Overview

Choosing among payroll providers for small businesses isn’t just a software decision—it’s a compliance, cash-flow, and change‑management decision. This guide goes beyond feature lists to expose true costs, security standards, timing and funding mechanics, industry‑specific requirements, support quality, and a step‑by‑step migration plan.

By the end, you’ll be able to model total cost of ownership (TCO), pick the right delivery model (software vs PEO vs EOR vs CPA), and follow a 30/60/90‑day blueprint to switch providers without errors.

We wrote this for 10–200 employee companies, including multistate teams and those with niche needs (tips, prevailing wage, clergy allowances, H‑2A, shift premiums). Use it to shortlist the best payroll providers, vet SLAs and APIs, and line up accounting, HR, and compliance owners so first‑pay accuracy and year‑end filings land on time.

True cost of small-business payroll: transparent pricing and hidden fees

Price pages rarely tell the whole story. True TCO combines subscription fees, per‑employee or per‑run charges, year‑end forms, state/local filing surcharges, off‑cycle runs, bank/expedite costs—and your internal time to manage changes and exceptions.

Late or incorrect deposits can trigger penalties that escalate quickly. The IRS sets failure‑to‑deposit penalties from 2% to 15% depending on lateness, plus interest, which can wipe out “savings” from a cheaper plan (IRS failure‑to‑deposit penalty rates).

Build a simple worksheet and ask each vendor to complete it in writing so quarter‑ and year‑end don’t bring surprises.

PEPM vs per-pay-run pricing

Small business payroll software typically bills either per employee per month (PEPM) or per pay run. PEPM is predictable if you pay weekly or have many add‑ons. Per‑run can be cheaper for monthly/biweekly schedules or a seasonal headcount.

For example, a 25‑employee firm paying biweekly might see PEPM at $8/employee/month ($200/mo) versus per‑run at $40 base + $2/employee/run (about $180–$220/mo depending on months with three pay cycles). Map headcount and pay frequency for a year, then test both models with your seasonality.

If you run off‑cycle or multiple bonus runs, account for them. Per‑run plans can flip from “cheaper” to “costlier” fast.

Year-end forms and amendments

Year‑end charges often hide in the fine print. Many providers price W‑2s and 1099s per form, plus fees for corrections (W‑2c/1099‑NEC corrections) and reprints.

If you change benefits mid‑year or reclassify workers, amendment workflows can trigger additional filings at federal, state, and local levels. Ask about per‑form costs, corrected form fees, shipping for paper copies, and turnaround times for amendments.

Your decision rule: model a “best case” and a “two‑corrections scenario” so you see the real range before you sign.

State/local filing surcharges and multi-state costs

Each additional state can add registration support fees, per‑state filing surcharges, and local tax handling (e.g., school district or city taxes). Multistate onboarding also requires SUI rate setup and local nexus reviews.

Get a written list of included and excluded filings by jurisdiction, how local returns are handled, and any “per locality” fees. If you’re expanding, price out your next two states now and confirm whether you’ll need registration assistance or a CPA for initial tax accounts.

Payroll software vs PEO vs EOR vs CPA: which model fits your 10–200 employee company

You can run payroll via self‑service software, outsource to a CPA/payroll service, join a PEO (co‑employment for HR/payroll/benefits), or use an EOR for global or complex hires. The right fit hinges on how much control you want, risk allocation, benefits leverage, and expansion plans.

Use the trade‑offs below to match your company profile to a model and set shortlist criteria.

Software gives control and affordability; you own compliance inputs, while the provider files on your behalf. A CPA or payroll bureau can reduce admin for small, stable teams with simple needs, but you’ll still provide data and approvals.

A PEO bundles HR, payroll, compliance help, and large‑group benefits under co‑employment. It’s compelling if benefits savings offset fees and you want a single partner.

An EOR hires workers on its entity (often internationally), ideal for testing new countries without foreign subsidiaries. Costs are higher but risk and setup time are lower.

Rule of thumb: software or CPA for 10–50 employees with straightforward needs; PEO as you approach 25–100 employees seeking benefits leverage and HR support; EOR for cross‑border hires or when you can’t (or won’t) set up a legal entity.

Switching providers without payroll errors: a 30/60/90‑day migration blueprint

A clean migration lives and dies on data quality and testing. Plan 90 days: 30 to extract and clean data, 30 to configure and parallel test, and 30 to run live with enhanced monitoring.

