Small Business Owners: Guide to Payroll Software

By Rachel Stockton

One of the biggest headaches for the small business owner is staying on top of payroll, and the details thereof. I've seen (as an accountant) many businesses go under for failing to maintain adequate records and make timely tax payments to the federal and state government. Indeed, a business can have everything going for it, good leadership, adequate capital, proactive planning; yet it can tank quickly if payroll isn't properly managed.

But, today, there are payroll accounting software packages out there to help the small business owner with the minutia of this type of record keeping.

While there are free payroll software packages out there, the best packages are those that integrate with your "general" accounting software. In fact, if you use an accounting package like QuickBooks, you can purchase their Enhanced Payroll module to coincide nicely with the rest of your financial record keeping.

This is important, because every transaction you make, whether it's to a supplier, a utility company, the IRS, or an employee, needs to be recorded in your books. This means that if you do NOT use a payroll software package that will integrate with your general accounting software, you will have to manually enter the transactions (not only the paychecks themselves, but also the payments to federal and state entities) so that your books remain in meticulous order.

Software for payroll accounting enables you to perform your payroll functions in three easy steps: paying the employee, calculating payroll taxes, and handling/filling tax forms.

PAYING THE EMPLOYEES

If your employees are on salary, the same amount of federal, FICA, Medicare, and unemployment taxes will be deducted every pay period. If your employees are hourly, however, the checks will vary based on the number of hours, overtime pay, etc.

If you have a good payroll package, there will be no need for a supplementary time clock software package, because a full service package will calculate what each employee should be paid, based on their hourly and overtime wages. You simply enter in the number of hours, and all of the calculations are completed instantly.

You also have the option of using direct deposit, which usually has a fee attached to it) or printing out the checks yourself.

Payables" to your federal tax depository (which is usually your bank) and state agencies are immediately recorded. When the time comes to make your deposits or mail in your state payments, you simply print the checks, and you're on your way.

TAX CALCULATION

This is probably the most beneficial aspect of a payroll software package. The percentages required by FICA and Medicare can be somewhat confusing to calculate, because half of those tax payments come from you, the employer, and the other half comes from your employee. And, of course, the percentage varies by tax (FICA is 12.4%, Medicare is 1.45%).

Additionally, there are certain wages that deemed "non-taxable." Your accounting software will deduct the salary/wage amounts that are, for example, deposited directly into an IRA account, so they won't be taxed.

Then, there's the Social Security tax cap. Currently, employees pay into Social Security (FICA) until they've earned $90,000. As an example, the President earns $400,000/year. By the end of the first quarter of the calendar year (March), he will stop paying into FICA. The beauty of a payroll package is that your system will automatically stop deducting FICA if one of your employees hits $90K. You never have to keep up with this yourself.

Unemployment tax can also be painless with a payroll package. FUTA is paid by you, the employer, only, and currently is .8% of the first $7000 of an employee's salary. Your software package will stop deducting this amount after the $7K mark.

HANDLING TAX FORMS

Tax forms are a breeze if you have a software payroll system. Typically, you will have the option of printing the forms out and mailing them, or e-filing online. Your payroll package automatically fills in the right amounts in the right spots for you. It also fills in all of your employee information: employee address, SSN, etc.

While some business owners see payroll software as just an added expense, it can be MUCH more expensive to be inaccurate. A friend of mine, who is over the tax department in a large Fortune 500 company, tells me that said company lost millions in the 1980s to the state and IRS because of faulty payroll accounting.

While a large company might survive such a mistake, a small business owner cannot. With a fully functional, cohesive software package, however, you can be assured accuracy and efficiency.