Payroll Software Small Business Buyer Report – 2015

Every year, Software Advice speaks with hundreds of small businesses (those with $50 million or less in annual revenue) looking for new payroll software, which gives us unparalleled insight into the needs of today’s buyers.

We analyzed a random sample of these interactions from the past year to better understand organizations’ current payroll methods, functionality needs and reasons for considering new software, and identify payroll software buyer trends. Using the findings in this report, other payroll software buyers can make more informed purchase decisions.

Key Findings

  1. More than twice as many potential buyers are using manual methods to handle their payroll needs this year as compared to last year (24 percent versus 11 percent).
  2. Besides core payroll, buyers most often request functionality for reporting (30 percent), tax processing and filing (28 percent) and employee self-service (22 percent).
  3. Owners or founders (21 percent) are most likely to lead the payroll software search, suggesting that many prospective buyers lack HR or accounting experience.


Introduction

Ralph Waldo Emerson famously wrote that “money often costs too much.” While he likely meant something more poetic, this quote is quite literal to small businesses today: In the U.S., employees come at an increasing cost.

According to the Bureau of Labor Statistics, over the past 10 years, the average cost of paying employees (per hour worked) rose 28 percent for private-industry employers—more than the 22 percent rise in inflation over the same period.

employer costs for employee compensation

Source: Bureau of Labor Statistics

Companies, in turn, are increasing projected salary budgets, from 2.4 percent in 2010 to 3.1 percent in 2016. The cause? Workers are starting to push for higher pay again—a trend that will only continue to grow as employment rises to pre-recession levels.

Bigger paychecks come with more costly potential processing errors: In 2014, incorrect tax filing penalties totaled nearly $5 billion. Given this, it’s no surprise that growing numbers of small businesses are looking for software to run payroll.

Most of this software is cloud-based, and can perform a wide variety of functions, from directly depositing paychecks to filing taxes to employee self-service, which allows workers to complete payroll-related tasks themselves.

In this report, we take a look at trends among small-business buyers to help others in the market for new payroll software choose the right system.

Manual-Methods Users Double, Outsourcing Numbers Dwindle

When potential buyers contact Software Advice, we ask them what methods they’re currently using to run payroll at their organization. Comparing their answers to what we heard from buyers last year offers interesting results.

Commercial payroll software is still the most common method, cited by 31 percent of buyers. However, the number of buyers saying they use manual methods—such as pen and paper or general-purpose software (i.e., Microsoft Excel)—more than doubled, jumping from 11 percent in 2014 to 24 percent this year.

Meanwhile, those who outsource payroll entirely to an external payroll processing service fell dramatically: from 16 percent of buyers in 2014 to just 6 percent this year.

Prospective Buyers’ Current Methods (2014 vs. 2015)

Prospective Buyers’ Current Methods (2014 vs. 2015)

These results imply that more small businesses are now bringing their payroll in-house. There could be numerous reasons behind this, but Christine Thelen, manager of human resources (HR) HR services at consulting firm Trupp HR, believes cost could be the primary factor.

Outsourcing can be beneficial, but even then, payroll isn’t fully automated. Small businesses that outsource still need to hire someone internally to gather and send payroll data to external providers. Combined with the cost of the provider, this often makes outsourcing more expensive than doing payroll in-house.

There are other potential drawbacks to outsourcing, including security concerns. Just last year, a Pennsylvania payroll company was hacked, exposing as many as 200,000 workers’ payment information and Social Security numbers.

A large number of small businesses rely on manual methods, which present their own wealth of problems: They’re time-consuming, often disorganized and can lead to expensive errors. In fact, the American Payroll Association estimates that errors caused by using manual methods cost companies 1 to 8 percent of their total payroll.

“It’s pretty hard to run a payroll of any size outside a payroll system. If you do simple pay-by-the-hour or pay-by-salary, and there are no other earnings [and] no other paid time-off accrual, you could do it manually. But that’s about it, and that doesn’t even take into account that you have to do your payroll tax reporting manually if you’re not using a system.”

Christine Thelen, Trupp HR

As nearly one-third of buyers can already attest to, commercial payroll software presents a solution to these problems. It’s secure, less costly, accurate and typically easy to use.

Reporting and Tax-Filing Requested by Majority of Buyers

So, what do prospective buyers want in their new software system? Besides basic payroll capabilities, buyers most often request reporting (30 percent), tax processing and filing (28 percent) and employee self-service functionality (22 percent).

Top-Requested Payroll Software Functionality

For payroll especially, reporting is a necessity. Various external parties at local, state and federal levels need proper returns for compliance purposes, and employees need their W-2s or 1099s to do their own annual taxes. Given this, Thelen says, reporting should be the number-one thing to look for in a new system.

“When you’re using these payroll systems, you’re gathering a lot of critical information, and you’re often asked to report on that information in all kinds of ways to regulatory agencies,” she explains. “Businesses are also getting smarter about using [reporting] as a source to pull information to do analysis on labor costs and [related] things.”