Assign owners for data mapping, compliance (registrations/SUI rates), accounting (GL mapping), and employee comms. By following the checklist and running at least one full parallel payroll, you’ll protect first‑pay accuracy and avoid duplicate or missed filings.

Data extraction and import checklist

Start by exporting complete employee and contractor profiles from your current system, then validate every field against your target provider’s templates. At minimum, collect:

Before import, spot‑check 10% of records and reconcile YTD totals against your last Form 941 and state wage/tax reports. After import, re‑run the same checks to confirm no data drift.

Mid‑year cutover risks and mitigations

Mid‑year switchovers risk duplicate filings, missing SUI setup, and local tax onboarding gaps. To mitigate, lock a cutover date at quarter‑end if possible; otherwise, get your provider’s written plan for split‑quarter reporting.

Confirm each state’s SUI rate, SUTA wage base, and local tax accounts are active before your first live run. Run at least one parallel payroll and compare net pay, taxes by jurisdiction, and employer taxes line‑by‑line.

Reconcile quarter‑to‑date and year‑to‑date registers to ensure no missed pre‑tax/post‑tax categorizations.

YTD balance and tax mapping templates

Misclassifying earnings or benefits creates tax errors that surface at quarter‑end or on W‑2s. Use a mapping template that ties each legacy earning, deduction, and tax code to the new system’s codes, including taxability (FIT, FICA, FUTA, SUI) and W‑2 boxes.

For benefits, map pre‑tax vs post‑tax and employer match codes. For taxes, map federal, each state, and local taxes separately.

Validate by recalculating a sample employee’s YTD pay in the new system and matching totals to your legacy reports.

Security and privacy posture: certifications, encryption, data residency, and disaster recovery

Payroll systems hold SSNs, bank accounts, wage data, and health/benefit details—high‑value targets for attackers and high‑stakes for SMBs. Ask vendors to prove security with independent audits, not just marketing claims.

Ensure their privacy and disaster recovery posture matches your risk tolerance. After this section, you’ll be able to read a SOC 2, understand ISO 27001, and request concrete RTO/RPO metrics and data residency options.

A SOC 2 Type II report validates that a provider’s controls are designed and operate effectively over time; request the full report and bridge letter, not just a summary (AICPA SOC 2). ISO/IEC 27001 certifies an information security management system and continuous improvement practices (ISO/IEC 27001).

Press for encryption at rest and in transit, privileged access management, segregation of duties, production change controls, incident response procedures, and defined disaster recovery objectives (e.g., four‑hour RTO, one‑hour RPO). If you employ EU residents, ask how GDPR is supported and where data is stored. For California, review CCPA/CPRA commitments and data processing addenda.

SOC 2/ISO 27001 and why SMBs should care

SOC 2 Type II and ISO 27001 reduce asymmetric risk for small businesses by proving a third party has tested security controls and governance, not just technology. In payroll, that includes tax file transmission safeguards, bank detail protection, access logging, and vendor management controls.

Review the report scope (Trust Services Criteria covered), exceptions, and remediation timelines. Your rule: shortlist only SOC 2 Type II or ISO 27001‑certified vendors, and get the most recent report under NDA.

Funding and pay timing: direct deposit speeds, cutoffs, prefunding, and paycards

Pay timing depends on more than “2‑day vs 4‑day.” It’s a mix of ACH windows, your provider’s risk policy (prefund vs post‑fund), holidays, and the time you approve payroll.

Understanding these mechanics lets you plan payroll calendars, avoid rush fees, and support same‑day payroll direct deposit when needed. Use this section to set realistic cutoffs and decide if paycards or earned wage access (EWA) make sense for your workforce.

ACH has standard and same‑day settlement windows. Nacha’s Same Day ACH provides multiple daily windows, enabling same‑day credits if files are approved before published cutoffs (Nacha Same Day ACH).

Ask your provider for standard processing time (e.g., 4‑day vs 2‑day), same‑day availability, daily cutoffs by timezone, and holiday calendars. Set internal approvals one business day before provider cutoffs to buffer last‑minute changes.

ACH cutoffs and same‑day ACH windows

Most providers batch files early afternoon local time. Miss it and funds move the next window.

Same‑day typically requires morning approvals and may carry transaction caps and fees. Get a written schedule of:

Build your payroll calendar with these cutoffs and communicate them to managers who submit hours.

Prefunding vs post‑funding

Prefunding means you send payroll funds to the provider before they transmit ACH. This reduces their risk and can enable faster deposits.

