Setting up your company’s payroll is one of the most difficult tasks you face as a small business owner. You must do so accurately and comprehensively, or you might face fines and other penalties. Payroll software walks you through this challenging set of tasks and prepares you to run your first payroll, automating many of the processes. But that doesn’t mean your only job is to enter hours and click the Submit Payroll button on time. All the data you painstakingly entered provides the foundation for properly compensating contractors and employees, but you still need to closely monitor your entire system. The tips I detail below help you avoid common—and potentially costly—mistakes.
The Best Payroll Software We’ve Tested
1. Allow Enough Time Between Pay Period Ends and Paydays
Before you can create a payroll schedule, you need to understand the key distinction between the end of a pay period and the related payday. If you end a pay period on a Friday, for example, you probably won’t be able to pay employees until early the following week (though some software offers same-day direct deposit). Payroll software needs time to process (typically a couple of days), though it might be more or less. Understanding how long every element takes is especially important when you’re setting up your first payroll.
Pay period and pay date in Patriot Software Payroll (Credit: Patriot Software/PCMag)
2. Use the Correct Payroll Deposit Schedule
You don’t determine when you deposit payroll taxes. The IRS has very specific rules, and it will let you know what schedule you’re on. The IRS assigns new businesses to monthly deposits until it has more history on your payroll amounts and patterns. It bases your deposit schedule on the total tax you report on your Forms 941 for the four previous consecutive quarters (also known as the lookback period).
If you owed $50,000 or less in tax liabilities for your lookback period, the IRS keeps you on a schedule of monthly deposits. If you owe more than that, you move to semi-weekly payments. If you accumulate $100,000 or more in taxes on any day during either deposit period, the IRS requires you to deposit the tax by the next business day and then revert to a semi-weekly schedule. The agency sends out a Notice CP136 to confirm schedule changes. Your payroll software will likely flag changes that would trigger a deposit schedule modification, but you should always verify this when you receive a notice from the IRS.
3. Take Advantage of Integrations
Using payroll software by itself means you will have to enter a lot of data in your accounting software post-payroll to ensure you get a comprehensive financial picture of your company. Intuit QuickBooks Payroll integrates beautifully with QuickBooks Online, so you don’t have to worry about this manual data transfer.
But most payroll software pairs well with popular accounting apps, such as FreshBooks, QuickBooks Online, and Xero. Gusto also shares data with other kinds of related expense management, insight and analytics, and time tracking apps. If you didn’t consider integrations when choosing your payroll software, it’s never too late to check your options.
You can connect more than just financial applications, too. Gusto, for example, offers software provisioning, which lets admins create employee accounts for integrated apps such as Dropbox, Microsoft 365, and Slack.
4. Make Sure Your Software Is Sufficiently Capable
ADP, Gusto, and Intuit offer different versions of their payroll software to accommodate varying employee volumes and specific business needs. Hopefully, you understood what you needed from payroll software before you chose a specific app version. But, even if you didn’t, you should continually evaluate whether your current level is appropriate for your operation.
5. Classify Employees and Contractors Correctly
Employees and contractors have very different payroll tax obligations. You should occasional check to make sure no one’s status has changed. You are, of course, responsible for paying half of employees’ FICA taxes, but you don’t owe that for independent contractors. This is their self-employment tax.
Employee taxes in QuickBooks Payroll (Credit: Intuit/PCMag)
The IRS sometimes audits workplaces and questions both employees and employers at length about their relationship to ensure workers are properly classified. If you’re not sure, either you or an employee can file Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).
If you classify an employee as an independent contractor and you have no reasonable reason for doing so, then you might be liable for employment taxes for that worker.
Get Our Best Stories!
Your Daily Dose of Our Top Tech News
By clicking Sign Me Up, you confirm you are 16+ and agree to our Terms of Use and Privacy
Policy.
Thanks for signing up!
Your subscription has been confirmed. Keep an eye on your inbox!
6. Categorize Exempt and Non-Exempt Employees Accurately
Designating exempt and non-exempt employees is equally vital. Doing so incorrectly can create numerous financial and legal problems under the Fair Labor Standards Act (FLSA). The biggest issue? Overtime. If you classify an employee as exempt when they should be non-exempt, you could be on the hook for back pay, or overtime that you should have paid for up to three years.
