As a small business owner, you have many options when it comes to running payroll. You can do it by hand, outsource it completely to a payroll service, or use a payroll software. I’m partial to payroll software—I do run a payroll software company (Patriot Software) after all.
Payroll software can seem mysterious to some people. Not everyone understands what goes on behind the computer screen to make payroll software work. So, I’m going to explain how payroll software works throughout each step of setting up and running payroll.
Setting up payroll software
When you first purchase payroll software, you have to enter your business and employee information. If you don’t do the initial setup of your account, you won’t be able to use the software to run payroll.
Enter business information such as your Federal Employer Identification Number (FEIN) and your business location. You will also enter your tax rates for federal and state unemployment taxes and workers’ compensation insurance.
You also need to input employee information, such as each employee’s name, address, and Social Security number. Enter the employee’s desired income tax withholding allowances.
Include information about how you will pay the employee, too. Are your employees hourly or salary? Is the employee exempt or nonexempt from overtime wages? How much will the employee earn per hour or year? Are there other types of compensation, such as commissions, shift differentials, or holiday pay? Does the employee have any additional withholdings, such as benefits contributions or child support withholding? You need to include all this information in the software.
During the setup process, you will also enter payroll history. Your payroll history consists of any payrolls you previously ran in a year. Entering your payroll history allows the software to calculate taxes accurately. If you use the software company to file and deposit your taxes, your payroll history will help the software company correctly report and remit the tax liabilities.
The payroll software will use your business and employee information to calculate payroll, taxes, and benefit withholdings. And, if you use a full-service payroll, the information entered during the setup will help the software company file and deposit your taxes.
The three steps of running payroll
After you input all your employee and business information, you can finally start running payroll. The payroll software made by my company, Patriot Software, uses a three-step process to run payroll. The three steps are entering and running the payroll, approving the payroll, and paying your employees.
To explain how payroll software works to process payroll, I’m going to go through each of the three steps.
1. Entering and running payroll
To begin the payroll process, you need to select the pay period you plan to run payroll for. Then, you will enter the worked hours and hour categories for each employee.
You will need to type in the hours manually. You might have to enter the start and stop times, or you might just type in the total number of hours. You also need to divide the hours among hour types. For example, an employee might work 32 hours in a week and use eight hours of paid sick leave. Make sure you put the correct amount of hours into each hour category so the software can correctly calculate how much you need to pay each employee.
If your payroll software comes with an add-on for attendance management, you won’t have to enter manually the time employees worked. How payroll works, in this case, is that employees can enter their hours worked or use a time punch to log their time. Because the time and attendance software links with the payroll software, the hours will automatically import into the payroll software. You won’t have to enter anything. In the end, integrating time, attendance, and payroll can save you time, energy, and even money.
If you want to give employees other money types, such as commissions or bonus pay, you need to enter those numbers.
After the hours and additional money types are entered, it’s time to run payroll. Here’s where the magic happens. You only need to click a button; the software will do the rest. The software takes the information you entered about employee hours, employee tax and benefit withholdings, and your tax liabilities and uses them in combination with stored tax tables. With all this information, the software accurately does the calculations for you.
When you use payroll software, you will not need to learn how to do manual payroll calculations.
2. Approving payroll
Once the software calculates the payroll, you’ll move to the second step: approving the payroll.
This step is where you’ll look over the results of the calculations. If something looks strange or different from previous payrolls, you might have typed something in wrong. For example, you might have typed in 88 hours instead of eight.
If there is something wrong, you can go back and correct it. If everything appears correct, you can go ahead and approve the payroll. You’re ready to move on to the third step.
3. Paying employees
The third step is to pay your employees. The software did the calculations for you, so you should know exactly how much to give each employee.
There are many different ways to pay your employees. Here are some popular payment methods.
Written checks
You can handwrite checks and give them to employees. Handwriting checks will take more time because you have to physically write and give each check to an employee. You can use the payroll software to print pay stubs to give employees their checks. Or, you might be able to give employees electronic pay stubs through the software.
Printed checks
You can use the payroll software to print out employee checks. To do this, you need to buy check stock that works with your software. Depending on the type of check stock you purchase, you might also need a special kind of printer, called an MICR printer.
Direct Deposit
With direct deposit, you don’t have to give anything to employees (unless your state requires you to give a paper pay stub). This type of paperless payroll allows an employee’s earnings to be automatically deposited into their bank account. Your payroll software might offer free direct deposit, like Patriot Software does. If this is the case, the direct deposit process will begin after you approve the payroll.
Pay cards
Pay cards are similar to debit cards. You will load employee earnings onto cards, and employees can use the cards to pay for things. You might be able to load the payroll cards by using your payroll software.
After you pay your employees, you are finished with the three steps of running a payroll with payroll software.
Payroll taxes
When you have employees, your payroll responsibilities don’t end when you pay the employees. You still have to pay payroll taxes and file tax forms.
When you use payroll software, the software company might handle your payroll tax liabilities for you. This is usually a feature that comes with full-service payroll software.
If you want the software provider to handle the taxes for you, you will need to sign documents that authorize the company to do so. Once you give your approval, the company can begin depositing and filing taxes on your behalf.
When you run a payroll, the software company will calculate how much of each payroll tax is due. The software company will charge you for the tax amounts. When the payroll taxes are due, the software company uses the money collected from you to pay the taxes.
The software company will also file the payroll tax forms for you. The company will fill out the forms based on the payrolls you ran. Then, the company will file the forms by their deadlines.
If the IRS ever needs something regarding your payroll liabilities, it will contact you, not the payroll company.
If you do not sign up for payroll software that handles payroll taxes for you, you must file and deposit the taxes yourself.
Software updates
Payroll laws and tax rates change all the time. When you run payroll, you have to consider federal payroll laws and tax rates. Many employers also have to follow state and local laws and tax rates, too.
As laws and tax rates change, your payroll also needs to change. An online payroll software company will stay on top of any changes for you. When you use online payroll software, you don’t have to worry when laws change. The software will automatically update. You don’t have to manually update anything or purchase a new version of the software.
When you use online payroll software, your payrolls will always be accurate.
There you have it: the basics of payroll services are no longer a mystery. With your new understanding of how payroll software works, you can decide whether or not payroll services are right for your business.
Patriot Software
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