Post‑funding allows debits near or after payday but may require longer lead times or holds. New customers, companies with limited history, or those running large bonuses may face prefunding.

Ask if policies change after a risk period, whether reserve accounts are used, and how rush runs are handled. Align your cash‑flow plan to avoid last‑minute wire fees.

Paycards and earned wage access

Paycards help unbanked workers and can speed hiring, but watch fee schedules and state wage payment laws. EWA gives employees access to a portion of earned wages before payday.

Ensure your provider supports accurate hours feeds and considers deduct‑at‑payday safeguards. Document employee consent, provide no‑cost withdrawal options where required, and audit fees quarterly.

Pilot with a single location, measure usage and costs, then roll out with clear education.

Industry-specific payroll scenarios: restaurants, construction, nonprofits, agriculture, healthcare

Some verticals add complex rules you can’t “wing.” Restaurants require tip credit handling and service charge treatment. Construction often needs certified payroll. Nonprofits and churches handle clergy allowances. Agricultural employers navigate H‑2A. Healthcare manages shift differentials.

The Fair Labor Standards Act regulates tipped employees and the use of a tip credit; the federal minimum wage is $7.25, and there are strict pooling and notice rules (FLSA tip credit rules). Federal construction contracts require WH‑347 certified payroll under the Davis‑Bacon and Related Acts (DOL Davis‑Bacon certified payroll).

Ask vendors to demo these flows using your sample data, not canned decks.

Restaurants: tips, tip credit, and service charges

Configure separate earnings codes for cash tips, charged tips, tip outs, and service charges. Ensure the system can calculate tip credit, allocate tips where needed, and include tips in overtime regular rate calculations when required.

Build reports that show tip declarations, tip pool distributions, and credit usage by pay period. Train managers on capturing charged tips and service charges correctly; mismapping service charges as tips can skew taxes and overtime.

Construction: certified payroll and prevailing wage

Set project/location codes with prevailing wage rates and fringes, plus craft/classification tags for WH‑347. Use fringes as cash‑in‑lieu or split between benefits and cash, tracking both on the check and in reports.

Your provider should generate WH‑347, signature lines, and statement of compliance—and map hours by project for job costing. Before go‑live, run a test project across two pay periods and validate hours, fringes, and report formatting.

Nonprofits and churches: clergy housing allowance

Add a non‑taxable clergy housing allowance earning that’s excluded from federal income tax but subject to FICA unless exempt. Keep allowances on separate GL lines and ledger classes for transparency.

Provide year‑end summaries for ministers and confirm how allowances display on W‑2s. Align with your auditor on documentation and approvals for allowance designations each year.

Agriculture and seasonal: H‑2A considerations

H‑2A employers must comply with wage rates, recordkeeping, and housing/transport rules that can affect taxable benefits. Set seasonal pay calendars, multiple worksites, and piece‑rate or hourly mixes as needed.

Confirm your provider can produce job‑ and site‑level hours for audits, and track in‑kind benefits separately. Train field managers on capturing start/stop times accurately to support audits.

Healthcare: shift differentials and premiums

Create earnings codes for evening, night, weekend, and on‑call differentials, with rules that roll into the regular rate for overtime. Sync scheduling outputs to payroll to reduce manual entry and errors.

Use department/unit codes for cost allocation and labor distribution reporting. Test overtime calculations with combinations of base, differentials, and bonuses to ensure accurate premiums.

Garnishments, wage attachments, and workers’ compensation: compliance and automation

Garnishments and workers’ comp are high‑stakes, high‑volume edge cases that strain manual processes. The right payroll provider automates order setup, calculations, and remittance for garnishments, and integrates with pay‑as‑you‑go workers’ comp to smooth cash flow and simplify audits.

After this section, you’ll know what to automate, what fees to expect, and how to prepare for audits.

Child support and tax levies

Establish intake workflows to capture order details, priority, and jurisdiction. Calculate disposable earnings correctly, apply federal and state limits, and respect priority rules when multiple orders exist.

Set remittance schedules and confirm electronic remittance support where available. Keep employee communications templated and on file, and audit deductions quarterly to confirm caps and balances are correct.

Provider fees and automation options

Vendors may charge per‑order setup fees and monthly remittance fees. Automation typically includes electronic remittance, status tracking, and stop notices.

Compare “full service” (setup + calculation + remittance) against “calculation only” and price both ways if you have many orders. If you choose manual remittance, assign a dedicated owner and build a monthly reconciliation checklist.

