • Workers' compensation

  • Payroll taxes

  • Direct deposit information

Modern payroll services offer more than standard payment delivery. They act as a complete payroll management option for businesses of all sizes across all industries. Here are some things a payroll service can help with:

  • Tracking employee attendance

  • Collecting wage and time information

  • Calculating wages

  • Monitoring workers' compensation premiums

  • Keeping electronic payroll records

  • Following federal and state laws for payroll

  • Calculating payroll taxes

  • Preparing and mailing employee tax forms

  • Setting up, adjusting and making direct deposits

  • Integrating third-party benefits into payroll

Some payroll services also provide additional human resources support for employers. However, the overall goal of using a payroll service is to guarantee that every employee receives the correct payment amount on time, every time.

What do payroll services do?

Payroll services streamline your payroll processing. They reduce the stress on the person in a company responsible for payroll management and eliminate redundant busywork that manual payroll calculations may cause. For example, without a payroll service company, an employee may have to track their hours worked and send them to a manager. The manager then manually inputs the hours into the computer and calculates the employee's paycheck. With payroll services, the employee would clock in and out every day, and the service would automatically track their hours to calculate their pay.

Related: Learn About Being a Payroll Specialist

How do payroll services work?

Most payroll services are internet-based services. When you hire a payroll service company, they will show you how to access their services online. It's often a single entry point to a website that assists with time and attendance, payment processing, taxes and more.

Employees log in each day to clock in and out for their shift. The platform tracks their hours automatically. At the end of the pay period, you can review and confirm their hours worked. The payroll service calculates their pay, subtracts the necessary taxes, withholdings and deductions and pays the employee. Payroll services typically pay employees via direct deposit, but other options may be available as well.

How much do payroll services cost?

Payroll services can be expensive, but they are often a good investment for your business. The cost of payroll services varies. Here are some factors that affect how much you pay for payroll services:

  • Services you require

  • Number of employees in the company

  • Number of pay periods per year

If your company hires a payroll service for multiple services, the cost will likely increase. For example, services may cost more if you add third-party benefit integration to your basic payroll processing. Also, some companies charge you for online and phone support services.

Related: Semimonthly vs. Biweekly Pay Schedules: Understanding Key Differences

What are the benefits of working with a payroll service company?

Here are some of the benefits of working with a payroll service company:

Streamlines your payroll processing

Using a payroll service consolidates your payroll-related software into one convenient location. The same website serves as the access point for many things, such as employee hour tracking, payroll calculation and direct deposit management. You can avoid confusion or conflicting programs by simplifying the process.

Allows you to use your time for other things

If you work in HR or management, a payroll company reduces the time you spend on the payroll process. You no longer have to spend your time inputting employee information, calculating wages or distributing payments. Instead, you're able to focus your time on more important tasks that directly relate to your responsibilities.

Monitors employee time and attendance

Payroll services offer easy clock-in options for employees. This allows you to monitor their hours worked and track their attendance. Some services also include the ability to process PTO requests within the system.

Ensures correct tax information

Payroll service companies calculate and deduct proper payroll taxes for each paycheck. They assist with taxes on a federal, state and local level. These companies often assist with preparing and distributing employee tax forms as well, like W-2s and 1099s.

Related: 1099 vs. W-2: What's the Difference?

Pays employees on time

A payroll service company ensures you pay all employees on time. They also make sure that every employee receives the correct amount. Therefore, hiring a payroll service helps you avoid delayed or incorrect payments.

What's the difference between a payroll service and payroll software?

A payroll service allows you to outsource your payroll processing, which means you can focus your time on other business responsibilities. In comparison, payroll software requires you to input and calculate payroll manually, but it gives you more control over payroll processing. After you input all of the information, it calculates the payments and generates checks for you to print or send via direct deposit. You will have to calculate payroll taxes yourself, however.

Payroll software is often less expensive than working with a payroll service, but it may be challenging to navigate unless you have accounting experience. If you want to use payroll software rather than a service, be thorough in your research to find software that is easy to use.

Related: What Is Payroll Accounting? (Definition and Examples)

How do you decide between a payroll service and payroll software?

Deciding between using a payroll service and payroll software ultimately depends on your preferences and business needs. Here are some things to consider as you make your decision:

  • Budget: A service may be more expensive than software, but trusting a professional with your payroll processing helps prevent miscalculations with taxes, which can potentially save your company money in the future.

  • Number of employees: Handling manual payroll management with software for a large team can be tedious, but it may be a good choice for small businesses with fewer employees.

  • Your experience: Using software may be easy for you if you have previous accounting or billing experience. If you don't have this experience, outsourcing payroll to a service may be a better option.

  • Your schedule: Working with a payroll service allows you to spend more time handling other tasks than you would if you had to use payroll software.

  • Added benefits: Payroll services often offer more comprehensive services than software, such as time management tools and third-party benefits like 401(k) plans.

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