What Is the Best Way to Do Payroll for Your Small Business?

Payroll can be one of the most complex back-office tasks you’ll need to deal with when running a small business. If you only have a handful of employees, you may choose to handle payroll on your own. 

However, as the business scales, you’ll likely want to consider other options. In this article, we’ll discuss the different options for ensuring that your employees are paid on time and accurately.

What Are the Options Available for Handling Payroll?

There are three main options to choose from when deciding how to administer payroll for your employees. If you are inclined toward math and have the time to do so, you may choose to calculate payroll on your own for your employees. This is referred to as the manual option.

Software solutions can provide an easy way to ensure that your employees are paid correctly. These solutions often require minimal effort on your part, and once the basics of an employee’s salary or wages are entered into the software, it can ensure that the appropriate amounts of taxes and benefit payments are withheld.

The final solution is outsourced payroll. Companies that choose to outsource their payroll benefit from a specified amount that they pay a provider to handle payroll entirely for them. 

Using outsourced payroll may make sense for companies that want to save money on salaries and other expenses related to hiring an on-site, dedicated payroll administrator.

What’s Involved with Manual Payroll Processing?

If you choose to handle your payroll processing manually, you’ll be responsible for hand-calculating employee paychecks. Businesses that have very few employees, or employ a few individuals on a seasonal basis, may benefit the most from manual payroll processing. 

Manual payroll processing is labor-intensive and requires careful attention to income tax withholding schedules. If your employees receive benefits, you’ll need to deduct the required amount of their benefits from their paychecks. 

In some cases, there may be other necessary deductions, such as those for wage garnishments or extra tax withholdings. 

Pros of Manual Payroll Processing

Probably the best benefit of processing payroll on your own is the cost savings. For companies that don’t have a lot of extra room for additional expenses, calculating payroll on your own may be a good solution. 

If you have experience calculating payroll or are accounting-minded, you may find it easy to make sure your employees are paid accurately.

Cons of Manual Payroll Processing

There are cons associated with calculating payroll on your own as well. First, it’s easy to make errors. Tax withholding amounts can be confusing, especially if your only guidance is the IRS website. Some states also require additional payroll tax withholding. This adds additional room for error to the whole process.

If you make mistakes in calculating wages or tax withholdings, you may find yourself with upset and disgruntled employees. This can reduce the efficiency of your business and potentially leave your company with a bad reputation.

In addition to the potential for errors, calculating payroll manually is incredibly time-consuming. As a business owner, you likely have other tasks to accomplish that can add greater value to your company.

How Does Payroll Software Work?

There are a variety of payroll software options on the market today. These options calculate the appropriate federal and state income tax withholdings for you. They’re also quite user-friendly. Even someone who doesn’t have much familiarity with accounting or payroll systems can generally use these payroll software options with ease.

With typical payroll software, you pay a small monthly fee to use the service. You input your employee details, including their salary or hourly wage information. Once the software has the information required, it can easily calculate the payroll for each employee.

Pros of Payroll Software

Payroll software eases the burden for employers who want to ensure that their employees are paid accurately with the correct amount withheld in deductions. It’s much less time-consuming than calculating payroll manually, and there are many available software options to choose from.

Cons of Payroll Software

The main con of payroll software is the expense. You’ll need to allocate a certain amount each month to pay for the solution that you choose. This can be hard for new start-ups that don’t have a lot of extra money to spare.

Another con is that you will still need to handle the payroll yourself or put an employee in charge of administering it. That means there’s still time spent on payroll that could be used for other tasks.

When Is Outsourcing Payroll Appropriate?

In some cases, outsourcing may be the best payroll solution for your business. While more expensive than handling payroll on your own or with software, outsourcing entirely removes the responsibility of processing payroll from you and your team. 

To get started, you’ll select a payroll processor who will handle the payroll process from end to end.

Pros of Outsourcing

Outsourcing payroll allows you and your staff to focus on the activities that add the most value to your company. Rather than spending your time on administrative work, you’ll pass that task to the outsourcing company. 

It also reduces the potential for payroll errors. Since companies that provide outsourced payroll solutions have staff who focus only on payroll, your company is able to harness their expertise without spending money on an on-site employee.

Cons of Outsourcing

Outsourcing is the most expensive option on this list. While you may pay less than $100 a month for a payroll software solution, outsourcing can cost several hundred dollars a month, or even more. 

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