Buying guide: Payroll for contractor-based businesses

Payroll. Just the word itself can bring to mind lots of paperwork and processes. When you add in managing contractors—along with tracking down their payments and associated forms—things can get even more complicated.

This guide will cover what to look for in a payroll platform that can serve both employees and contractors, while reducing costs, saving time and boosting worker satisfaction. You’ll learn how to evaluate payroll software features, review costs and get the best solution for your business.

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Evaluating payroll features

Evaluating payroll comes down to meeting your business needs. Does the payroll provider check the boxes that are relevant for your company size? Are payments for employees and contractors all within one app? And does the software contain the functionality your team needs to efficiently do their jobs? Assess the following features as you conduct due diligence on your payroll software. 

Processing and calculations

Calculations are the obvious but still most valuable work-horse feature of payroll software. From payroll calculations and deductions that figure out net pay to the non-standard calculations for contractors like tips, etc., letting a robust payroll system handle this means less time spent cranking out spreadsheets or tracking down payments in apps like Venmo.

Flexible pay

Many gig economy companies offer on-demand services and goods to their customers. Why not offer on-demand pay to workers? A modern payroll system can reward contractors immediately with same-day ACH direct deposits and/or multiple payment frequency options (daily, weekly, bi-weekly, etc.). Flexible payment options reduce the financial stress of workers and boost morale (as long as it’s a solution that doesn’t charge your workers for this benefit). Using tools like Everee means there’s also no change to your cash flow.

Tax compliance

Compliance is a necessary headache. Selecting a software package that has not only done the compliance homework for you, everything from IRS to EEOC to Sarbanes-Oxley, but also keeps up with the nearly constant changes in those regulations (AB5, anyone?) can be the cure for that headache.

A good payroll system can bring some ease to the compliance deadline accountants dread: tax season. Your payroll software should be able to handle both W-9 and 1099 compliance and offer automatic filing with the IRS. Some providers will even offer guarantees, so you can feel confident you’ll be covered if there are any issues that come up. 

Time tracking

Having a central software system that can perform time tracking, paired with a mobile app that lets workers record time and managers approve and transmit that data, can make managing employees and contractors even easier. The ability to report, approve and send hours to the payroll system in a timely fashion is critical to a company’s ability to get all workers paid correctly and on time.

Managers should be able to easily verify their hourly workers time, so payroll admins aren’t left to track down approvals and reconcile time punches days or sometimes weeks after the work was done. The delta between when a worker performs tasks and when their hours are verified can lead to not only inefficiency but also time fraud.

Geotagging

Geotagging is also useful in today’s contractor-run world. Whether you employ drivers, door-to-door salespeople, delivery couriers or any other contractor on the move, knowing worker location during timestamps improves time tracking and prevents time card fraud. When evaluating a provider, check out the apps. Mobile capabilities are key to accurate geotagging and geofencing.

Security

Payroll systems often come with additional features over and above the periodic needs of payroll processing. The retention of those records is also important (see Tax compliance). Payroll systems that offer secure cloud storage can bring the peace-of-mind to not only compliance but also disaster recovery by having financial information stored off-site.

Built-in payroll reporting

Reporting is available on many payroll systems, but the key to good reporting is not making it complicated. Look for reports built into a system that have been proven over time to fit most customers’ needs, or reporting dashboards that give crucial numbers at-a-glance. These options can alleviate end-of-week/month/year headaches that many payroll managers face. For the ad-hoc reports that all managers ask for, having custom reporting that is easy to use and easy to save is important as well. Once those custom reports are built, the option to automate generation of those saved reports is also an important time-saver.

Smart payroll

Get to your desk in the morning and see a notification that your reports are in your inbox/network folder waiting for you. That’s much better than getting to your desk with a day’s worth of reports looming in front of you like a charging rhino. A good payroll system can make this a reality. Automation can also go beyond reporting to include things like automated transfers and manager verification of hours.

