How to Choose the Best Payroll Software for Your Small Business
If you’re shopping for new payroll software, here are the requirements you should consider, and the features and functionality you may want to look for.
Your Responsibilities as an Employer
Whether you use a payroll service or process payroll in-house, you’re ultimately responsible for timely and accurate tax and reporting compliance. Here are some of the factors that you need to handle:
- Form I-9 – Employers must have all new employees fill out an I-9 form within three days of beginning employment. Once completed, the form must be retained for three years after the date of hire or for one year after the employee is terminated, whichever is later.
- New Hire Forms – All new employees must be reported to your designated state agency soon after they’re hired. The deadlines and forms needed vary by state. The state then forwards this information to a corresponding federal agency.
- State and Local Payroll Taxes – For states that have a tax, you will need to withhold state taxes as well as any local taxes, if applicable. You’ll also need to file a quarterly tax and wage report with the state, so you must check with the appropriate state agency for filing due dates.
- State Unemployment Tax – You’re also responsible for employer contributions to state unemployment funds (also known as SUTA or SUI). These taxes are not withheld from employee checks. You’ll have to check with your state agency for filing dates and relevant forms.
- Federal Tax Filing and Deposits – Federal tax deposits are made separately from the tax returns. Tax deposit frequency is determined by the IRS. Federal returns are typically filed quarterly, though very small businesses can often file their return annually.
- FICA – The Federal Insurance Contributions Act requires employers to withhold two taxes, a 6.2 percent Social Security tax and a 1.45 percent Medicare tax. For higher earning employees, an additional 0.9 percent Medicare tax is assessed and withheld from their checks for any wages over $200,000 in a given tax year. Both FICA and Federal taxes are reported on IRS Form 941.
- FUTA (Federal Unemployment Taxes) – Along with state unemployment tax, you’re also responsible for paying Federal unemployment tax on the first $7,000 in wages paid for each employee.
- Health Insurance, 401(k), and Other Deductions – If your employees are paying a portion of their benefits, such as health insurance, or contribute to a 401(k) or other retirement plan, you’re responsible for withholding the correct amount and remitting payment to the appropriate vendor on a timely basis.
- Year-End Forms – In addition, you’ll need to provide your employees with W-2s at year-end. You’ll also have to provide a 1099 form to any non-employee contractor who was paid more than $600.00 during the calendar year.
Different payroll software companies offer most (if not all) of these services, while others require you to do some of the work in-house. Still, no matter who is processing the returns and remitting taxes, keep in mind that it’s up to you that they’re completed accurately and in a timely manner.
If you’ve recently made the decision to process payroll in house, your next decision becomes more important – deciding which payroll software best fits your needs. Here are just a few of the factors that you should consider before deciding.
Getting Payroll Taxes Right
As a business owner, it’s your responsibility to ensure that the appropriate taxes are withheld from their employees’ checks each pay period. But your responsibility doesn’t stop there. In addition to withholding both federal and state (if applicable) taxes, along with any city, county, or municipal taxes, employers must remit a portion of both Social Security and Medicare for their employees. Reconciliation reports must be processed and filed, and the appropriate amount of withholding remitted on a timely basis. It’s a time-consuming process and one of the main reasons why business owners turn to payroll software applications. Be sure that the software you’re considering can handle this complex task!
10 More Features You Should Consider
There are certainly a lot of payroll choices available on the market today, but don’t assume that they’re created equal. While they can all handle the basics, most small businesses will require a variety of features and functionality in the payroll software application they ultimately purchase. Here are a few things that your payroll system should be able to do:
1. Tax Updates
To avoid inaccurate deductions and erroneous tax remittance, ensure that your payroll software is updated with the most current tax rates. Cloud-based payroll software typically gets updated automatically, so this is something to consider.
2. Direct Deposit Capabilities
More than 3 out of 4 employees in the U.S. are currently paid by direct deposit. Offering direct deposit is convenient for employers as well, eliminating the need to process checks, track outstanding checks, and voiding missing checks to replace them.
3. Ability to Handle Both Salaried and Hourly Pay Types
While hourly and salaried pay is typically covered in most payroll systems, it doesn’t hurt to be sure. Pay particularly close attention to whether the payroll product can handle a combination of the two for the same employee, as well as multiple pay rates per employee.
4. Can Also Handle Other Pay Types
This can include tips, commission payments, expense reimbursements, bonuses, and manual check processing. Make sure your payroll software is appropriate for your business type, because payroll forms and calculations are not the same for every business.
5. Processes Multiple Types of Deductions
These include medical, dental, 401(k), and any other supplemental benefits you may offer your employees. The ability to define each deduction is important; for example, you want to be able to specify deductions made from an employee’s check, and not have the deduction lumped under a single category.
