Payroll Software vs Full-Service Payroll
The choice between DIY payroll software and a full-service provider comes down to three things: how much you want to pay, how much time you have, and how much compliance risk you are willing to accept. Here is the honest breakdown.
Payroll Software
Examples: Patriot Payroll, Wave Payroll, Square Payroll
Advantages
- +Lower monthly cost - typically $17 to $35/month base fee
- +You control the timing and details of every payroll run
- +Good option if you already have an in-house bookkeeper or accountant
- +Simpler plans with fewer features you will never use
- +Often integrates with accounting software you already pay for
Disadvantages
- -You are responsible for calculating and filing all payroll taxes accurately
- -Missed tax deadlines trigger IRS penalties - starting at 2% for deposits 1 to 5 days late
- -State and local tax rules change frequently and require manual updates
- -Year-end W-2 and 1099-NEC filings are your responsibility (or an add-on cost)
- -Less support - most software providers offer email-only or limited phone access
- -Time-consuming - expect to spend 2 to 4 hours per month managing compliance
Full-Service Payroll
Examples: Gusto, OnPay, ADP RUN, Paychex Flex, QuickBooks Payroll
Advantages
- +Automated tax calculations, deposits, and filings with every payroll run
- +Guaranteed accuracy on filings - providers typically cover penalties if they make an error
- +Handles both federal and state tax filings including FUTA, SUTA, and local taxes
- +Year-end W-2 and 1099-NEC generation and filing included
- +Better support - phone and live chat from payroll specialists
- +New hire reporting filed automatically in most states
- +HR tools and benefits administration available on higher tiers
Disadvantages
- -Higher monthly cost - typically $40 to $80+/month base plus per-employee fees
- -ADP and Paychex require a sales call for pricing - no self-serve signup
- -More features than a 2 or 3 person business may ever need
- -Can feel locked in once your employee data is stored in the platform
- -Switching providers later requires exporting historical payroll data
Cost Comparison by Team Size
Based on the cheapest software option (Patriot) vs the mid-range full-service options (OnPay, Gusto).
| Team Size | Software (monthly) | Full-Service (monthly) | Software (annual) | Full-Service (annual) |
|---|---|---|---|---|
| 1 employee | $21-$41/mo | $46-$85/mo | $252-$492 | $552-$1,020 |
| 5 employees | $37-$65/mo | $70-$104/mo | $444-$780 | $840-$1,248 |
| 10 employees | $57-$95/mo | $106-$129/mo | $684-$1,140 | $1,272-$1,548 |
| 20 employees | $97-$155/mo | $166-$179/mo | $1,164-$1,860 | $1,992-$2,148 |
Choose payroll software if...
- ✓You have fewer than 5 employees and an accountant who handles quarterly filings
- ✓You are a solo founder paying yourself through payroll only
- ✓Your business is in one state with simple payroll requirements
- ✓Budget is the primary constraint and you have accounting experience
- ✓You only pay 1099 contractors and have no W-2 employees
Choose full-service payroll if...
- ✓You have employees in multiple states with different tax rules
- ✓You cannot afford IRS penalties from a missed deposit or filing
- ✓You want to spend your time on the business, not on compliance
- ✓You are hiring your first employee and want guidance from day one
- ✓You offer health benefits or retirement plans that require coordinated deductions
The Bottom Line
For most small businesses with 3 or more employees, full-service payroll is worth the extra cost. The time you spend learning state tax rules, filing quarterly 941 forms, and managing year-end W-2s is worth more than the $30-50/month difference. The IRS assessed over $7 billion in employment tax penalties in 2023 alone - the majority for small businesses that missed deposit or filing deadlines.
If budget is truly the primary constraint and you have an accountant handling quarterly filings, Patriot Payroll at around $37/month for 5 employees is a solid option. Just be sure to understand exactly which filings you are responsible for before you sign up.