Choosing the Best HR Software for Small Businesses

What to Know:

• HR software systems help small businesses manage key HR functions, like payroll, benefits administration, onboarding, compliance, and employee recordkeeping.
• The three main types of HR software—HRIS, HCM, and HRMS—all manage core HR functions, with key differences and specialties among them.
• When choosing the best HR software for your business, consider factors like cost, ease of use, integration capabilities, and scalability.

Human resources (HR) solutions help companies solve everyday workforce challenges, from payroll and onboarding to time tracking and compliance. Indeed, the best HR software for small businesses makes core HR functions easier to access and faster to manage.

However, the price per employee adds up quickly, especially if you need HR modules for recruiting or performance. Our guide walks you through how to select the right HR management system for cost and time savings.

How we evaluate HR software

Guide to HR software for small businesses

Implementing cloud-based HR software can enhance efficiency while helping your business attract and retain employees. The time savings can be significant, considering nearly two-thirds of companies surveyed by Paychex reported spending “at least 11 hours per week on HR administration.”

But with hundreds of vendors offering all-in-one HR suites, stand-alone tools, and paid add-ons, it’s challenging to narrow down your options. This guide breaks down key HR software features, pricing models, and integrations. Use these tips to evaluate and choose the right HR platform for your company.

What is HR software?

HR management software is a dedicated hub that unifies employee data and processes. It automates time-consuming tasks, replaces unwieldy spreadsheets, and reduces the costs and legal risks of human resource management.

According to Business.com’s HR market report, an estimated 3.2 million small and medium-sized businesses (SMBs) use cloud-based HR software tools. It found that small teams often rely on HR systems for complex or compliance-intensive tasks, like payroll and employee benefits.

Types of HR systems and who needs them

The HR software category includes human resource information and management systems. These platforms can support all-sized HR teams but have different strengths.

Here’s what you need to know about HCM vs. HRIS vs. HRMS:

• Human resources information system (HRIS): This is the database for managing employee records and payroll, essentially the core components of most HR software. Solo employers and startups can implement HR policies with an affordable HRIS.
• Human resource management system (HRMS): In addition to core HR functionality, this platform streamlines internal HR processes, like time tracking and scheduling. Many cloud-based HR software for small businesses are HRMS solutions.
• Human capital management (HCM) software: Gartner defines human capital management (HCM) as practices and applications related to workforce acquisition, management, and optimization. HCM platforms may offer strategic support and tools in addition to HR automation and administration.

HR software must-have features

Human resource management systems provide a core set of HR tools to organize employee records and manage admin tasks. Basic metrics, digital onboarding, and leave-tracking functions come with many entry-tier plans.

In addition to key HR software features, most vendors offer tiers or modules with payroll management functions, time and attendance, and applicant tracking. Explore the following features and capabilities to see how they differ between top HR software solutions.

HR administration and workforce management

Core HR functions are the features you or your HR team use daily. According to several industry reports, they’re also the reason many small businesses choose HR software.

Here’s what each feature does, how vendor capabilities vary, and what to look for:

• Employee record management: This is an HR database that stores employee information, ranging from basic contact and job-related details to robust profiles with custom fields and uploaded documents. Make sure you can store signed policies and tax forms, like I-9s and W-4s, and use checklists or alerts to track required employment documents.
• Payroll processing: Built-in payroll functionality is an in-demand feature requested by 46% of HR software buyers in Gartner’s analysis. Full-service payroll calculates wages, taxes, and deductions; sends direct deposits; and files taxes. Confirm that you can pay contractors (1099 workers) and handle multistate payroll.
• Onboarding: This HR feature ranges from a welcome PDF and simple checklist for new hires to full onboarding workflows with e-signatures, software provisioning, and in-app communication. Look for role or location-based options and workflows that guide new hires through each step.
• Scheduling: HRMS platforms may offer calendar-only options or advanced features for assigning shifts, notifying employees, and tracking coverage. Small businesses with shift-based teams or hourly workers benefit from scheduling tools that provide mobile alerts, allow shift swapping, and implement overtime rules.
• Time and attendance: This feature tracks who’s working and when. It’s great for small companies with on-site employees or hybrid teams who need to clock in and out, and according to Gartner, 40% of buyers want this functionality. The time entry methods vary, from browser-based tools to kiosks and mobile apps. Confirm the time-tracking system supports your attendance policies, allows manager overrides, and flags missed punches.
• Leave management: Companies and employees use this feature to track time away from work. Time-off calendars and self-service portals are standard with top HR software systems. However, the best solutions can automate time-off approvals and accruals and schedule block-out dates based on custom policies and rules.
• Benefits administration: These tools help small businesses offer and manage retirement, wellness, and health insurance plans. Functionality varies significantly. Some HR platforms provide full benefits marketplaces, open enrollment assistance, and detailed plan comparisons. Others will direct you to the broker’s site for benefits administration.