With HR departments spending up to an estimated 80 percent of their time on administration and paperwork alone, employee self-service becomes another important way to reduce the burden on HR staff. With this functionality, if employees need to update their address or view their pay history, for example, they can go into the system and take care of it themselves.

“Allowing employees to make changes through self-service eliminates a lot of manual steps and increases the chance of accuracy and things not getting missed,” Thelen says.

Twenty-One Percent of Buyers Are Company Founders/Owners

Does payroll belong in the HR, accounting or finance department? The debate wages on. But it’s interesting to note that, among the small businesses in our sample, the most common prospective buyer doesn’t come from any of these departments. In fact, company owners or founders are the ones most likely to lead the payroll software search, at 21 percent. Coming in second and third are HR managers (14 percent) and HR directors (12 percent).

Job Titles: Prospective Buyers

Job Titles: Prospective Buyers

In small businesses without dedicated, in-house accounting or HR roles, it commonly falls on the owner or founder to lead the payroll-software search. However, such leaders often lack the necessary depth of knowledge in these areas—and may make a purchase that’s not a great fit. Having someone well-versed in the subtleties of payroll calculation and legislation lead the search can help avoid buyer’s remorse down the road.

“The more that you have somebody [who] understands those nuances and understands what a payroll system needs to be able to do—with respect to taxes, reporting and managing the different types of compensation over your typical hourly worker—the more they’re going to be able to ask questions to make sure the system you’re getting meets the needs you have.”

Christine Thelen, Trupp HR

If a small-business owner is lacking payroll knowledge and doesn’t have anyone on hand who does, an outside small-business consultant is ideal to either offer suggestions and advice, or take over the software search outright.

Purchase Drivers Are Improved Organization & Functionality

Why are the small businesses in our sample looking for a new solution? The reasons remain largely the same as last year. Most often, businesses seek new software because they want to increase organization and efficiency (30 percent); their current solution is missing features and functionality (23 percent) or they want to consolidate systems internally (15 percent).

Top Reasons for Evaluating New Payroll Software

Top Reasons for Evaluating New Payroll Software

Motivations such as the current software lacks functionality and the need for consolidation point to the growing demand for end-to-end HR software systems. These comprehensive suites can not only handle essential needs—such as payroll, benefits administration and time-tracking (collectively referred to as “core HR”)—they also offer more advanced capabilities, such as recruiting and onboarding new employees.

From an integration standpoint, HR suites allow everything to be centralized in one internal database, which can help businesses avoid unnecessary double-entry and manual work.

As one buyer told us, they are looking to “automate and streamline the HR and payroll process into one single, consolidated solution.” This represents a step forward in the way HR and payroll is handled today.

“You used to use a combination of Excel spreadsheets, the payroll system and the time-keeping system, and you were constantly entering information into multiple places,” Thelen says.

“Now that the tools are out there, people are recognizing that they save lots of time by having it be an integrated process, where they’re not having to update multiple places in order for them to do their job.”

Another interesting finding: The number of buyers saying their current system is outdated or unsupported doubled year-over-year, with the main culprit being Sage’s recent decision to discontinue the popular DacEasy payroll module.

Conclusions

With the costs of paying employees high and rising, here’s what small-business payroll software buyers should take away from our 2015 findings:

⇒ Reporting is the primary concern. Functionality varies, but every payroll system can ensure employees are paid accurately for their work. It’s the reporting that makes the biggest difference—and if users can’t easily run that report they need for their boss or an external regulatory agency, it’s a problem. Reporting can also help with internal considerations, such as determining labor costs.

⇒ Suites are sweet. Regular wage rates, hours worked, benefits contributions and more all factor into the final number on a paycheck. Finding a system that integrates core HR functionality is beneficial not only for reasons of automation and accuracy, but also to avoid unnecessary double-entry and manual work.

⇒ Have an expert on your side. As Thelen puts it, it’s very important that “you’re asking all of the right questions, and you’re vetting these [software vendors] well before you decide to pick the pool you want to dive into.” If you’re an owner or founder with little to no payroll experience, find a payroll expert in-house or through an outside consultant. Meeting with vendors and demoing software can also help you find the right system.

Demographics

Every industry has a need for payroll software, but most commonly, prospective buyers are from the manufacturing (11 percent), medical (10 percent) or nonprofit (8 percent) verticals.

Prospective Buyers by Industry

Prospective Buyers by Industry

As mentioned earlier, small businesses in this sample are defined as those with $50 million or less in annual revenue. Eighty-four percent of businesses in our sample actually make $25 million or less annually. A little over half (54 percent) have 100 employees or less, and 87 percent expect only one to five users for their new system.

  • By Annual Revenue: Prospective Buyer Size

    By Annual Revenue: Prospective Buyer Size

  • By Number of Employees: Prospective Buyer Size

    By Number of Employees: Prospective Buyer Size

  • By Number of Users: Prospective Buyer Size

    By Number of Users: Prospective Buyer Size

 

The detailed methodology for this report can be found here.

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