The Definitive Guide to
Employees are the lifeblood of every business. And businesses need to pay their staff. But manually processing payroll can be expensive and time-consuming. This is where payroll software comes in.
However, payroll solutions are typically not one-size-fits-all packages.
This guide will walk you through the different types of payroll solutions, their features, benefits and challenges. We’ll also provide advice on what companies should look for when purchasing payroll software.
Payroll is more than just cutting employees a check.
There are payroll taxes to withhold (on the federal, state and local level, as well as Social Security and Medicare), deductions for specific benefits (e.g. health insurance or retirement contributions) and even wage garnishment (in the case of child support).
Another factor to consider is if work is not being done by employees, but contractors (e.g. freelancers or temp/staffing agencies). Payroll administrators would also need to factor in employee exemption (wages or salaries) plus bonuses and any pay raises. And finally, a multinational corporation would need to factor in taxes, payment and labor laws for their employees who reside in another country.
The payroll process tend to be done in biweekly increments. However, some businesses pay their employees weekly or monthly. Companies have the option to either pay their employees manually via checks or directly deposit paychecks in their employees’ bank accounts.
Who typically handles payroll? It varies by company size.
- Larger companies have a dedicated in-house Payroll Administrator.
- In smaller companies, there may be an employee that handles additional Accounting or HR tasks aside from payroll.
- If a company is extremely small (less than 10-20 employees), the responsibility falls to the business owner. The owner may outsource the payroll function to an outside accountant/bookkeeper or a third-party payroll provider.
Payroll vs. Accounting Software
We also want to note that payroll software and accounting software tends to overlap. As accounting software focuses on all income and expenses of the business (including taxes and employee pay), payroll management is included as a feature, either as standard or an add-on. Examples of payroll management features include payroll processing, withholding and paying taxes, and issuing paychecks.
Some businesses may prefer to process payroll via their accounting software, if offered. However, the payroll function may not include all features of a dedicated payroll solution (e.g. tracking benefits or time & attendance). And there is some accounting software that doesn’t include payroll management.
Payroll: Outsourcing or In-House?
Some businesses tend to outsource the payroll function to a third-party company.
One reason would be that the company is too small and there is no dedicated payroll administrator, so the business owner or his/her accountant would have the responsibility. Another reason is to eliminate the expense of an in-house administrator or payroll software. And finally, another reason to outsource payroll is because of the complex payroll tax codes and their annual changes.
However, outsourcing payroll does have its challenges: services can cost more than payroll software, there is a risk of mistakes in the employee’s paycheck, and businesses can be unsure if their employees’ personal information is secure.
There is a new trend emerging in payroll – companies are beginning to offer hybrid payroll solutions, which combines payroll software (available in the cloud) and payroll outsourcing.
This is especially beneficial for small businesses when they still want some control over payroll data but not the headaches of fully running payroll and ensuring tax compliance. One example is Patriot Software. Its Full Service Payroll package allows the business to process payroll straight from the software while Patriot handles the tax withholdings and ensures proper tax compliance.
This trend is expected to continue growing in the next few years – IHS Technology forecasted a $5.25 billion market growth by 2018.
For some businesses, outsourcing payroll makes sense. But other companies may prefer to handle payroll in-house with a payroll system. More information on payroll systems follows this section.
Types of Payroll Software
Payroll software tends to be targeted toward company size – there is no one-size-fits-all solution. Some vendors may only offer solutions available just for small businesses or large enterprises, while others offer a range of solutions intended for specific company types.
Here are the breakdowns of software by business types:
- Intended for smaller businesses (less than 50 employees)
- Intended for medium-sized businesses (50 to 100 employees)
- Intended for larger companies (100+ employees, multiple locations, locations in different countries, etc)
Payroll Software Features
Most payroll software offers basic payroll features (e.g. payroll processing, printing checks/direct deposits, tax management, etc).
However, depending on the software, some features may be standard, while others may be add-ons or not offered at all. Below, we’ve listed the most common features of payroll software:
Payroll processing – This feature automatically calculates the employee’s gross pay based on hours worked (this information is gathered either from a time & attendance module or it’s manually entered from a time sheet), as well as any deductions for taxes, insurance, retirement contributions, etc. It also takes in consideration any bonuses, raises or additional pay.
Tax management – The tax management feature automatically calculates the federal, state, local and other (Social Security and Medicare) tax that is deducted from each employee’s paycheck. It also automatically updates any tax code changes and alerts the user of these changes.
Tax forms preparations – At the end of each year (or quarter, depending on the business), employers need to report their employees’ withholdings and file other taxes to the IRS. Payroll software helps users file tax forms by preparing them – the users can either print them out or send them electronically. Payroll also prepares W2, W4 or 1099 forms for employees and contractors.
Time & Attendance management – This feature records the time the employees work. Employees can clock in via this system (if they’re hourly) or via a manual time clock (time cards data can be manually entered into payroll). Salaried employees can fill out either an electronic or manual time sheet. This feature also keeps track of vacation and sick time. Some payroll systems have the time & attendance feature built in, but others may require integration with an attendance module.
Benefits management – Benefits management can either be a built-in feature or a separate module, depending on the software. Employers can keep track of benefits offered, such as insurance, retirement, vacation/sick, and other benefits.
Ability to print checks or directly deposit paychecks – Direct deposit is a common feature with payroll, and many employers take advantage of it. However, payroll systems also have the ability to print or electronically send paychecks. In some cases, employers have the option to provide employee pay in the form of a pay card (similar to a debit or credit card).
Reporting – Many payroll software provides reporting functionality, such as gross-to-net payroll register, compensation analysis, tax reports, deduction analysis and more. Reporting templates are typically offered; however, the user can create custom reports.
