Payroll Software vs. Outsourced Payroll Services: Which is Right for You?

Small business owners are often required to handle multiple jobs, including everything from human resources tasks to sales and marketing. One of the tasks with the most potential room for error is payroll, which is why it’s common for businesses to invest in specialized payroll software or outsource their payroll to third party payroll providers.

Our Addition Financial business members often come to us with questions related to payroll and business accounting. One of the topics that we hear most frequently is the issue of payroll software vs. outsourced payroll services, and which is preferable. Since the answer may differ depending on your circumstances, we’ve created this guide to help you make the best choice for your company–and your employees.

What are the key differences between payroll software and outsourced payroll services?

Let’s start with the most important distinctions between in house payroll software and outsourced payroll services.

Payroll software keeps your payroll in-house and outsourcing does not

Perhaps the most important distinction between payroll software and a payroll service provider is that the former keeps your payroll in house while the latter puts it in the hands of a third party.

Some business owners prefer running payroll themselves. If that’s how you feel, then software may be the best option for your needs. As your company grows, you may find that you need to hire someone to handle your payroll. Some small business owners prefer to leave things like tax withholding to a professional, and that’s where outsourcing payroll comes in.

Using a payroll service gives you time for other aspects of your business

Anybody who has ever had to set up or manage payroll knows that it can be time-consuming, particularly if you don’t have a background in bookkeeping or accounting. Your time is valuable, and it’s important to take that into consideration when choosing a payroll solution.

Payroll services have the process of managing payroll down to a science. They can accomplish every payroll-related task far more quickly and efficiently than you can while still providing you with access to your payroll details when you need them.

Outsourcing payroll is more expensive than handing payroll in house

Your business bottom line must be part of the equation when you’re considering payroll options. While neither option is free, it is more expensive to outsource your payroll than it is to handle it yourself.

We should note here that there may be a larger up-front cost associated with payroll software, particularly if you’re buying software outright instead of paying for software-as-a-service. You’ll need to factor that in when you evaluate payroll management options.

Mistakes are less common with outsourced payroll

Managing payroll is more than paying employees for their work. It also involves tax withholding, overtime pay, wage garnishments and other tasks. Payroll errors, particularly if they involve payroll tax, can be costly.

With outsourcing, you’re unlikely to be confronted with compliance issues or tax problems because the payroll provider you choose will handle those issues for you. While payroll software can help with compliance, you’ll have less to worry about with outsourcing.

Access to payroll may be an issue with outsourcing

Many payroll service providers use cloud computing and storage. While reputable companies are unlikely to have many outages, there’s still a risk that you might temporarily lose access to your payroll records–and that employees may not be able to access their information.

In-house payroll may leave you with more peace of mind about storage and access, but it can also present some challenges if you don’t secure your records properly.

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What should you look for in a payroll service?

If you want to explore outsourcing your payroll, here are some of the things you should consider:

  • Security. Whether your payroll will live in the cloud or on a server, you should ask about security and make sure that any provider you choose is protecting your employees’ personal data.
  • Customer Support. Review the company’s website before you interview them and see what type of support is available. You want to be sure that you can get help when you need it.
  • Online reviews. We always recommend checking online reviews to get a feeling for how a company’s clients feel about their services.
  • Timing of a Payroll Conversion. It’s often easiest to plan a payroll conversion either at the end of a year or the end of a quarter. Ask each company you’re considering what they recommend and how it would work.
  • Software Integration. Every business uses accounting software and you’ll have an easier time switching to an external provider if they can integrate with your existing software.
  • Compliance management. Any legitimate payroll service provider should have a compliance department to handle issues related to employment taxes and regulations.
  • Data conversion. The company you choose should have a person in charge of data conversion to make sure the process goes smoothly.
  • Features. The company you choose should offer multiple payment methods for employees, including direct deposit. You may also want the option of outsourcing services that would normally be handled by an HR department, including tracking employees’ PTO or managing workers compensation insurance.
  • Cost. While many payroll companies have similar costs, you should compare your options before you choose a provider.
  • Employee self service. The payroll provider you choose should allow employees to review their pay stubs and other information.

It’s essential to take your time and do the research necessary to help you understand which payroll service provider is right for you.

How can payroll software help with tax compliance?

Online payroll services typically have a compliance person whose job it is to make sure that their clients’ payroll is compliant with local, state and federal laws. If you want to go with payroll software, there are some ways that software can help you with tax compliance:

  • Payroll software typically has up-to-date information on tax filing and withholding requirements, which minimizes the risk of making mistakes with your payroll.
  • It can help you track new hires and report them to the state.
  • It keeps your employees’ information in a centralized location, minimizing the need for ongoing data entry.
  • It can be used to compile data and generate HR reports, something that’s crucial in the public sector.
  • It can give employees the option to correct errors and update their information.

Of course, data entry errors still have the potential to cause problems. The key is to audit your records regularly. Before you upload your existing data to your new payroll software, you may want to double check everything to make sure your information is correct.

What are the pros and cons of payroll software vs. outsourcing?

Depending on your company’s size and needs, you may decide on either payroll software or outsourcing to a third party payroll provider. Here are some pros and cons to consider as you weigh your options.

Payroll software pros and cons


  • Software is usually less expensive than a payroll service, particularly if you have a small company with few employees.
  • Using payroll software allows you to maintain control over your payroll in a way that wouldn’t be possible with outsourcing.
  • Compared to doing payroll manually, it’s quick and easy because you’ll be able to save data.
  • You can restrict access to maximize your security, something that’s more difficult if you have payroll service employees accessing your data.


  • You may need to make an up-front investment depending on what type of software you choose.
  • Doing payroll in-house is more time-consuming than outsourcing.
  • You may need to hire and pay somebody to manage your payroll process as your company grows.
  • There is likely to be a steep learning curve at the beginning.
  • Payroll errors and compliance issues are more common with in-house payroll than they are with outsourced payroll.

Payroll outsourcing pros and cons


  • Payroll outsourcing removes much of the stress involved in handling payroll.
  • In many cases, payment is made month-to-month and is easy to incorporate into your budget.
  • You can take advantage of the provider’s compliance expertise.
  • You may be able to outsource HR tasks and other functions in addition to payroll.
  • You won’t need to pay somebody to do your payroll in-house.


  • While you will have access to your data, you may not have as much access as you would if you kept your payroll in-house.
  • In the long run, the cost of outsourcing payroll is likely to be higher than the cost of software, particularly if you exclude staffing costs.
  • Security may be a concern, particularly if you sign up with a cloud-based service. You’ll need to vet the company’s security to be sure that your data is safe.
  • There may be a fair amount of work and expense involved in migrating your payroll to a third party provider.

Streamline your payroll with Addition Financial

Choosing between payroll software vs. outsourced payroll services requires a careful evaluation of your payroll needs and budget. This guide can help you understand the differences between the two and choose the option that best suits your needs.

Do you need assistance with your payroll? Addition Financial is here to help. Click here to read about our payroll service and get in touch with us today!

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.