Workers’ comp pay‑as‑you‑go and audits

Pay‑as‑you‑go calculates premium each payroll based on actual wages by class code, improving cash flow versus estimated annual premiums. Look for carrier integrations that send class‑coded payroll by location and department, with audit reports by period.

Before renewal, reconcile payroll by class to your carrier’s reports to avoid audit surprises. Validate that overtime premium exclusions (where applicable) are handled correctly.

PTO and sick leave accrual compliance: automation by jurisdiction

Paid time off and sick leave rules vary widely by state and city. Automation reduces manual calculations, but only if policies are modeled correctly—rate of accrual, carryover, usage caps, frontloading, and documentation.

Use this section to configure compliant accruals and build a process to update rules as laws change.

Define accrual methods (e.g., 1 hour per 30 hours worked), frontloading options, carryover caps, and usage minimums. The National Conference of State Legislatures maintains a helpful summary of state and some local paid sick leave laws—review it when you expand or update policies (NCSL paid sick leave laws).

In your RFP, require vendors to show how they manage multi‑jurisdiction employees and conflicting rules.

Accrual methods, carryover, and caps

Decide between frontloading (simpler administration, no accrual tracking for eligibility) and per‑hour accrual (more precise, required in some locales). Configure carryover rules, annual caps, and blackout dates where allowed.

Build policy variants by jurisdiction and attach them to work locations automatically. Quarterly, audit a sample of employees for accrual, usage, and carryover accuracy.

Local sick leave rules

Some cities and states set stricter accrual rates, usage reasons, and employer size thresholds. Tag employees to both work and home jurisdictions when rules require it, and capture documentation where permitted.

Maintain a change log so HR and managers know when policy updates take effect. For multi‑state teams, publish a one‑page summary mapping locations to policy variants.

Accounting depth: job costing, granular GL mapping, and multi-entity reporting

Payroll’s accounting backbone determines the quality of your P&L, job cost reports, and audit trail. The best small business payroll software supports classes/locations/departments, job/project costing, per‑earnings‑code GL mapping, and consolidated reporting across EINs—plus a clean, reconcilable sync to QuickBooks or Xero.

Use this section to define your chart‑of‑accounts needs and test sync behavior before go‑live.

Dimension tagging (classes, locations, departments, projects) should flow from time tracking to payroll to the general ledger. Your provider should support granular mapping so wages, taxes, and benefits hit the right accounts and segments.

During testing, reconcile a full month’s payroll to your GL: totals, segment splits, and employer tax allocations.

Classes, locations, departments, and job costing

Assign dimension tags at the timesheet or position level so labor rolls up into project P&Ls and departmental budgets. Include employer taxes and benefits in job costing if you track fully burdened labor.

Validate that split shifts and cross‑location hours allocate correctly to segments. For service businesses, align job costing reports to customer/project billing.

Granular GL mapping and sync

Map each earnings, deduction, employer tax, and benefit code to specific GL accounts; consider summary vs detail sync depending on your reconciliation process. Confirm how voids, reversals, and corrections are posted and whether syncs can be rerun.

Test QuickBooks payroll integration or Xero exports with a mock month and tie out cash, liabilities, and expenses.

Multi‑entity consolidation

If you run multiple EINs or entities, ask about cross‑company users, shared dimensions, and consolidated reports. Confirm intercompany labor handling and whether a holding company view is available.

Standardize codes across entities to simplify consolidated statements and audits.

Onboarding compliance: I‑9, E‑Verify, and state new‑hire reporting

Onboarding isn’t complete until you verify work authorization and report new hires. Providers should streamline Form I‑9, support E‑Verify where required, and automate state new‑hire reporting with audit trails and retention.

Finish this section knowing exactly what’s due when—and whether your provider or your team owns each step.

Form I‑9 must be completed for every new hire; Section 2 verification is due within three business days of the employee’s start date (USCIS Form I‑9). Some employers (e.g., certain federal contractors and in some states) must also use E‑Verify.

Require digital I‑9 with document capture, remote verification options where lawful, and retention rules that support audits. For E‑Verify, confirm how tentative nonconfirmations are handled and who communicates with employees.

Form I‑9 and E‑Verify requirements

Provide clear instructions to new hires on acceptable documents and deadlines. Your provider should flag missing or expiring documents and track reverifications.

If you’re an E‑Verify participant, define roles for resolving TNCs and timelines to avoid work disruptions. Keep I‑9s separate from personnel files and purge on the correct retention schedule.

