When it comes to payroll, you can’t afford to make mistakes. Employees rely on you to accurately compensate them for their time, just as you rely on them for keeping your business running. That part is simple. But once you add taxes, classifications and reporting, the task becomes more complicated.
Of course, you likely already have a payroll system. Chances are, you’re not writing paper checks and using an accounting notebook (although some businesses still do!). But, if you aren’t using the best payroll system for your situation, you could be leaving your business open to costly mistakes. According to the IRS, 40% of small and medium-sized businesses are fined each year for failing to meet payroll tax regulations.
Avoiding fines is just one reason to know the basics of payroll systems. When your HR team is matched with the appropriate payroll system you can also confidently grow your business.
What kinds of payroll systems are available?
- Internal manual payroll management
Some business owners don’t believe their size or revenue justifies the need for an automated payroll system. Small businesses with a single location, or very few employees (less than 5) often complete payroll on-premises using a company computer with Excel spreadsheets or even in some cases, pen and paper. Believe it or not, in 2018, at least 25% of small businesses were still using manual methods (Clutch).
This system, while it allows for oversight and a single accountable party, is labor-intensive and creates a high risk for errors thanks to fluctuating tax rates, classifications and labor laws.
Additionally, it requires a great deal of time to manage. According to the National Small Business Association, 40% of small businesses spend more than 80 hours on federal taxes alone.
While this method saves you the cost of an accountant or a monthly fee, it offers few guarantees that you will not miss updates or credits. Also, you have no real support.
- Outsourced payroll, professionally managed with a bookkeeper or CPA
Outsourcing payroll to a bookkeeper or CPA can free up time you could dedicate to directly improving your company.
When you have an expert managing the numbers, you can almost breathe a sigh of relief. You will be more likely to receive tax credits for which your business is eligible; payroll will be handled by teams whose job it is to be up-to-date on tax information; and, the printing, distributing and depositing of funds is another party’s responsibility. But notice we said almost. This particular payroll system will cost you.
CPAs often charge by the hour and add on additional fees for additional services. There is also always a risk of identity theft and embezzlement. Additionally, if you choose to use this method, payroll will always be a separate function and not able to be integrated with onboarding or benefits.
- Outsourced payroll, managed by payroll agencies
Partnering with an established HR and payroll company that can handle everything might make the most sense for your business.
A payroll partner will handle all the deposits and tax filings and should cover any compliance or tax penalties if they occur (which they shouldn’t). They’ll also maintain accurate records that are available in case of an audit. A payroll company stays up-to-date on federal law and searches for any available tax credits or opportunities. They’ll help you manage compliance risk and keep accurate records in case of an audit.
Selecting a payroll agency or software provider will not necessarily mean a hands-off approach for your business. Depending on the service, you will have some oversight. If you do choose a payroll partner, make sure the company offers additional HR services like recruiting, onboarding and benefits. An HR partner who provides more than just payroll can save you countless hours of administrative work, so you can focus on what matters most—your people.
How do you choose a payroll system?
As you weigh the options, consider which approach is best for your team now and as you grow. Does your team need oversight? How much time can your HR operation dedicate to accurate reporting? When evaluating your existing payroll system, here are a few questions you should ask:
- Is my system prepared to handle changes in tax rates for federal, local and state taxes?
- Can we use our existing system to properly calculate overtime?
- How will we know or be alerted if we are eligible for tax credits?
- How does my payroll system prepare our business for reporting?
For more information about how to find the appropriate payroll service for your organization, check out our Buyer’s Guide.
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