Hiring and talent management

All-in-one technology suites offer a broad range of tools to support the employee lifecycle. These features vary in function and capability, from simple resume storage and skills tracking to end-to-end recruiting or full learning management systems (LMS).

See how these popular HR modules differ:

• Recruiting and applicant tracking: Manage job postings, applications, and hiring workflows through a built-in applicant tracking system (ATS) or recruiting tools. See if the HR software integrates with job boards, tracks hiring metrics, and enables communication.
• Performance management: Track employee goals and performance reviews using appraisal templates, progress tracking tools, and 360-degree feedback. Look for solutions to help managers document performance throughout the year and conduct reviews when needed.
• Learning and development modules: HR software can centralize employee training documents and track certification deadlines. Advanced systems provide pre-built content, skill assessment tools, and reporting dashboards.

HR compliance and reporting

Being able to analyze workforce data to make informed decisions is a key reason for choosing HR software. Indeed, the majority of small companies surveyed by Business.com already use technology for or outsource risk management, compliance, reporting, and analytics.

Take a look at these features for unifying HR data and risk management:

• Compliance support: Meet federal, state, and local employment regulations using compliance management tools. HR platforms may offer alerts for expired or missing tax forms and automatically update overtime, employee classification, and Affordable Care Act rules. Verify that the software supports your state and industry requirements.
• Reporting and analytics: Visualize turnover rates, PTO use, and head count using HR reports. Go through the reporting and dashboard functions to ensure they cover the metrics your business actually uses, whether that’s overtime trends or time-to-hire. See if it offers compliance reports and audit logs, lets you customize the dashboard, and provides enough filters to drill down into the data at the level you need.

Employee experience and engagement

HR software isn’t just for business owners, managers, and HR staff. It gives employees access to their own information on their own time. The employee self-service portal is how employees interact with your company.

Look for HR systems offering mobile-accessible portals with simple interfaces that let staff:

• Update personal information.
• View and print pay stubs and W-2s.
• Check PTO balances and submit time-off requests.
• Access health insurance and benefits information.

If your HR software includes integrated training or performance tools, see if employees can view details through the same self-service portal or if it requires a different app or log-in. Modern platforms may also include engagement features like pulse surveys, company announcement centers, and skills-tracking dashboards. Feedback capabilities can help small business owners track employee sentiment and even uncover toxic leadership practices.

How much does HR software cost a small business?

According to Gartner, the average organization budgets $35 to $160 per user per month for HR software. However, the costs vary greatly depending on what modules you choose and how many employees you have. For example, you can find free HR software without payroll processing for under $10 per employee monthly.

HR software pricing models

Cloud-based HR software vendors typically offer flat rates or per-employee per-month (PEPM) plans. Both are subscription-based pricing models with recurring costs. Some providers have on-premise or hybrid options available via the perpetual licensing model.

