Sense with Cents

This is one of those questions where the honest answer is: it depends — and not everybody will tell you that.

I’ve watched business owners pay for services they didn’t need, and I’ve watched others struggle with payroll they should have handed off. The difference usually comes down to three things: how many employees you have, how complicated your payroll is, and how much you value your time, security, and privacy.

What a payroll service actually costs

The advertised price is not always the whole price. Most services charge a base monthly fee plus a per-employee fee, plus charges for year-end W-2s, plus charges for tax filing, plus whatever add-ons they’ve bundled in by default. A business with five employees can easily spend $1,500 to $2,500 a year on a mid-tier payroll service. Some spend more.

DIY solutions can have add-on fees too — best to ask before you commit. With Medlin Payroll, for instance, you can choose to efile W-2 data directly with the SSA yourself, then print and distribute employee copies (and replace the inevitable lost ones), only paying for your time and printing supplies. Or you can pay an efiling service to handle the whole process, including employee copies. Your choice, either way.

What you give up when you hand it off

Control, mainly. When a payroll service makes a deposit late or files something incorrectly, the penalties come to you. The service may reimburse you — eventually, after some back and forth — but you’re the one who gets the notice, and you’re the one who has to deal with it. Your name is on the return.

Accuracy is the other thing. Payroll services process hundreds or thousands of clients. They don’t know that your employee changed her withholding mid-year, or that you paid a bonus that should have been handled differently. You’re a data entry problem to them. You’re not.

One more thing worth knowing: a payroll service is not your backstop for penalties and interest. If a deposit is late or a filing is wrong, the IRS and state agencies come to you — not the service. The service may make it right if the mistake was clearly theirs, but don’t count on that being quick or easy. And in rare but real cases, the risk goes further than that. A few years back, at least one payroll service was collecting money from employers for tax deposits and never making the deposits. Employers ended up having to pay the same amounts twice while trying to recover their money from the service. Your name is on the return. The liability is yours.

When a service makes sense

If you have more than 250 employees, or an unusually complicated payroll, a service starts to make more sense. Time cost is also worth considering. If processing payroll is starting to take most of a day, that’s a signal worth paying attention to.

For a business owner doing their own payroll, the process should likely not take more than an hour or two per payroll run — just getting employees paid and tax deposits handled. That’s not a hard rule, just a reasonable benchmark. If you’re spending significantly more than that, it’s worth weighing the time cost against the savings, security, and privacy that come with doing it yourself. That’s a call only you can make.

Even though I sell DIY payroll software, I tell customers when I think they’d be better served by a payroll service. That might be someone with no payroll background stepping into it cold, someone already stretched too thin to give it the attention it needs, or someone who simply would rather pay someone else to handle it. There’s no shame in any of those. Knowing your limits is its own kind of good management.

When DIY makes sense

If your employee count is well under 250, you have a consistent pay schedule, and you’re willing to spend a few hours a year staying current — with honest support and newsletters from your payroll software vendor — you can absolutely do this yourself. The software tools available today are not complicated. The tax tables are publicly available. As for deposit schedules, we suggest making a deposit every payroll for simplicity — it makes it easy to account for each deposit and keeps things clean.

Over 40 years I’ve heard a lot of reasons why business owners prefer to handle payroll themselves. The two that come up most often are cost and privacy. DIY payroll software is a small fraction of what a service costs — Medlin Payroll can run less than $100 a year. Many owners do payroll during a slower part of the week or month, and the savings compared to a service are real. The other common reason is security. Payroll figures are about as private as business information gets, and some owners simply don’t want to share that with an outside service. Both are completely legitimate reasons.

I’ll admit I’m the outlier here. I learned payroll the old-fashioned way — pen, paper, and the state and federal booklets. Math came easily to me, so it worked. I don’t expect anyone else to go that route, and there’s no reason to. But here’s the part that doesn’t change: you still need to understand the process well enough to know when something looks wrong. Payroll isn’t plug and play. You don’t need to be an expert, but you do need enough knowledge to double-check what the software is telling you.

That’s where a good software vendor makes a real difference. A payroll software vendor is supporting tens of thousands of customers, each running their own payroll. That breadth of real-world experience is hard to match — a payroll service handling even 100 clients a week simply doesn’t see the same variety. Find a good vendor and that expertise is working for you every time you process a payroll. With Medlin Payroll, you can communicate directly with the person who writes the software — someone who has been in the payroll and accounting industry for more than 45 years.

As for checking my work — I’ll own it. I use every payroll I process to make notes on Medlin itself, what’s working well and what could be better. That means I’m sometimes prone to a wild key press. The loose nut at the keyboard is a real factor. All the more reason to review your payroll check listing carefully before locking anything in. Preventing mistakes is FAR less time-consuming than fixing them afterward.

To give you an idea of what’s possible: in the 1990s I used to handle a 50-person payroll, while on the phone, in under half an hour. The bottleneck was waiting for the HP laser printer of that era to spit out checks at five or six pages per minute. With today’s printer speeds and direct deposit, it should take less time than that. I spend more time than ever checking my work — reviewing the payroll check listing before locking in amounts, noting what I’ve verified so I can prove to myself I checked the important items.

Or, if you’re willing to learn and just give it a try, a tool like Medlin Payroll — backed by Medlin expertise — can get you up and running quickly, at a fraction of the cost of outsourcing. For many new users, having a copy of their last payroll run’s check stubs and reports is all they need to get set up, even in the middle of a year.

The businesses I’ve seen run their own payroll successfully for decades are usually the ones who took the time to understand what they were doing. That investment pays back every year.

The bottom line

Don’t let anyone tell you payroll is too complicated for a small business to handle. It’s not — if you’re willing to learn it. And don’t let anyone tell you a payroll service is always the safe choice. It’s not — it just moves the risk around.

Know what you have, know what it costs, and make the call that fits your business. And remember — there is no such thing as a payroll crisis. Not even at the point where you’re deciding who runs your payroll. If you go the DIY route and plan to e-file your 941s, see The 941 E-File PIN: What You Need to Know before your first filing deadline.