3 Signs That Your Business Should Switch to Payroll Software

Software helps small businesses work more efficiently, but it’s not the best solution in every case.

an open laptop computer sitting on top of a table: Accountant calculating payroll

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Accountant calculating payroll

For example, I don’t use software to keep my personal budget. I made my own Microsoft Excel template that tracks my income, spending, and investments in lieu of more high-powered applications.

However, it’s hard to find a good reason to keep doing payroll by hand in a time when payroll software is affordable, secure, convenient, and accurate. Let’s talk about the difference between running payroll by hand and using software and when it’s time to make the switch.

When does it make sense to run payroll by hand?

Manual payroll means calculating and cutting employee paychecks without software or a payroll specialist’s help. Most business owners should leave the number crunching to software or an expert, but some small business owners prefer to run payroll by hand to save money.

If your business has just a couple of employees, and you’re intimately familiar with payroll tax rules, you might be a good candidate for running payroll manually. In any other scenario, you’re better off enlisting software’s help.

Here are the pros and cons of running payroll manually.

Advantages of manual payroll

Cost savings: Payroll software can run your small business anywhere from $20 to upwards of $200 per month. Running payroll by hand can save you some cash, but those cost savings are swiftly wiped out if you need to bring in a payroll professional in the eleventh hour to make payroll on time.

Intimate understanding of the process: You’re committing to hitting the tax books before running payroll manually. After a year of running payroll, you’ll learn a lot about employee benefits, payroll taxes, and other compensation matters.

Disadvantages of manual payroll

Increased risk of error: Payroll requires a heightened level of attention to detail. The risk of human error is higher for those doing manual payroll compared to those who use payroll software.

No compliance backstops: You’re putting profound trust in yourself by doing manual payroll. Getting tax withholding wrong or incorrectly exempting a fringe benefit from taxes can lead to costly problems when federal and state tax authorities come knocking.

Time: Running payroll by hand will almost certainly take more time than processing payroll using software. Software can calculate payroll tax in seconds, and you’ll need at least a couple of hours if you’re careful.

When does it make sense to use payroll software?

Unless you were a payroll administrator in a previous life, payroll software is a small business owner’s best bet at running payroll accurately and without breaking the bank.

Even if your business has just one employee, consider the advantages and disadvantages of payroll software.

Advantages of payroll software

Time savings: Not everyone is like me and loves talking about accounting, taxes, and payroll. I respect that many business owners would rather spend their time doing other things. Payroll software speeds up the payroll process, letting you invest more time in other areas of your business.

Expert support: Most payroll solutions come with customer support that can help you navigate unfamiliar compensation issues, from wage garnishment to fringe benefit taxability.

Tax compliance: Payroll tax rates can change annually, and it’s sometimes hard to stay apprised of all the new local taxes that might apply to employee wages. You might sleep better at night knowing software is responsible for accurately calculating payroll.

Document management: The IRS, Social Security Administration (SSA), and Fair Labor Standards Act (FLSA) all have payroll recordkeeping requirements. Payroll software companies are familiar with these requirements and can help you securely and appropriately store necessary documents.

Report generation: Lenders and investors might ask for payroll reports to consider employee compensation. Payroll software can generate payroll analytics reports within minutes.

Disadvantages of payroll software

Costs: Though free payroll software exists in Payroll4Free, most solutions cost money. Most run on a Software as a Service (SaaS) business model with monthly fees, and some charge an extra nominal fee to submit Form 941 quarterly.

When should I switch from manual payroll to software?

Consider these telltale signs that your small business is ready to upgrade from manual payroll to a software system.

You have more than five employees

As you add employees, it becomes less justifiable to run payroll by hand. Though Microsoft Excel is a powerful program for calculating and organizing gross wages, it’s not as good for calculating payroll taxes accurately. Running payroll by hand becomes too laborious when you have more than a handful of employees.

You have a complicated payroll matter

Say your business has two employees. For years, you’ve been comfortable calculating payroll using an Excel spreadsheet, and you keep up with the latest payroll tax guidance. You’re happy having saved hundreds in software subscription fees.

Then one day, you receive a letter telling you to garnish an employee’s wages. The letter explains how to calculate the garnishment, but it’s making your head spin. Absent software that can walk you through the process, you risk incorrectly garnishing the employee’s paycheck.

Payroll solutions are set up to handle garnishment and other complicated payroll matters. When you have questions, customer support can help you to make payroll on time.

You’re spending too much time on payroll

Small businesses are agile, able to change with their environments. As your business grows, you might find yourself with less time to dedicate to running payroll. Don’t compromise your payroll process to save time — invest in software instead.

Running payroll is not one of those tasks that condones cutting corners, so don’t hesitate to switch to payroll software once you feel tempted to skip any part of the manual payroll process, especially the payroll reconciliation step.

Protect your business from exposure

When caught and remedied quickly, payroll errors shouldn’t cause concern. Perhaps the strongest reason for favoring payroll software, however, is to ensure that your business avoids making payroll errors in the first place.

Before going out and running payroll without software, make sure a payroll professional helps you set up a payroll system.

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