Do you run a small business and need an easy to use payroll software? You’re in the right place. This blog will show you how to manage payroll for a one employee business and explain why you don’t need payroll software for two employees.
Whether you run a one-person business that doesn’t have on-site employees or if you manage a payroll for a small team, payroll software can simplify the process of calculating revenue and deductions and producing payroll checks. Although there are companies that will handle your payroll for a fee, you don’t need to pay someone else when there are affordable and easy-to-use solutions like Gusto .
Payroll software
Do you need payroll software?
Not every business needs payroll software. If your headcount is small and the calculations you need to carry out simple, you may be comfortable processing your payroll manually. However, if you employ more than a few people, automating your payroll can save you valuable time and money, and even improve your payroll accuracy.
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)
Outsourcing your payroll activities to an accountant or a payroll specialist may help you save time and reduce some of the costs.
Signs that you might need payroll software for your small business
If you find yourself drooling as you look over this list, chances are you’re a good candidate for switching payroll providers.
You want to automate your business as much as possible
From filling out forms for new hires to calculating and filing your payroll taxes, to paying your staff and your contractors on time, the ability to set it and forget it (or at least forget parts of it) is what sets modern payroll software apart.
You want customized software that works for your small business
Whether you run payroll weekly or monthly, offer health benefits, allow employees to make charitable donations from paychecks, or give the occasional bonus, your payroll system should be tailored to your needs. Otherwise, you’ll end up doing more administrative work on the side, which really defeats the purpose.
You want to simplify your business taxes
Payroll software can do much of the heavy lifting with your employment taxes—withholding, filing quarterly reports, preparing W-2s and 1099s, and more. This will help your end-of-year accounting go much more smoothly.
You want to offer an employee portal
Employees often need to be able to access their own pay and benefits records. A portal can actually improve employee morale because they’ll have access to information when they need it and better control over their work lives. It’ll also save you time by empowering your employees to access their pay stubs or W-2s on their own.
You want flexible access and integrations with other software
Maybe you want your HR manager to have their own login. Maybe you want your accounting or time-tracking software to sync with payroll.
Whatever the case, payroll software can help take the administrative pressure off yourself by offering integrations and features that let you collaborate with other people on your team.
You want great customer support
You want to know that someone has your back. Any small business payroll provider you work with should be responsive and able to help when you need it.
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.
1. 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.
2. 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.
3. 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.
4. 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.
However, time is money, and payroll software can help you save valuable hours you need to grow your company. But more importantly, it can bring back the joy you used to feel whenever payday came around.
Conclusion
This article focuses on how to use payroll software for small business. It is written as a guide for one-employee businesses and for two-employee businesses to help them manage their payroll in a way that helps them minimize the time they spend on administrative responsibilities and focus on the growth of their business. It provides information about which online payroll software would be right for you, and what benefits it offers to help you understand if it’s worth the investment.