6. Tracks Both Vacation and PTO
This is particularly important to employees and should be important to you as well. Remember, if employees are not provided this information, they will be calling, emailing, and knocking on your office door to get their vacation and PTO balances.
7. Has an Employee Portal
This is another area that can save you a lot of time. If your employees have access to an employee portal, they can log in and access their most recent pay stub, check their vacation and PTO balance, and manage their current personal information, such as updating their address or other contact information. They can even access end-of-year forms such as W-2s.
8. Offers Mobile Access
If you travel frequently, you may need to process payroll or access other information from your mobile device. Plus, it might be helpful for employees to have mobile access, especially if they work remotely.
9. Includes HR Functionality
If you have an HR employee on-site, this may not be necessary, but for small businesses without in-office HR representation, access to HR-related functions such as state and federal employment laws, annual review templates, and a set onboarding process can be important. Although some payroll products don’t offer HR functionality, it’s certainly a bonus if included.
10. Can Process Contractor Payments
While most of your payroll will be processed for employees, you’ll likely have to pay some 1099 contractors as well. Due to this, you should determine if your payroll technology provider offers both options. If they do, you should also find out if their software can process the year-end 1099 for each contractor that has been paid.
Making Sure Your Payroll Software Fits Your Back Office — and Your Budget
There are still a few more questions you should ask before signing a contract. Once you know all the ins and outs, you should be able to make the right choice:
Cloud or Desktop?
While many small business owners like the security that comes with using desktop payroll software, remember if your desktop system isn’t secure, then neither is your payroll data. Cloud-based payroll software typically offers secure encryption using SSL certificates, keeping employee data confidential. If you’re still on the fence, keep in mind that having a payroll system that can be utilized from any location makes cloud-based payroll the clear winner. As a bonus, cloud-based applications typically offer multiple login options, making it easy for your accountant to access payroll data if necessary.
Does Your Payroll Integrate with Other Software Applications?
There are numerous software products on the market that offer an integrated payroll application, although that may not be the best solution for your needs. Ideally, you’ll want to have a payroll product that offers integration with popular accounting applications such as QuickBooks or Xero, which will reduce or eliminate the need to enter data into two separate systems.
But integration with your favorite accounting software isn’t the only factor that you should be concerned with. If you operate a retail store, own or service business, or run a nonprofit, you’re likely using a time entry system to track employee hours, so payroll software that integrates with time tracking systems can be useful. You’ll also likely be tracking information such as gratuities, multiple hourly rates, and hours worked by program, project, or grant, so it’s important to check with payroll software vendors to see if this is offered.
Can You Do Multiple Pay Runs?
One of the features that your payroll software should provide is the ability to process payroll on your schedule, whether it’s weekly, bi-weekly, bi-monthly, or monthly, with extra pay runs thrown in if necessary. You’ll also want to check to see how early you have to run payroll in order to pay your employees on time. This can vary, so it’s especially important in order for direct deposit data to be processed and transmitted on a timely basis to ensure your employees are paid on time.
What Does It Really Cost?
Payroll software, perhaps more so than other types of technology, can be confusing when it comes to pricing. There is typically a flat fee paid each month, in addition to costs per employee or per check fee assessed for each payroll that’s run. Be sure to check closely or ask the vendor if there are additional charges for direct deposit, debit cards, W-2 or 1099 processing. There may also be additional fees assessed if you have an extra pay run. You’ll want to consider all associated costs prior to making a final decision.
Is There Good Product Support?
Good product support is one of the most important features to consider when choosing software, and payroll is no exception. Be sure you know the answers to the following questions before you purchase payroll software:
- Is product support included in the price?
- What are the hours that support is available?
- Do support personnel have payroll experience?
- What forms of support are available (telephone, email, live chat)?
- Are there resources that you can utilize to find answers to common questions?
- Is data migration from another payroll system available and is there a cost?
Finally, Check Out What Other People Say
Once you find a software product that you think is a good fit, take the time to gather some additional information on the product and its performance. Be sure to ask the vendor for some references that you can contact, look for product reviews on the Internet, and visit a product forum. Another place to visit is the vendor’s Facebook or Twitter page, which is where customers frequently go to complain about product performance. In addition, you should inquire with the vendor about a money back guarantee or if there’s an option to try the product out for a period before you decide. If you’re actively working with a CPA or accountant, you can also ask them what they think about the product prior to purchasing.
There are a lot of aspects to consider when looking for a payroll software application. Ease of use, cost, support options, and even the ability to grow with your company are all things that should be considered prior to purchasing a payroll software product. Good luck!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.