Do I Need Payroll Software for One Employee? Yes. It is absolutely necessary to pay attention to payroll when your business begins to grow, whether you want one employee or 10 employees. Every business owner should know that they must be prepared to create the tools and processes that will be required to manage their growing business. Seeking payroll solutions is the first step in doing this.
Do I Need Payroll Software for One Employee? The answer may be yes, if you don’t want to waste your time. However, there is a much easier way to do your payroll that doesn’t cost you any time or money.
Payday is typically a moment people look forward to. But for many small businesses and startups that are just getting started, it’s a huge source of stress and frustration.
Why? Because payday means payroll—and payroll is complicated and takes time. Twenty percent of small business owners reported spending more than six hours a month handling payroll taxes. And some said they spend more than 10 hours a month, or the equivalent of three work weeks a year, just dealing with payroll.
Luckily, automating payroll makes things a whole lot easier—especially when you’re a new business owner. Here are four reasons why you might want to consider getting payroll software right as you’re first setting up shop.
You want to accurately calculate your pay, whether it’s a salary or owner’s draw
You’d think that paying yourself would be as easy as writing a check and depositing it (or, even better, simply direct-depositing money into your account). But there are actually different ways to pay yourself, depending on factors like your entity type, business plan, and years in operation.
As you’re thinking about how you want to pay yourself for the first time, here are the main types of owner payments you should know about:
Salary
A salary is a set, recurring payment to your employee(s)—which can also be you. If you own an S or C corporation and are involved in the day-to-day business operations, you’ll want to give yourself a salary.
S and C corp owners need to make sure they’re paying themselves a reasonable compensation as an employee. Of course, “reasonable” is objective, but it generally means you should pay yourself what you’d make if you had the same role at a different company.
When you start paying yourself a salary, payroll taxes kick in—and a payroll service will help you make sure you’re taking the correct amount out.
Owner’s draw
An owner’s draw is for LLCs, sole proprietorships, and partnerships. It’s exactly what it sounds like: a way for owners to withdraw money from their business for their own personal use.
This payment method differs from a salary in a few ways:
- It’s more flexible. You can pay yourself however much you want (as long as your business has the money), whenever you want. This makes it a great option if your cash flow is inconsistent and, for example, you need to keep more money in the business during the slow season.
- You’re not taxed right away. Owner draws aren’t taxed at the time they’re taken out. But keep in mind that you do have to pay taxes on them when you file your individual return.
You don’t want to deal with calculating and paying payroll taxes on your own
When people gripe about taxes, they tend to think about the financial aspect of it. However, for small business owners, figuring out all the tax responsibilities is often the worst part. Fortunately, many payroll services can make life easier by taking out the correct amount of taxes and filing them automatically.
According to the National Small Business Association (NSBA) 2018 Small Business Taxation Survey, payroll taxes were easily the second-most burdensome tax—both in terms of administration and cost.
Why are payroll taxes such a headache? Let us count (some of) the ways:
- There are a bunch of agencies/authorities businesses need to pay
- Each of these agencies has different filing deadlines
- Payroll taxes need to be paid within a specific amount of time after your employees are paid
- There are ongoing changes to state, federal, and local regulations
- If you take an owner’s draw, your audit risk goes up
And that’s not to mention further complexities if you have employees in other states or if you need to pay bonuses or overtime.
Yes, payroll taxes still apply even if you’re the only employee
Unfortunately, you’re not off the hook if you’re the only employee. The IRS doesn’t make special exemptions for “solopreneurs” or sole proprietors. Once you start paying yourself a regular salary, you’ll need to deduct the correct amount and send payments to the IRS (and usually a state tax authority) at least every quarter.
If you’re paying yourself through an owner’s draw, remember that you’ll pay taxes on the amount through your individual tax return.
You want to stay compliant as you bring on contractors (and eventually employees!)
Hiring people to help your business can make your life both harder and easier. On one hand, extra help can give you more time to work on your business. On the other, there are a ton of rules you need to follow when bringing on contractors and employees.
A payroll service can help out in a couple of ways:
- Sending new hire reports. When you hire a new employee, many states require you to send them information like your new hire’s name, address, Social Security number, and date of hire within 20 days (or sooner). Fortunately, many payroll software companies can automatically send new hire reports to the state for you.
- Collecting new hire paperwork. Forget file cabinets or desktop folders. Not only can some payroll software help your new hires complete mandated federal forms, such as I-9s, W-4s, W-2s, and 1099s, but it can also keep all those forms organized for easy access.
You don’t want to make payroll mistakes
Some mistakes, like typos on your site, are embarrassing but manageable. Other mistakes, like messing up payroll, have real-life implications.
In the 2017 fiscal year, the IRS levied over $5 billion in penalties for mistakes businesses made with their employment taxes. Plus, some payroll mistakes could even trigger a tax audit.
Instead of spending hours poring over numbers and forms, consider letting payroll software help you avoid mistakes like:
- Not staying current on payroll rules and regulations. One of the biggest advantages of using payroll software is that it helps you stay on top of changing state and federal requirements (like the 2017 tax reform, for instance). This means you can worry less about being penalized for not complying with the law.