A smart payroll system should have the ability to catch errors when they occur and the predictive ability to help humans reduce and avoid errors in the future. This technology can discover an worker forgetting to record a break or enter their recent PTO day into the system before it carries over to a point where fixing it requires costly man-hours and redundant manual processes.

Sustainability 

If a provider is still delivering hard copy documents and paper checks, it’s wasteful and also slow. Besides being socially conscious, another motivation to “go green” is that workers increasingly want quick access to real-time information on their device rather than on a sheet of paper. Workers overwhelmingly prefer digital access to their wage/salary and benefits information, so look for modern solutions vs. providers that feel stuck in the past. 

What should your payroll cost?

We’ve reviewed how to evaluate a payroll system, so now let’s discuss what goes into payroll pricing. While prices vary greatly depending on number of users, number of workers, and the complexity of the software itself, what should be made clear to you is an easily comparable itemization of what exactly you are paying for, so that you make an affordable and reasonable investment.

Costs that should be made clear to the purchaser are:

  • The base price of the software and the features it includes.
  • The features the base price does not include and how much each feature costs.
  • Any structured pricing (Example: cost per number of workers per month)

Clarity is the key to payroll affordability. Pricing should be straightforward, so that a business with 50 workers is not paying for a payroll system scaled for 3,000 until they get to the point where they are closing in on that amount.

Look for a provider that doesn’t lock you into a long-term contract and offers upfront pricing, so you don’t have to go through a lengthy negotiation process. Beware of expensive onboarding add-on costs as well. To maintain affordability, opt for a solution that shares the onboarding work with you and doesn’t charge for it. 

Should you outsource payroll services?

Keeping payroll in-house versus outsourcing it to a third party is a decision many business owners struggle with. To understand the difference between the two, it’s easiest to think of it in terms of the involvement of staff and technology. 

Keeping a payroll system in-house requires involvement of both staff and technology, while outsourcing payroll removes the day-to-day data entry, calculations, payroll check processing and other administrative overhead involved in the process. It also removes the responsibility of administering the software and hardware the system resides on. But it comes at a cost. Working with a professional employer organization (also known as a PEO) typically starts at $49 per worker per month (and can go much higher) and costs as much as $200 per when benefits are included. 

Doing it 100% in house means the business owner or admin is responsible for all the tax calculations and withholdings, making all worker payments and remittances, filing all returns, manually obtaining and securely storing worker documents and more.

What many companies ultimately land on is a combination of in-house work and out-sourcing other tasks like payroll, health benefits or retirement vehicles. 

A company will have some software that resides in-house and staff whose duties involve payroll, but they’ll also have a third-party software solution (Everee, Gusto, Paylocity, ADP, etc.) that creates efficiencies by removing a lot of the day-to-day time-consuming tasks. The company is left with a staff that’s involved in payroll instead of consumed by it. Moreover, in a world where payroll is more and more digital, they have software that’s user-friendly enough for both payroll staff and workers to not only get paid, but access things like tax information, withholdings, retirement contributions, etc. Most of these tools also offer features around things like timeclock, worker onboarding, document storage and more, to lessen the burden of HR tasks as well as payroll. 

Why you need to choose a payroll built for contractor payments

The drawbacks of choosing the wrong payroll provider are obvious. For workers, not getting paid on time or accurately causes low morale and poor performance. For employers, administrative issues create reputational difficulties at the least and legal difficulties at worst. And if contractors experience late or inaccurate payments due to separate payment systems, important aspects of your business can be undermined. A good payroll system can eliminate these issues by managing payments for both employees and contractors, which in turn increases a business’ confidence that it can pay their workers accurately and promptly.

Simply put: a good payroll system built for managing contractor payment is worth the investment. It removes administrative overhead from your accounting and payroll staff, alleviates obstacles to compliance, and creates consistency that your workers can count on. In the evolving world of gig work and contractor-based businesses, the reputation of your company and satisfaction of workers is something worth protecting. Taking the time to do the research into investing in the right payroll provider is time worth spending.

Looking for a payroll provider built for contractor payments? Learn more about Everee.