Payroll Management : The Ultimate Guide

Payroll management encompasses the entire process of calculating employee hours, paying employees, withholding taxes and maintaining the financial documentation for your business.

From handling sensitive employee information to calculating taxes and depositing money into the bank accounts of your employees, payroll management can be complicated and fraught with liabilities. It’s important to understand the right way to manage your payroll so you’re compliant legally.

Why Managing Payroll Is Vital

Why Managing Payroll Is Vital

If you can’t run payroll then you can’t pay employees. Without employees, your business cannot function. Employees want to be paid on time and if you can’t manage payroll efficiently, then you could lose important members of your team and even have legal difficulties.

Here are the most important reasons that you need to manage payroll properly for your business:

  • Legal requirements. Filing payroll taxes carries its own unique set of rules and regulations from both the federal and state levels. If you don’t file on time, you could be subject to hefty fines or penalties. If you make a mistake with an employee’s pay and don’t fix it, again you are liable. It’s vitally important to stay as compliant as possible.
  • Employee retention. Superstar members of your team probably aren’t going to stick around if you can’t pay them correctly or on time. Strong employees can find work elsewhere, so it’s important to retain your team and make sure their pay is always done correctly and on time.
  • Employee performance. Beyond just keeping your employees, you want them to perform and do a good job. Even if you can retain them, failing to pay them on time or correctly can cause their performance to slip as they may become disinterested or look for new work.
  • Business finances. Failing to manage payroll properly can impact your finances negatively. Not only could you get fined, costing you money, but you could end up thinking you have more in your bank account than you do, leading to bank fees or bounced checks.

Payroll management is one of the most important administrative functions of your entire organization. If done correctly, it will largely go unnoticed, but if done incorrectly it can make it impossible to stay in business.

How To Manage Payroll

Managing payroll can be done in a number of different ways. The entire process involves collecting employee data and inputting it correctly into a file or document. You’ll have to calculate each paycheck for every pay period, making sure taxes are calculated correctly. The last step is making sure both your employees and the appropriate government agencies are paid on time correctly. Here is more information about how to process payroll.

There are three top ways to manage payroll:

1. Manual Processing

This is where you do all of the payroll calculations on your own and then submit any direct deposits or print any checks all by yourself. You’ll need to keep your own records and find a system for calculating every single payroll payment.

Here are some of the drawbacks to manual processing:

  • Amount of information. You need to make sure you always have access to the required information on every payroll you’ve ever processed.
  • Incorrect payments. The largest problem with manual payroll processing is making mistakes and giving incorrect payments to employees. This can damage employee trust and result in the loss of good employees.
  • Time. Processing payroll manually can take quite a bit of time that could be better spent running or growing your business.

The largest benefit of manual processing is the cost, as you don’t have to buy any software or pay someone else to run payroll. However, if you calculate what your own time is worth and how long it takes to process payroll, you may find that you aren’t saving money.

2. Payroll Software

There are many payroll software options on the market today that will handle most of the payroll process on your behalf. This can save time, be cost-efficient and ensure timely payments to both your employees and to the various government agencies collecting payroll taxes. Here are some of the most important things that payroll software does for you:

  • Calculate taxes and paycheck amounts. You don’t have to worry about accurate payments as long as you’ve entered the correct information at the beginning of the process. Adding the right employee information, such as whether they are paid a salary or hourly wage, combined with your pay period data will give the software what it needs to calculate all pay amounts accurately.
  • Pay taxes. Payroll software companies typically will pay all payroll taxes on your behalf. You don’t have to worry about spending tax dollars you are holding for the government. Instead, payroll software can withdraw the tax money at the same time as your employees’ pay and pay and file your taxes on time.
  • Pay employees automatically. Payroll software will deposit the money into your employees’ accounts per the payment schedule that you’ve created. All you have to do is process payroll each period and the rest is done for you.

Payroll software can be extremely affordable, costing from $40 per month plus $10 or less per employee. With all of the time, energy and potential liability involved in payroll, this is well worth the price.

3. Outsourced Payroll Service

The final option is a third-party payroll provider that handles everything for you. You’ll never have to worry about adding employee information into the database or making sure you process payroll on time in your software because the provider will handle all of it without you. Costs range from $40 per month and up plus additional fees per employee. Many companies will require you to contact them for a quote, as they will tailor their services for your unique needs.

This is the easiest way to manage your payroll because you don’t have to do anything but notify your payroll service of new employees and then make sure you have the funds in your bank account. This is the most hands-off approach, giving you time back to spend on growing or operating your business.

The primary drawback of this method of managing payroll is the cost, as it’s the most expensive option. There is also a lack of control in the process. Many businesses appreciate the touchpoint with their employees of managing the process and making sure they are the ones that deal with any issues that come up. Having a third party handle that could impact your business culture in a way you may not intend.

When To Choose Payroll Management Software

Many businesses decide to process payroll manually on their own when first starting out. While this doesn’t incur third-party costs, it can be difficult as your business must keep track of many different types of employment records when you start paying employees. These records include income tax withholding, Social Security tax and federal unemployment tax.

Keeping track of gross pay vs. net pay, making sure each is accurate and then paying all of the taxes to the appropriate government entity is at least a full-time job all by itself. The cost of paying an employee to process this may wind up being more expensive than using another option.

You may opt to use payroll software or service if you are looking to save time or if you’re concerned about the number of regulations that are involved with the payroll management process. When you have more than a few employees, the payroll process becomes very difficult to manage on your own. We recommend using payroll software if you are processing payroll for anyone other than yourself.

Best Payroll Services and Software

While there are many payroll services and software options on the market, we’ve extensively studied many of the market leaders and isolated our favorites. It can be hard to define the difference between payroll software and services, but we’re defining a payroll service as a third party that handles the entire payroll process for you. Many payroll software providers perform services as part of their software offering, such as processing tax payments for you.


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