Even the most meticulous and experienced human resources professionals find that handling payroll can be a headache. For many small businesses, payroll services offer an attractive and valuable alternative to in-house processing. They can provide a less expensive, simpler means of paying employees, filing taxes, and performing other essential but mundane tasks.

Is a payroll service right for your small business?

Extremely small firms with a stable, salaried staff and minimal changes in tax obligations may well be better off processing internally; it can be more convenient and cost-effective if your needs are straightforward.

However, even for small businesses, processing paychecks internally is not always as cost-effective as it appears. At minimum, it costs valuable hours of employee time every pay period plus expensive accounting software and training. In addition, the person who handles your payroll needs to keep up to date on changes in personnel, deadlines, and tax requirements. Without the proper knowledge of payroll procedure and access to a sound payroll program, it is easy to make mistakes.

Payroll outsourcing can be an affordable way to remove this burden. If your employees work varying amounts of hours each week or if you have significant turnover, a small business payroll service can be a time-saving and cost-effective alternative to internal processing. Using a small business payroll service can also be helpful if you have to pay payroll taxes for multiple states.

Even if your payroll expenses are quite stable, companies with more than 10 employees may find that the time saved by outsourcing payroll easily makes up for the low costs.

What do they do?

Small business payroll services typically handle a range of payroll tasks, including calculating paycheck and tax obligations for each employee, printing and delivering checks, and providing management reports. Paychecks can be issued on a weekly, bi-weekly, monthly, semi-monthly or yearly basis.

Additional payroll-related services that may carry separate fees include automatic check signatures, direct deposit, and handling of W-2s. Many services now offer tie-ins with 401(k) and Section 125 mutual fund plans, allowing employees to set up automatic deductions from their paychecks.

Many small business payroll services offer the option of filing state and federal payroll taxes for your business, as well.

How does it work?

Each pay period, payroll data has to be "called in" to the payroll service provider. While this used to be done via a phone call or fax, almost all data is now transferred electronically.

The standard method is by modem. The provider will supply software for tracking each employee's pay rate, deductions, and vacation time. You simply enter the relevant information for that pay period, and information is automatically transferred to the payroll service provider.

Some providers also offer Web-based payroll data entry. You enter employee information on a secure Web page, which feeds directly to the provider. This method is gaining acceptance, but is still less popular than modem-based communication.

How much does it cost?

Basic small business payroll services typically cost between $3 and $5 per check, including add-on fees for direct deposit, tax filing, and check delivery.

There are often fees for adding or dropping employees, adjusting employee information, and setting up your account, and these fees can differ dramatically from provider to provider. Make sure you are looking at comparable pricing when evaluating different providers.