- Not paying employees correctly. When you have employees, you need to make sure you’re paying them often enough and giving them the correct amount (which includes amounts for any accrued sick time or vacation, depending on where you are located). Otherwise, your employee(s) can sue and you could even lose your business license. Payroll software can help protect your business from wage complaints by automatically paying your employees and keeping records of each payment.
- Not keeping the right reports on file. As mentioned above, in addition to needing to fill out various forms whenever you hire someone new or run payroll, or to help figure out how much you owe in taxes, you’ll also need to keep them on hand for a certain amount of time. By using a centralized service, like payroll software, to fill out forms, you can keep them organized for whenever you need them.
What to look for in a good small business payroll service
Different payroll providers offer different things, but in general, many can help you with the following:
- Calculating and filing payroll taxes
- Filling out forms for new hires
- Determining payroll deductions
- Paying employees (including yourself!)
- Withholding taxes
- Filing end-of-year taxes
- Helping you avoid the most common payroll-related mistakes
- Sending you alerts when you have tax deadlines to meet
- Preparing W-2s and 1099s
- General management of your employee records
When looking for a payroll provider, keep in mind that there are many options out there. You no longer have to go with a pricey payroll service that’s meant for businesses with hundreds of employees. Today there are a number of providers that are geared toward small businesses—their main goal is to make payroll easier at a price point that won’t bankrupt your business.
Payroll software can save you time
According to SCORE, most small businesses spend between one and five hours managing payroll every month. And that number doesn’t even include the 41-plus hours spent on year-end tax preparations.
If you use payroll software, you could spend some of that time on other things.
Photographer Nicole Chen used to dread the end of the month when she’d spend an hour and a half sorting through labor codes and technical glitches to get her payroll right. With payroll software, it now takes her five minutes.
“[My business partner] Karen and I can do a lot with that extra hour and 25 minutes,” she said. “We’ve been making a distinct effort to work on personal creative projects, so that additional time is really valuable.”
Payroll software can help you avoid crucial mistakes
For the 2018 fiscal year, the IRS levied nearly $5 billion in penalties for mistakes businesses made with their employment taxes.
There’s no way around it: Payroll errors can be costly, time-consuming to fix, and stressful from start to finish.
From calculating and withholding taxes to helping with end-of-year filings, the best payroll software will help you avoid the most common payroll mistakes.
Payroll companies usually update their systems to stay on top of changing state and federal requirements. They even automate tasks like tax filings and send you alerts when you have tax deadlines to meet.
Payroll software can help you focus on your business
Using payroll software to streamline payroll means you can focus on actually running your business. Wish there were more hours in the day to interact with customers, bond with your employees, figure out marketing, or brainstorm new ideas? Payroll software can give you more than a few.
“My time is everything to me,” said Andrea Talley, owner of GreenLid restaurants in San Francisco. Using software for payroll gives her “more time to be in the business—like thinking about our products, and our quality and sourcing—and doing the types of things that I started the business to do.”
Manual payroll vs computerised payroll
Manual payroll involves working out calculations for each pay period entirely by hand and keeping records on paper. This process is relatively cheap but tedious to prepare and liable to human error. It typically becomes more difficult to manage as you grow and employ more staff.
Computerised payroll uses software with built-in capabilities that allow the user to carry out routine payroll tasks more efficiently. It enables you to gather all payroll-related information in one place, electronically, and automate processes such as wage calculations, deductions, tax returns, reports, etc. See payroll software: what it can and can’t do.
If you decide to run payroll yourself, you need payroll software to report to HM Revenue and Customs (HMRC). See more on choosing a payroll software supplier.
Should you get payroll software for your business?
Whether you should get payroll software or not depends largely on the size of your business and the type of calculations you need to carry out. It may be worth getting payroll software if you need to speed up your payroll calculations, keep on top of rates and allowance changes or avoid computational errors.
Many businesses choose to automate their payroll. However, bear in mind that using payroll software makes you dependent on your computer system. If you’re switching from manual to automated payroll, take steps to protect and back up your data and IT systems regularly.
You can typically buy payroll software on its own, or as part of a wider business management system.
Payroll software costs
If you only have a few employees and you decide to purchase payroll software, keep in mind that costs may be greater than the advantages. The total cost of ownership of the new system may not always be obvious and may include:
- the initial purchase costs
- fees for system implementation, upgrades and maintenance
- labour costs for staff involved in setting up or running the system
- consultant or supplier fees
- annual subscription costs (covering any regulatory or rate updates)
Conclusion
Do I need payroll software for one employee? If all you have is one employee and a part-time assistant or two, you might be able to get by with a simple app. Payroll processing will be relatively simple, and you may not have any taxes to file. However, maintaining business records with only one employee on the books can be quite overrated. Salaries should stay the same from month to month, but uniforms and equipment should not cost the same for each person. To keep your small payroll business running smoothly, you may need more than an app.