How To Choose Payroll Systems: Manual, Software, External

Processing payroll can be one of the most complex tasks facing an organization.  Besides simply paying your employees, you will need to file taxes, submit reports and process year-end data for tax-reporting purposes. Choosing any kind of business system can be difficult.  To determine the best payroll system for your company, consider the following points:

  1. What types of payroll systems are available? There are three basic types of payroll systems.
    • Manual payroll means that you, or another employee within your company, calculates the payroll each pay period entirely on paper.  You will need to calculate taxes, insurance, 401K, and any other applicable deductions in addition to each employee's actual earnings.  The advantage of using a manual system is that it is very inexpensive, with virtually no start-up costs.  The disadvantage is that whatever you save on start-up costs will probably be eaten up by the amount of time it takes to process payroll.  In addition, it's very easy to make mistakes when processing payroll manually, and the penalty for mistakes, especially mistakes in taxing, can be very costly. There are at least free payroll templates out there, but it still difficult to do manual payroll processing.
    • The second type of payroll system is computerized.  Many companies offer computer software that will assist you in processing payroll.  You will need to input information for each employee when he is hired, but after that, the software will calculate payroll taxes and other deductions automatically.  Most programs will also process W-2 forms for each employee at year-end, which can be a real time-saver.  The advantages of this type of payroll system are numerous - fewer potential mistakes and less time spent processing payroll.  In addition, employees can be trained to run the program more easily, Payroll calculationsso you won't need to depend on just one person to process payroll.  The disadvantages are that you still have to input each employee's hours manually, and the software has to be updated annually or whenever new tax laws go into effect.  There can also be additional charges if the software has to be configured specifically for your business.
    • The final type of payroll system is to use an external payroll service.  Companies such as ADP and Paychex will process your payroll for you, including submitting all necessary tax payments and generating year-end reports.  Although this is the most expensive type of payroll system, it can pay for itself in larger companies, which might otherwise have to hire a full-time employee dedicated to processing payroll.  A payroll service may also offer a direct-deposit option to your employees, which is very popular.  When you are researching payroll services, check to see what services they offer, and if the reports that they provide to you are helpful.  If not, see if they can customize their services to better suit your needs.  Another important consideration is to find a payroll service that is bonded.  This protects you from liability in the case of mishandled finances.  Check with any potential payroll services to be certain that they will pay any applicable penalties if they make mistakes in remitting tax payments, and that they can re-process payroll quickly if there are mistakes.  The main disadvantage to this system, besides the higher cost, is that security can be an issue if your payroll computer is on the same network as all of the other computers in your company.  To avoid this, you should have a computer which is used only for payroll that can go online without using the same connection as your other computers.  Also, keep in mind that you will still have to transmit employee payment information to the payroll service each pay period.
  2. How many employees do you have?  If you have fewer than ten employees and their hours stay basically the same from one pay period to the next, or they are salaried, it may be relatively easy to process payroll manually.  If your company has between ten and fifty employees, a payroll software package may work well for you, as long as there are relatively few complex issues involved.  If your company is large - fifty employees or more - you'll either want to hire an outside payroll service, or hire an employee strictly to process payroll.Payroll companies vary in the services they offer and the amount the cost - do your research to find the right company for you.
  3. What accounting software do you use?  If your current accounting software includes a payroll processing system, you may want to use it, because you can then integrate all of your financial information into one package.  When you consider this, think about how well the program meets your needs, and if it can be adapted to meet your future needs. 
  4. How complex is your payroll?  If your payroll is quite complex - for example, if you have many employees at different pay rates, and on different pay scales, possibly even with different insurance packages from which to choose, you may spend a lot of time processing payroll, and on trying to keep up with changes.  Such a task may be better suited to an external payroll service.  However, be certain that you understand what is included in your basic fee, and what is considered extra.  Some companies include only the minimally necessary steps in processing payroll, and everything else is an extra charge.  The best way to avoid this problem is to assemble a typical payroll for your company, then ask any potential payroll services to quote the job.

The key to determining an ideal payroll solution for your business is to be realistic about how much time and money you can devote to this task.  Also, consider whether or not you have an employee in your accounting or human resources department with the knowledge and time to dedicate to payroll.  If a payroll system isn't working for you, don't feel tied to it just because that's the way it's always been done.  It may take a few tries to find a great fit! Good luck in finding the best payroll system for your company!


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