What makes payroll processing so complicated?
As a startup founder or business leader, you’ll quickly find that certain aspects of running your business are foundational and vital. Paying bills, financial reporting, and filing your taxes properly are definitely on the list. Another thing that is an absolute must? Payroll processing.
Of course, you probably already know how important it is to pay your employees the correct amount, on time, and in a method that is as smooth as possible. But as companies grow, this is something that is easier said than done.
Because yes, while company growth is an incredible thing, it also leads to new levels of complexity for processes and procedures. That includes payroll processing.
Payroll processing is one of those things that seems simple and straightforward on the surface but is actually incredibly complex to navigate on your own. That’s why many business leaders and founders choose alternative solutions for their payroll processing.
Payroll, why not just write checks?
If you’re a brand new business with just one or two employees, you might start paying them through checks or with manual bank account transactions. But as soon as you start to take on more employees (or you start off with more employees, to begin with), you’ll find that cutting checks is not only an inefficient use of time, but it can be downright risky.
To start, writing checks is a time-consuming process for employers, and depositing them is a time-consuming process for employees. Everyone has to take time out of their day to actually execute the process of creating and depositing checks. Secondly, checks are less secure than direct deposits because checks can be lost or stolen. If a check goes missing, the employer needs to manually cancel and reissue it, and if the funds are stolen, they’ll need to open up a case with their bank.
Third, handwritten checks leave room for error, especially when it comes to payroll processing. As we’ll dive into, there are many complexities of payroll processing that far exceed what amount you’re paying to who. This is where things like taxes, withholding, time off, and corrections come into play. When you’re handling payroll the “old school” way with checks, there is a much higher risk that critical aspects of payroll processing will be mishandled in a way that is difficult to correct.
How does payroll work? What do I need to get started?
Let’s start with the basics: what is payroll processing (actually), and what do you need to get started? Payroll is the way you compensate your employees for their work over a certain pay period. Employers are responsible for figuring out exactly how much to pay their employees for their time worked, and for distributing those funds at the established time interval.
Payroll doesn’t just stop there. If you’ve received a paycheck from others before, you’ve likely seen that for full-time employees, deductions are typically made for taxes and Social Security. These numbers also need to be taken into consideration by businesses.
Speaking of full-time employees, there are different payroll practices for different types of employees. If you use freelancers or contractors, your payroll practices with them might look different. They might send you an invoice, for example, which then needs to be fulfilled by your payroll team.
As you might have guessed, the best way to get started with payroll is not by handwriting checks or guessing how much to pay people. Instead, you should have an excellent payroll system in place, which takes the headache, guesswork, and risk out of payroll processing.
What does a payroll system do?
How exactly do payroll systems work, and what do they do? Let’s dive into the most common ways businesses handle payroll processing and what each system looks like.
With this payroll system, managers, HR, or another senior employee is responsible for manually handling payroll every pay period. This means sending out individual payments, recording payments, cross-checking the amounts owed, and ensuring that the proper amount is being withheld for taxes and other payments, like Social Security.
This is when there is a full-time accountant on your staff, who is responsible for financial matters, including payroll. In this instance, your full-time accountant is a financial expert who is tasked with running payroll every pay period and doing the additional tasks and reporting that come along with it.
Virtual or part-time accountant
When considering using a financial expert, many startups and new businesses will choose to use a virtual or part-time accountant. This is something more common when you’re just getting started with accounting for startups, and can be a great solution to some common issues businesses have with full-time accountants. Virtual or part-time accountants will work with your company only on certain tasks, and that can include running payroll.
These financial services can also come from outsourced financial service providers who specialize in services such as payroll, and they can be a great solution for a business that doesn’t have a fully-fledged accounting department. Companies that use outsourced CFOs also might have virtual or part-time accountants.
Payroll software is an advanced application or program which can help a business manage their own payroll. Payroll software is somewhere between an in-house operation and an outsourcing service: it gives a business owner or other leader the tools to do their own payroll, but ultimately, it’s still left in the hands of the business.
4 reasons why to utilize a payroll provider
With all of the options out there, which one should you go with? At the end of the day, going with a payroll provider is almost always your best bet. Here’s why:
If there’s one thing that payroll processing is, it’s complicated. Payroll processing goes far beyond sending out payments. Employers need to verify the amount being paid, calculate how much to withhold, and know how to handle things like time off and overtime. When you go with a payroll provider, all of that weight is off your shoulders.
If you do choose to take on payroll on your own, it can be incredibly time consuming to get right. As we mentioned above, there’s a lot more that goes into payroll than meets the eye. In order to make sure it’s accurate and complete, you would need to take a lot of time to get it done. When you go with a payroll provider, you get those valuable hours back, so you can focus on running your business.
Employees want to be paid accurately, and on time. The last thing you want is for your employees to not receive the money they’re working for or for there to be an error in their payments. With payroll providers, you know your payments will be made on time, every time, and with the utmost accuracy.
As we touched on, many of the complexities surrounding payroll have to do with regulations and laws, such as tax requirements and Social Security. There are other aspects of payroll compliance that businesses absolutely need to get right and where there’s zero room for error. Payroll providers are experts in every aspect of financial compliance, so you can breathe easy knowing that you’re checking all of your boxes.
What actually makes payroll so complex?
While simple at the surface, payroll processing can be shockingly complex and nearly impossible to execute manually for many reasons. First of all, company growth leads to exponential needs and changes when it comes to payroll processing. It might be possible to handle manual payroll for one or two people, but dozens or hundreds? It would be an enormous and ineffective task, fraught with room for error.
Other real-world aspects of businesses translate into the complexities of the payroll process. For example, if you have multiple locations, that might be very difficult to handle manually. And what about making corrections? The manual process around correcting payroll errors is virtually non-existent and would be very challenging to execute.
There are endless other aspects of payroll that make it far more complicated that meets the eye. Payroll tax law, tax deductions, and validating entries are all best done when left to the professionals who are experts at payroll processing.
We know, payroll is a lot. We’ll handle it for you.
If you’re winded just reading about all that goes into payroll processing, we don’t blame you. We know just how complicated it is, because we’re experts in it. That’s right: we can take care of everything from taxes to statutory filings and payroll inquiries, so you can focus on the stuff that really matters.
Find out more about our payroll services by clicking here.
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