Which do you need?

The benefits of payroll software outweigh its drawbacks. Here’s the difference between managing payroll by hand versus software and how you know when to make the switch.

Software helps small businesses work more efficiently, but it’s not always the best solution.

For example, I don’t use software to keep my personal budget. I created my own Microsoft Excel template that tracks my income, expenses, and investments instead of more powerful apps.

However, it’s hard to find a good reason to keep doing payroll by hand in an age where payroll software is affordable, secure, convenient, and accurate. Let’s talk about the difference between managing payroll by hand versus using software and when it’s time to make the switch.

When does it make sense to manage payroll manually?

Manual payroll means calculating and reducing employee paychecks without software or the help of a payroll specialist. Most business owners should leave the handling of numbers to software or an expert, but some small business owners prefer to handle payroll by hand to save money.

If your business has only a few employees and you’re familiar with payroll tax rules, you might be a good candidate to manage payroll manually. In any other scenario, it is better to enlist the help of software.

Here are the pros and cons of manually running payroll.

Benefits of manual payroll

  • Cost savings: Payroll software can run your small business from $20 to over $200 per month. Running payroll manually can save you money, but those cost savings are quickly wiped out if you have to call in a payroll professional at the eleventh hour to run payroll on time.
  • Intimate understanding of the process: You agree to review the tax books before manually running payroll. After a year of managing payroll, you’ll learn a lot about benefits, payroll taxes, and other compensation issues.

Disadvantages of manual payroll

  • Increased risk of error: Payroll requires an increased level of attention to detail. The risk of human error is higher for those who do payroll manually than for those who use payroll software.
  • No compliance backstop: You place a deep trust in yourself by doing a manual payroll. Getting the wrong tax withheld or wrongly exempting a social benefit from taxes can lead to costly problems when federal and state tax authorities come knocking at the door.
  • Weather: Managing payroll manually will almost certainly take longer than processing payroll using software. The software can calculate payroll taxes in seconds, and you’ll need at least a few hours if you’re careful.

When does it make sense to use payroll software?

Unless you were a payroll administrator in a past life, payroll software is a small business owner’s best bet for managing payroll accurately and without breaking the bank.

Even if your business has only one employee, consider the pros and cons of payroll software.

Benefits of payroll software

  • Time saving : Not everyone is like me and likes to talk about accounting, taxes and payroll. I respect that many business owners would rather spend their time doing other things. Payroll software speeds up the payroll process, allowing you to invest more time in other areas of your business.
  • Expert support: Most payroll solutions come with customer support that can help you resolve unfamiliar compensation issues, from wage garnishment to benefits taxation.
  • Tax Compliance: Payroll tax rates can change every year and it is sometimes difficult to keep up to date with any new local taxes that may apply to employee wages. You may sleep better at night knowing that the software is responsible for accurate payroll calculation.
  • Document management: The IRS, Social Security Administration (SSA), and Fair Labor Standards Act (FLSA) all have payroll record keeping requirements. Payroll software vendors are aware of these requirements and can help you securely and appropriately store the necessary documents.
  • Report generation: Lenders and investors can request payroll reports to account for employee compensation. Payroll software can generate payroll analysis reports in minutes.

Disadvantages of payroll software

  • Costs: Although free payroll software exists in Payroll4Free, most solutions cost money. Most operate on a software-as-a-service (SaaS) business model with monthly fees, and some charge an additional nominal fee to submit Form 941 quarterly.

When should I switch from manual payroll to software?

Consider these telltale signs that your small business is ready to move from manual payroll to a software-based system.

You have more than five employees

As you add employees, it becomes less justifiable to manage payroll by hand. Although Microsoft Excel is a powerful program for calculating and organizing gross salaries, it is not as good for accurately calculating payroll taxes. Manual payroll management becomes too laborious when you have more than a handful of employees.

You have a complicated payroll file

Suppose your business has two employees. For years, you’ve been comfortable calculating payroll using an Excel spreadsheet and keeping up to date with the latest payroll tax guidelines. You’re glad you saved hundreds of dollars in software subscription fees.

Then one day, you receive a letter asking you to garnish an employee’s salary. The letter explains how to calculate garnishment, but it makes your head spin. Without software that can guide you through the process, you run the risk of incorrectly entering the employee’s paycheque.

Payroll solutions are set up to handle garnishments and other complicated payroll issues. When you have questions, customer support can help you complete payroll on time.

You spend too much time on payroll

Small businesses are agile, able to change with their environment. As your business grows, you may find yourself with less time to spend on payroll management. Don’t compromise your payroll process to save time – invest in software instead.

Managing payroll isn’t one of those jobs that tolerates shortcuts, so don’t hesitate to switch to payroll software once you feel tempted to skip any part of the manual payroll process, especially the payroll reconciliation step.

Protect your business from exposure

When detected and corrected quickly, payroll errors shouldn’t worry you. But before you go out and run payroll without software, make sure a payroll professional helps you set up a payroll system.

However, perhaps the biggest reason to favor payroll software is to ensure that your business avoids making payroll mistakes in the first place. If you’re ready to worry less about errors and enjoy the many other benefits, consider the following list of The Ascent’s best payroll solutions:

  • OnPay: Designed for small businesses, OnPay does more than payroll. It includes tools for human resource management, tax reporting and multi-state payroll processing. OnPay is one of the easiest solutions to use and, combined with its affordable and transparent pricing, is a very attractive option for small businesses looking to implement a very comprehensive payroll solution. Check out our full OnPay review here.
  • QuickBooks Online Payroll: If you use QuickBooks Online to manage your business accounting, QuickBooks Online Payroll’s seamless integration will make it a very attractive option. Its tiered pricing model means you only pay for the features you need, while all tiers offer a good selection of standard features including: unlimited pay cycles, direct deposit, automated tax filing and a portal for employees. Read our full QuickBooks Online Payroll review here.
  • Patriot pay: We gave Patriot Payroll our “Best for New Users” award and it’s easy to see why. Patriot Payroll offers a free onboarding and onboarding service, during which its staff handles the initial setup, even entering your employee information and historical payroll data. Most users find Patriot very easy to use, and its full range of live support options allow users to quickly resolve any issues they may face. Click here to read our Patriot Payroll hands-on review.

About Irene J. O'Donnell

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