State new‑hire reporting

Most states require new‑hire reporting within 20 days, with some requiring shorter timelines. Ask if your provider files on your behalf in every state where you employ, how often they transmit files, and how rehires are handled.

Build an internal calendar and spot‑check confirmations monthly to ensure filings are accepted.

Off‑cycle, bonus, and correction payrolls: workflows and costs

Real life brings bonuses, advances, missed hours, and stop‑payments. Off‑cycle runs and corrections often carry extra fees and can affect tax timing.

This section clarifies how supplemental wages are taxed, how to run net‑to‑gross bonuses, and how to void and reissue payments without creating tax errors or employee frustration.

For supplemental pay, providers support aggregate (combine with regular pay) or flat‑rate methods. Ask for a configuration that matches your tax strategy and state rules.

If you need net‑to‑gross (employee receives a fixed net), ensure your system can calculate gross and taxes accurately. Set clear approval and funding cutoffs for off‑cycle runs, especially before bank holidays.

Bonus payroll and gross‑up options

Decide whether to process bonuses as a separate run (often faster) or with regular payroll (simple but may change withholding). For net bonus promises, use gross‑up features to calculate taxes and avoid shortfalls.

Confirm how retirement plan limits and garnishments apply to bonuses. Document a calendar for annual bonuses with deadlines for manager submissions and final approvals.

Corrections, voids, and reissues

Build a standard playbook: identify the error, assess tax and deposit impacts, void or adjust the payment, and reissue via direct deposit or paper check. Confirm who files amended returns and when fees apply.

For underpayments, consider a same‑day run if cutoffs allow. For overpayments, get signed repayment plans when needed. Keep employees informed at each step with templated messages.

Reliability, support quality, and platform extensibility: SLAs, APIs, and data portability

When payroll is down or support is slow, you carry the risk. Benchmark providers on reliability (uptime, status page transparency, incident history), support SLAs and escalation paths, and extensibility (APIs, webhooks, exports, and data retention).

Also review tax penalty protection terms—what’s covered, caps, and the claims process—given IRS penalty stakes (IRS failure‑to‑deposit penalty rates).

Expect public status pages with historical uptime and incident post‑mortems, and ask for recent SOC reports covering change management and availability. For support, get SLAs in writing: response times by channel, hours (including after‑hours and payroll‑day coverage), and escalation to a senior team or dedicated CSM.

On guarantees, understand exclusions (e.g., employer‑provided data errors), caps, and how you initiate claims. Request sample language in the MSA.

Uptime and incident transparency

A credible vendor publishes real‑time status, historical uptime, and incident details. Ask for average monthly uptime over the past year, time to recovery for critical incidents, and how customers are notified.

During diligence, subscribe to the status page and review the last 6–12 months of incidents to gauge operational maturity.

Support SLAs and escalation paths

Insist on channel‑specific SLAs (phone, chat, email) and named escalation contacts. Clarify peak‑period staffing around payroll cutoffs and quarter‑/year‑end.

If you’re 50+ employees or multistate, ask for a dedicated CSM and quarterly business reviews. Track first‑contact resolution and average wait times in your pilot period.

APIs, webhooks, and data retention/export

Public APIs and webhooks enable integrations with time tracking, HRIS, and custom systems; confirm coverage (employees, earnings, deductions, GL data), rate limits, and event payloads. Ensure you can export all payroll history, forms, and documents in human‑readable formats on demand.

Document data retention policies and your exit plan, including how long you’ll retain access post‑termination.

ROI and decision framework: TCO modeling and provider shortlisting criteria

Put numbers behind your choice. Build a TCO that includes license fees, PEPM or per‑run costs, year‑end forms, add‑ons (garnishments, certified payroll, API), bank/rush fees, and internal hours for admin and corrections.

Then select a delivery model (software vs PEO vs EOR vs CPA) based on headcount, benefits strategy, compliance complexity, and growth plans.

A simple worksheet drives clarity:

Decision triggers: choose software when you need control and cost efficiency, CPA/payroll service when you want help without changing benefits, PEO when benefits leverage and HR depth outweigh co‑employment trade‑offs, and EOR when hiring across borders or without entities.

Finally, pilot your top two providers for one mock cycle. Import a subset of employees, configure GL and accruals, run a parallel payroll, and measure accuracy, support responsiveness, and time‑to‑close.

The best payroll providers for small business will make that pilot easy—and prove they can scale with you.