- Payroll software vs. online payroll services. With payroll software, you are responsible for installing software updates and tax table updates, and backing up your own data. Although online payroll services have the highest level of security, you might feel more comfortable having your payroll information stored on your own computer system rather than being available online. The software used in online payroll services is continually updated for your payroll system, as are the tax tables used to process payroll. Online payroll services allow you to access your payroll system via the Internet from a computer, tablet, or smartphone. If that's the kind of convenience you want, you'll be pleased with the variety of vendors offering cost-effective, secure payroll processing in your area.
- Size: how big is your payroll? If you only have one employee, you can easily calculate your own payroll deductions using free spreadsheet software. But if you have two or more employees, processing payroll starts to get complex. If you have employees in more than one state or country, processing payroll can quickly turn into a nightmare. If you have between 2 and 50 employees, online payroll services can save you time and money. Companies with more than 50 employees face very different regulations in terms of mandatory benefits and electronic tax filing. Most online payroll services can accommodate these needs, although prices may be higher for managing mandatory payroll benefits.
- Which optional payroll services do you want? All online payroll services should be able to cover basic paycheck calculations, including direct deposit of employee paychecks, electronic payroll tax filing, and electronic payroll tax payments-all for a nominal monthly fee. Most services charge a flat rate for that package, plus an extra amount per month, per employee. You might also be charged extra for more than one user who can access the system. Other fees are charged based on the optional extras in the payroll package. For example, employers may choose to add benefits management, 401K management, health insurance management, or other enhancements to the basic payroll processing service. Many employers require time and attendance tracking systems that allow employees to log in, or to log time to specific accounts or tasks. Time tracking is usually an optional add-on and is available from most payroll services vendors.
The trend toward online cloud-based payroll systems is the next step in the evolution of payroll services. One can add on a variety of enhancements that supercharge ordinary payroll services, turning them into employee benefit management systems. Let's take a look at some of the most valuable and interesting add-ons:
- Retirement Benefits Management. Some payroll systems allow employees to choose how to invest their 401(k) retirement accounts. Systems will automatically make payments to the accounts through payroll deductions, to make one-time investments, to track the progress of investment accounts, and to shift funds between approved accounts.
- Medical Benefits Management. Employers are increasingly giving employees greater control over their health benefits. Some payroll systems allow payroll deductions for employee health insurance premiums and health savings accounts. Don't be surprised if your online payroll service becomes the gateway to health insurance exchanges for employees.
- Time and Attendance Tracking. Most payroll services vendors offer optional services to track employee attendance, hours, and time-related billings. Systems allow employees to "punch in" and "punch out" virtually, and to track their time related to specific tasks or accounts.
- Deep Data Analytics. Many modern payroll services have the ability to go beyond calculating paychecks and depositing taxes. They can compare your data against industry averages, and alert you to areas where your company departs from the norm. For example, employees can compare their 401(k) balances and deductions with goals they've set for themselves. And with time-tracking software, managers can compare the cost of having different employees do the same task. Deep data analytics can help managers grow their companies while giving employees better feedback about how their performance stacks up.
Getting Started: Step by Step
Setting up a payroll service is complex because it involves coordination between the payroll service, banks, and government agencies-plus, the data is sensitive and needs to be kept secure. In order to take advantage of the benefits of an online payroll service, follow these steps to get your payroll service, your bank, and your tax collectors to all play nicely with each other.
- Step 1: Enroll for a Free Trial. Most services offer a 30-day free trial. Take advantage of it and try to test the service before your 30 days are up. This is the easiest time to get personal assistance with setting up your new payroll system.
- Step 2: Migrate Existing Payroll Data. You should be able to input historical payroll data into the new payroll system electronically. It might require exporting data from your old system and importing it into the new system. Often you can add employees to the system now, and add historical data later.
- Step 3: Adding New Employees to the System. The payroll service should provide an easy way to add new employees to the system. Ask if the service produces employment forms, such as W-4s, which employees use to indicate their deductions.
- Step 4: Setting Up Direct Deposit. You may need to sign authorization forms for your payroll service, your bank, the IRS, and state taxing agencies to allow direct deposit of employee paychecks and electronic payment of payroll-related taxes. The payroll service will help you gather these authorization forms and fax, mail, or email them to the proper authorities.
- Step 5: Paying Taxes Electronically. Once electronic payments have been authorized, you should be able to pay all your federal, state, and local payroll-related taxes through your payroll service. Not all taxing jurisdictions have implemented ePay or eFile yet, but most do; and those who don't, likely will soon.
- Step 6: Filing Tax Returns Electronically. Your online payroll service might charge extra for filing your tax returns electronically. Most services now provide 941 tax deposits, 941 filings, and annual W-2s and W-3s. Most online payroll services offer similar eFile capabilities for state income taxes, state unemployment taxes, and other state and local taxes.
- Step 7: Integrating Payroll with Accounting. Payroll is just one piece of a total accounting solution. Information from your payroll service needs to be combined with the rest of your accounting functions to generate financial statements and tax returns. Many payroll services offer full-service accounting solutions that integrate seamlessly with your payroll data.