What are the benefits of using payroll software?
Is payroll software really worth the cost? After all, if you can do payroll for free, shouldn't you?
If you genuinely enjoy the math and time involved with doing payroll manually, then hold on to that joy.
But if you're looking for an out, it's time to start considering payroll software for your small business. Not only does it save you time, but in the long run, an online payroll provider can save you some serious money.
What does small business payroll software include?
Instead of calculating your employees' wages and taxes by hand and filling out complicated tax forms, payroll software like Gusto automates all that hard work for you.
There's a whole bunch of stuff that needs to happen when you run payroll. Stuff like:
- Calculating wages and overtime pay
- Keeping track of sick and vacation pay
- Calculating and withholding taxes from your employees' paychecks
- Sending tax payments to federal, state, and local agencies
- Filing quarterly forms on time
- Filing annual forms on time
- Following state-by-state payroll requirements
- Managing employee benefits
A good payroll service takes care of all of these things for you. Even better? It takes care of this stuff in the background, which means you aren't bothered every time there's a form to file or payment to send.
With payroll software, you have one job — to run payroll. The software does the rest.
But isn't doing payroll manually way cheaper?
Not necessarily.
Sure, when you DIY your payroll, you don’t have the cost of payroll processing, but the trade-off is time. No matter how simple your payroll is, there are always wages to calculate, taxes to withhold, and forms to file.
The real question isn't about the cost of the software, it's about the value of your time.
Let's say it takes you three hours a month to do payroll for three employees. And let's say it costs $57 a month for payroll software. Is your time worth more than $19 ($57/3) an hour?
Can you generate income for your business in those three hours, instead?
If you answered yes, then it costs you more to do payroll by hand.
What if you hire someone to do payroll for you? Well, if you pay that person more than $19 per hour, you're losing money.
“My favorite thing about Gusto is the fact that it takes a lot of tedious and time-consuming payroll work off my plate and allows me to focus on my business.”
How payroll software saves you time and money
Maybe you read the example above and thought, “Nope! It's still more cost-effective for me to do payroll manually.” It could seem like that, but there are other ways payroll software saves you money that aren't all about time.
Here are the top benefits of using payroll software at your small business.
1. Accurate calculations
There's no way around it. Payroll involves math, and math is prone to human error. Luckily, your payroll software is programmed not to make mistakes.
What happens if you make a payroll calculation error? The best-case scenario is that you catch it early and make a correction on the next paycheck (which means more work for you). The worst-case scenario is that you don't find it and get sued by a disgruntled employee.
Even if your employee doesn't sue you, a payroll error could result in having to pay unpaid payroll taxes, plus interest and underpayment penalties. Don't put yourself in that spot.
2. On-time payroll tax payments and filings
Running payroll involves two pretty important requirements:
- Sending the government your tax deposits on time
- Filing the right payroll tax forms by their deadlines
When it comes to making federal tax deposits, there are three payment schedules for employers:
- Quarterly
- Monthly
- Semi-weekly
The semi-weekly deposit schedule is based on the day payroll is paid. So if payroll is paid on Monday, your deposit schedule is different than if you pay employees on Friday.
Also, you can't just pick one of these schedules — your schedule is determined by your payroll history. And keep in mind, this is only the federal payroll tax deposit schedule. Each state has its own rules.
What happens if you don't pay your federal taxes on time or on the right schedule? You pay a penalty on the unpaid taxes.
Here's a breakdown of the IRS penalties for unpaid payroll taxes:
| Number of days late | Penalty |
|---|---|
| 1-5 | 2% |
| 6-15 | 5% |
| 16+ | 10% |
| More than 10 days after the first IRS bill | 15% |
Let's say you have $5,000 in payroll tax deposits to make. You get busy and forget the deadline. Three weeks go by, and suddenly you remember to pay your payroll taxes. In addition to paying $5,000, you now owe $500 in penalties.
That's not all. You'll also have to pay interest on unpaid tax deposits, which range between 3% to 6%.
Okay, that's your payroll tax payments. What about the forms you're required to file? If you file your Form 940 or Form 941 late, the IRS also imposes a penalty.
The penalty for filing your forms late is 5% of the total tax due for each month or partial month the return is late. The maximum penalty is 25% of the tax due.
And if you don't pay the taxes you owe with Form 940 or 941, the IRS charges you a failure-to-pay penalty, which is 0.5% of the unpaid tax amount for each month the tax is late.
The bottom line is that missing even one payroll deposit or filing can set you back hundreds, or even thousands, of dollars. Payroll software figures out your federal and state payroll tax deposit schedule, pays your deposits on time, and files your payroll tax forms before the deadline.
“They do our medical, dental, vision, and life insurance. It’s so painless, it’s like going to the spa, and we have great options and rates even though we have a super small team.”
3. Legal compliance
The challenging thing about payroll is that there are federal and state payroll laws that you need to follow. From minimum wage requirements to pay date schedules and state and local tax withholding rates, every state (and sometimes city and county) has its own set of laws.
When you DIY your payroll, it's on you to learn the laws and stay on top of changes. Accidentally using the wrong tax rate could result in underpayment penalties. If you violate federal and state labor laws, your employees could report you to your state's employment agency — or even sue you.
Payroll software automatically updates with the latest tax rates, so you don't have to spend your Saturday night sifting through state tax laws.
With an online payroll service, your employees can also update their personal information, like their filing status, withholding allowance, and direct deposit accounts themselves. This means you don't risk forgetting to make changes that could impact your payroll taxes.
4. Accounting and other software integrations
Most payroll providers integrate with accounting software like Xero and QuickBooks Online. With an accounting integration, the software syncs your payroll data directly into your accounting program.
On the most basic level, it will sync:
- Regular wages
- Employer taxes
- Reimbursements
- Vacation pay
- Sick pay
- Overtime
- Bonuses
- Benefits liabilities
What does this mean for you, the small business owner? It means that you don't have to manually calculate the splits between wages, taxes, and liabilities.
What does this mean for your accountant or bookkeeper? It means that your bookkeeper spends less time processing payroll data, which saves you money.
Payroll software also integrates with other types of software, like time and expense tracking programs. These integrations dramatically cut down the time it takes you (or your accountant) to prepare payroll, and it decreases the chance of errors.
Leaving the world of manual payroll may be daunting at first, but once you experience the benefits of using payroll software, you'll never go back. Every accurate payroll run and on-time tax deposit keeps money in your pocket — money that you can invest right back into your business