Employee portal to view pay history/current pay stubs – This feature is becoming more common in payroll software. The self-service portal can be accessed via the Web browser or even as a mobile app (e.g Intuit’s iPhone app).
Ability to integrate with accounting or other HR systems – Most payroll software can integrate with another system, such as an accounting software or an HRMS. Users may also have separate modules for benefits and time & attendance that can integrate with payroll systems.
Mobile functionality – This is another feature that is becoming more common in payroll systems. Not only can employees view their paycheck on their mobile device, employers can also run payroll from their smartphones or tablets.
Benefits of Payroll Systems
Using payroll software includes several benefits, such as:
Ensured accuracy with employees’ paychecks: By using payroll systems, payroll administrators won’t need to worry about inaccuracies with employees’ paychecks as there is a reduced risks of mistakes.
Saves more time than manual payroll: If an administrator has other tasks, he or she won’t have a lot of time to process payroll, especially in biweekly increments. And manually calculating taxes and other deductions can be a time-consuming headache. In many payroll solutions, the user just needs to enter the number of hours the employee worked (and other information from a timesheet) and the software takes care of the rest.
Company saves money on outsourcing the payroll function: Depending on the payroll provider, payroll outsourcing tend to be expensive. Companies save expenses by having a dedicated in-house payroll solution. And more solutions are offered in the cloud as a subscription basis – companies will only need to pay a monthly or yearly subscription fee.
Fewer worries about security with employee personal information with 3rd party processing firms: When using an outside company for processing payroll, there is always a risk that employees’ personal information can be compromised. It can be the case even with due diligence in researching companies and if the company has the most secure server or software.
Reduced risk of non-compliance with payroll taxes/IRS: It is difficult and time consuming for companies to keep up with tax codes and other IRS changes, especially as they change yearly or even quarterly. Many payroll software can automatically make tax updates and then notify users of these updates.
Challenges of Payroll Solutions
Payroll systems, while beneficial, come with challenges, including:
Getting buy-in from top executives: Getting buy-in from top executives can be a challenge, especially if they prefer outsourcing payroll versus having it in house. Or if there are other HR tasks that need automation and it would make sense to purchase an HRMS rather than a dedicated payroll system.
Getting buy-in from IT: Another challenge is getting buy-in from the IT staff, as they’ll have concerns on security and software hosting. IT may feel they don’t have enough resources to host the solution on-premised, so having the vendor host the solution is better. Or IT would rather the software be on-premised for security reasons, so cloud solutions, having a cloud solution may not be a good choice.
Lacking the features a company is looking for: This may be a challenge more for small businesses as solutions targeted to that audience may not include every payroll feature as is typical for solutions aimed at larger businesses. Also, other HR functions (i.e. time and attendance management or benefits management) may either be optional add-ons or not offered at all.
Lack of integration with existing systems: Having a payroll solution integrate with a business’ existing systems (i.e. accounting or HRMS) is important so that all the data is in one place. And users don’t want to have to manually enter data. However, not all vendors offer this.
Buying a Payroll Solution: What To Look For?
Before purchasing a payroll solution, it’s important to figure out what features you’ll need. You’ll also want to figure out if a dedicated payroll solution works for you or if an HRMS is a better bet. It’s a good idea to have a checklist with your requirements ready before looking at vendors.
Be sure to consider these key factors before making a purchasing decision:
Cost – Payroll software is offered at many different price points. When comparing prices from different vendors, be sure to take the desired features and various deployment methods into account. Web-based solutions are often cheaper than on-premise software. It’s also important to know what’s included in the base price for the solution. Some vendors charge extra for certain features. Others offer implementation, support and training at an additional cost. Keep this in mind when asking for a price quote.
Scalability – Do you envision hiring more employees? Or are you a large organization with employees in multiple locations? Will you have more than one person processing payroll? If so, you’ll need a solution that has the ability to scale up or down.
Ability to work with existing systems – It’s important to find out whether the software can integrate with existing systems (e.g. accounting systems or employee databases), especially if it’s an on-premise solution. You’ll also want to make sure that data from any existing system (such as employee wages and salary) can be automatically transferred to the new solution.
Input from users – All affected parties need to buy-in to the new payroll solution, including top executives, HR and IT. One way to do that is get them involved in choosing the system – for example, have them participate in software demonstrations.
Demo of the solution – Getting a demonstration of the solution can help you see how it works – and how it can fit into your company’s operations. As another way to test the software, some vendors offer a free trial before purchase (typically for 30 days).
Training and support during and after solution implementation – Know all the details about training options during the implementation process. Can the solution be easily used by non-technical employees? If not, does the vendor offer additional training? Choose a vendor that can provide training at your convenience, if possible – for example, having a rep conduct training sessions for multiple users onsite. Also, make sure the vendor provides support after the software is deployed, such as 24/7 tech or customer service support on the phone or Internet. Along with investigating support and training options, be sure to ask about any security procedures (e.g., how the information is kept secure), especially if the vendor hosts the solution.
Input from the vendor’s current or past customers – It’s important to get references from a vendor’s existing or previous clients. The vendor will give you the names of clients with good experiences, but ask for companies that have similar needs to yours (e.g., businesses with under 50 employees or companies with employees in multiple locations). When contacting the reference, ask if there have been any issues with the vendor or the solution. You’ll want to get input on not just the positive experiences, but any issues as well.
Please check our payroll reviews page to find the right system for your needs.
Top Payroll Software Solutions
The HR technology space is a rapidly growing market with hundreds of vendors to choose from.
As vendors compete for clients, they continually add revolutionary features and improve customer satisfaction. Choosing one is no easy task.
To narrow down your search, we’ve listed and profiled some of the most popular payroll solutions: