Small Businesses Relying on Online Payroll Services
Today, online payroll software is the payroll system of choice for small business owners. It’s affordable, easy-to-use, and can grow with your business.
Accurately Pay Employees and Deduct Payroll Taxes With Online Payroll
The first and most important advantage of online payroll is being able to accurately pay your employees. Both employees and employers can enter hours into the software. You provide payroll information about each employee – like their wage, salary, overtime rate, and other unique data. Then, the software calculates payroll taxes and deducts those from the paycheck.
Payroll taxes vary from state to state and payroll software is guaranteed to be accurate no matter where you are (and yes, payroll software is available in many countries outside the United States as well).
How to process payroll with a payroll service:
Just like with the DIY option above, you need to have all your employees complete a Form W-4 and find or register for Employer Identification Numbers.
Step 1: Choose a full-service payroll provider. If you’re not sure how to do payroll yourself, use payroll software that reduces the risk of errors or fines. Many payroll processing services, like Square Payroll, handle your payroll taxes, filings, new hire reporting for you, and allow you to complete payroll online. Sign up takes minutes — so you can quickly start doing your own payroll the same day you sign up.
Step 2: Add your employees. You need to set up your employees before you process their payroll. Adding employees you’re paying for the first time is generally quicker; if you’re switching to a new payroll provider, then you also need to add your current employees’ year-to-date payroll information. Either way, you generally need to enter employee names, addresses, Social Security numbers, and tax withholding information. If you’re using Square Payroll and would like to pay employees using direct deposit, you can just enter your employees’ names and email addresses so they can enter their personal information themselves.
Step 3: Track hours worked and import them. The U.S. Department of Labor requires employers to keep track of wage records such as timecards for up to two years. Certain states may have longer retention requirements; be sure to check the specific requirements in your state. You can track time using your Square Point of Sale and import the timecards to payroll.
Manually do calculations
When you manually run payroll, you have full control over your payroll. You know when and how your payroll is completed. But doing payroll yourself likely means you don’t have someone to check your calculations. Doing payroll manually has an increased chance of errors—and errors are often followed by fines.
Doing payroll by hand also takes a lot of time. You have to do all the calculations, distribute wages, and file taxes. You could spend a lot of time working on payroll instead of working on your business.
There are many steps to follow for manual payroll:
- Gather information
- Find all business information related to payroll, such as your EIN and tax rates.
- Collect employee information, such as pay rate and withholding information (e.g., Form W-4).
- Track time
- Use an attendance management method to track employee time. Or, you could have employees track their own time.
- Calculate payroll
- At the end of each pay period, use employee time cards and the rate of pay to calculate wages.
- Make sure you include all types of compensation, including any tips and overtime for the pay period.
- Subtract deductions
- Begin by subtracting pre-tax deductions.
- Then, deduct employment taxes.
- Finally, withhold post-tax deductions.
- Pay employees
- Distribute paychecks to employees using your designated method. You can pay employees with checks, direct deposits, or pay cards.
- Pay taxes
- You will periodically have to file and remit employment taxes. How often you do this depends on your depositing schedule and form due dates.
The 5 Best Payroll Options for Small Businesses
Did you know that 1 in every 3 small business owners gets penalized by the IRS for payroll errors?
Those fees and fines add up. When you add on the extra time and energy of figuring out the complicated payroll system, it suddenly doesn’t seem like a great place to cut costs. That’s why many small business owners choose to pay for a payroll service instead. That way, you won’t need to worry about legal mistakes, clerical errors, or wasted time.
Here are five of the best payroll options for small businesses:
- Intuit Payroll
Looking for the barebones when it comes to payroll services? Or do you want a fully-automated, everything-but-the-kitchen-sink payroll service instead? No matter where you fall on that spectrum, Intuit Payroll has an option for you.
Intuit Basic, for $20/month plus $2 per employee/month, will run your payroll instantly and calculate your taxes (but won’t go as far as filing those taxes for you). Their most popular package is called Enhanced, $31.20/month, which adds tax form completion, filing, and payment on top of that. And finally, their Full Service option will run payroll entirely, transfer data from other payroll services, and guarantee its accuracy — for just $79/month.
OnPay doesn’t have all the tools and add-ons that Intuit offers, but in exchange, it provides a simple pricing model with the straightforward payroll necessities that especially small small businesses need.
For $47.95 per month, you get up to 10 employees’ worth of unlimited pay runs, tax filings and deposits in one state (with additional states running you extra), and check printing. It’s an easy, quick, mobile-friendly system that doesn’t require a steep learning curve.
Gusto, previously known as ZenPayroll, is an intuitive payroll service for any sort of small business. PC Magazine named Gusto its payroll service of choice for a reason: after its one-month free trial ends, Gusto costs only $39/month, plus $6 per month per employee. That includes benefits planning, direct deposit and check services, and more.
While it has an undisclosed price, Namely offers a full suite of payroll and HR tools to help you cut down on wasted time. It will automatically carry out benefits deductions, pay and file all of your payroll taxes, handle year-end reporting and time-tracking, ensure your small business is compliant with regulations, and give employees access to their paycheck histories.
Like Intuit, Sage also offers different payroll packages depending on how big your small business is. If 10 or fewer employees, Sage Payroll Essentials comes in at the low price of $49.95/month. (For comparison, Intuit’s Enhanced plan would run you around the same price with fewer features.)
10 Steps to Setting Up a Payroll System
Here are 10 steps to help you set up a payroll system for your small business.
- Obtain an Employer Identification Number (EIN)
Before hiring employees, you need to get an employment identification number (EIN) from the IRS. The EIN is often referred to as an Employer Tax ID or as Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS. In addition, the EIN is necessary when reporting information about your employees to state agencies. You can apply for an EIN online or contact the IRS directly.
- Check Whether You Need State/Local IDs
Some state/local governments require businesses to obtain ID numbers in order to process taxes.
- Independent Contractor or Employee
Know the Difference. Be clear on the distinction between an independent contractor and an employee. In legal terms, the line between the two is not always clear and it affects how you withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes.
- Take Care of Employee Paperwork
New employees must fill out Federal Income Tax Withholding Form W-4. Your employee must complete the form and return it to you so that you can withhold the correct federal income tax from their pay.
- Decide on a Pay Period
You may already have a manual process for this, but setting up a pay-period (whether monthly or bi-monthly) is sometimes determined by state law with most favoring bi-monthly payments. The IRS also requires that you withhold income tax for that time period even if your employee does not work the full period.
- Carefully Document Your Employee Compensation Terms
As you set up payroll, you’ll also want to consider how you handle paid time off (not a legal requirement, but offered by most businesses), how you track employee hours, if and how you pay overtime, and other business variables. Don’t forget that other employee compensation and business deductibles such as health plan premiums and retirement contributions will also need to be deducted from employee paychecks and paid to the appropriate organizations.
- Choosing a Payroll System
Payroll administration requires an acute attention to detail and accuracy, so it’s worth doing some research to understand your options. Start by asking fellow business owners which method they use and if they have any tips for setting up and administering payroll. Typically, your options for managing payroll include in-house or outsourced options. However, regardless of the option you choose, you – as the employer – are responsible for the reporting and paying of all payroll taxes.
- Running Payroll
Once you have all your forms and information collated, you can start running payroll. Depending on which payroll system you choose, you’ll either enter it yourself or give the information to your accountant.
- Get Record Keeping Savvy
Federal and some state laws require that employers keep certain records for specified periods of time. For example, W-4 forms (on which employees indicate their tax withholding status) must be kept on file for all active employees and for three years after an employee is terminated. You also need to keep W-2s, copies of filed tax forms, and dates and amounts of all tax deposits.
- Report Payroll Taxes
There are several payroll tax reports that you are required to submit to the appropriate authorities on either a quarterly or annual basis. To get more information, visit the IRS’s Employer’s Tax Guide, which provides clear guidance on all federal tax filing requirements. Visit your state tax agency for specific tax filing requirements for employers.