Consider how pricing and features differ to determine which options fit your budget:

• Free tiers: Freemium plans support a limited number of users and provide basic HR features and functionality. These help solopreneurs and small teams manage data but offer less storage, fewer integrations, and fewer customizations than paid plans.
• PEPM: Most HR solutions for SMBs charge per-person rates. You pay a monthly fee for each employee. Module-based pricing, subscription tiers, and custom quotes use PEPM pricing and may have additional costs.
• Flat fee or fixed tiers: Some providers offer a flat monthly or annual rate for agreed-upon terms, more common in quote-based pricing models. Alternatively, those with multiple subscription tiers may increase workforce coverage and feature limits.
• Site or perpetual licensing: Small companies in regulated industries may prefer on-premise infrastructure for some or all of their HR systems. Permanent or hybrid software licensing options involve one-time fees and ongoing maintenance.

Additionally, a few HR companies offer human resources outsourcing (HRO) or professional employer organization (PEO) services. Prices, features, and benefits differ between PEO vs. HRO packages.

How to choose the best HR management software

There is HR software for every business stage and size. Yet, choosing a solution that scales with your company is harder than it sounds. Capterra found that, on average, SMBs with one to 1,000 employees use five HR tools, and one-third of applications “don’t get regular use.”

Knowing what features and support your team requires can help you invest in the right HR system.

Assess business and HR priorities

Decide how new HR software can support your business goals. This step helps you focus on the tools and features that drive meaningful results.

Consider these steps:

• Define business and HR goals. If your business objective is to increase revenue, HR should focus on improving hiring, retention, and productivity.
• Identify the HR challenges you want to solve. Are you losing top candidates during the hiring process? Struggling to deliver consistent onboarding experiences?
• Decide which outcomes matter most. Do you want to increase employee satisfaction? Reduce time-to-hire? Track performance more effectively?
• Assess your workforce needs. Think about how many users need access and what each group (managers, employees, and admins) needs the system to do.

Know what to look for in HR software

Once you identify the outcomes you want to achieve, like faster hiring or better compliance, the next step is to evaluate top HR solutions. With your budget in mind, create a checklist of core HR requirements and features.

Look for HR software that:

• Increases efficiency through automation. Consider how automatic alerts, rule-based automations, and autofilled forms reduce manual steps throughout the system.
• Offers artificial intelligence (AI) capabilities. Some platforms use AI to flag errors, suggest benefits or skills to employees, optimize schedules, or summarize staff feedback.
• Connects to essential business systems. Reduce app switching and improve accuracy using HR software that integrates with your accounting software, scheduling or time and attendance systems, and internal collaboration tools.
• Is easy to navigate and use. Test the software, dashboards, and portals from all roles to ensure they provide straightforward interfaces and simple navigation for employees checking time-off balances and HR staff running overtime reports.
• Supports your company’s growth. Look for solutions that offer flexible pricing, role-based permissions, custom application programming interfaces (APIs), and add-on modules.
• Provides reliable and knowledgeable customer support. Go through the customer service options to verify when and how to access live help. See if the HR vendor offers account managers, onboarding specialists, or compliance experts.
• Enables enterprise-grade security. Check out the platform’s security certifications and see if they’ve gone through third-party audits. Look for SOC 2–certified vendors offering two-factor authentication by default. Also, see if the provider encrypts uploaded documents at rest and supports logging and version histories.

How do you onboard with new HR software?

A clear setup plan can help you avoid disruption when switching to a new HR system from payroll software, spreadsheets, or another vendor. Most providers include some form of onboarding assistance. Ask if they offer free data migration support or dedicated HRIS implementation services.

Before finalizing your technology selection, review the vendor’s onboarding steps for HR software and ensure everything is doable at your budget (i.e., rather than later realizing you need additional paid customer or technical support services).

Your onboarding checklist should include:

• Migrate employee data. Import historical payroll records, tax documents, PTO balances, and staff information.
• Set up roles and permissions. Give the right level of data access to HR teams, administrators, managers, and employees.
• Train your team. Develop or use the vendor’s onboarding tools to show employees how to use the HR apps and role-appropriate features.
• Test payroll and tax settings. Confirm withholding rates and payroll schedules if you set up payroll in new HR software.
• Review compliance forms. Run a compliance or audit report to find missing documents before your go-live date.

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