The Department of Labor no longer assesses liquidated damages, which doubled the amount due. Still, the US Department of Labor Wage and Hour Division could impose civil monetary penalties, especially if you’re guilty of “repeated or willful” violations.
And, as you might have guessed, you would have to make payroll tax adjustments retroactively. That means paying additional FICA taxes, recalculating payroll tax filings, and submitting amended Forms 941.
7. Stay Up to Date on Changing Payroll Regulations
Payroll and HR matters overlap greatly, and many payroll software developers continue to develop support for the latter. Currently, apps are all over the map in terms of what they offer, how they integrate their tools and data with payroll, and what counts as an add-on. Some HR functionality doesn’t cost extra, however. Higher-end software typically includes more of these features.
Recommended by Our Editors
ADP Run offers an especially strong set of HR options, including support for benefits and leaves, hiring and onboarding, and performance management. You can take advantage of newsletters, podcasts, topic guides, and webinars, and sign up for compliance alerts (both federal and state). Patriot Software Payroll, a more affordable solution, offers a great HR add-on with tools such as document templates, an HR Compliance Library, and sample policies.
Compliance alert in ADP Run (Credit: ADP/PCMag)
Human resources management is a massive patchwork of procedures, regulations, and required documents. If you’re handling both it and payroll by yourself for a small business, payroll software can help. In fact, it might be all you need, depending on the provider and your company’s requirements. At a minimum, you should have access to updates on:
-
Changes in Department of Labor (DOL) rulings, Equal Employment Opportunity Commission (EEOC) regulations, and payroll tax codes
-
Leave policies
-
Wages and hourly pay
-
Workplace safety
8. Double-Check the Auto-Payroll
Some payroll apps have an auto-payroll option. This is appropriate only for smaller companies whose payroll changes infrequently. In Gusto, for example, you don’t even have to log in. You get a notification before it processes your payroll, and you have a limited window to go in and make any necessary edits or fixes. If you opt for automated payroll runs, you should still review everything before they run. Payroll software provides detailed summaries and reports on the current payroll that you can view before it finalizes.
9. Enter Previous Payrolls
If you’re going to be running your very first payroll using payroll software, this isn’t an issue. But if you have already paid employees (whether on paper or using a competing product), you must enter all your previous payroll data for the current year. If you’re not sure how to do that manually using pay stubs and reports, contact your new payroll provider. Payroll software companies are well aware of the moving parts and how difficult the process can be for novices. They employ teams of payroll experts who are happy to answer questions.
If you were running payroll using a competing product, you might be able to import your historical data automatically. Again, talk to your payroll software support team.
10. Leave Enough Time for Your First Payroll
If you currently handle payroll manually or through a competitor but really want to get started with a different payroll solution, slow down. The new app may well be able to process the actual payroll, but you can’t ignore related aspects, such as benefits, direct deposits, and payroll taxes. Don’t schedule your first payroll until all those elements are in place and you’re sure your bank account will accommodate their sum total, not just employee net pay.
Trust Your Payroll Software, But Verify Everything
The payroll services I’ve tested all come from reputable companies that have been in business for a long time. I trust them to get your payroll calculations right, submit payroll taxes and filings, and help you find and administer the benefits you want to offer employees. I also trust them to handle HR matters competently. But the repercussions of non-compliance and payroll mistakes—both for your employees and for you—are serious. Minimize your risk of fines and other penalties, and of affecting your employees’ livelihoods, by actively monitoring your finances.
About Our Expert
Experience
I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute!
After working at Lawson Associates, now Lawson Software, I switched my focus to accounting but learned that personal computer applications were more progressive and interesting to cover than mainframe solutions. So I served as editor of a monthly newsletter that provided support for accountants who were just starting to use PCs. I still ghostwrite monthly how-to columns for accounting professionals. From there, I went on to write articles and reviews for numerous business and financial publications, including Barron’s and Kiplinger’s Personal Finance Magazine.
Read Full Bio
