When you have employees, you have to run payroll. And you probably want to find the least expensive way to do so.
You might see the price tag on payroll software and panic. The sticker shock makes you think, “I can do payroll manually.” You built a business yourself, so why can’t you run payroll yourself?
That thought is understandable. Small businesses are often strapped for cash. Adding payroll software as another expense can be dismaying. You can do payroll yourself for no extra cost, right?
Sure, you can do your own payroll. Especially if you have few employees and a simple payroll process with minimal deductions and calculations. But, even doing payroll yourself has expenses. In fact, 46% of small businesses spend $101-$500 per month on payroll costs. This doesn’t account for any costly errors you might make either. Running payroll yourself isn’t as free as it seems. And, as you add employees and your payroll becomes more complex, you’ll have additional expenses.
Believe it or not, doing payroll yourself can be more expensive than using payroll software. Let’s take a look at the things that can increase the costs of doing payroll on your own.
Increased time to run payroll
Running payroll with software can take minutes. Running payroll by hand can take hours.
When you run payroll by hand, you have to do all the calculations yourself. You have to add employee hours, determine straight time pay, calculate overtime pay, consider other compensation, withhold taxes, deduct other benefits contributions, and subtract garnishments.
And, there’s not an easy way to do calculations. You must calculate each employee’s paycheck individually.
Learning how to do payroll by hand can quickly become your biggest payroll time waster. Before you can even begin payroll yourself, you must know about taxes and labor laws. Learning everything you need to know can take a while.
You should know that time is money. You pay your employees for their time after all. Your time has a dollar amount attached to it, too.
While you don’t have the expense of small business payroll software, you still have to account for the time you spend running payroll. When you use multiple hours per week to set up and run payroll, the cost of your time adds up.
Manual payroll has more room for mistakes than any other payroll method. There are more opportunities for human error.
When you are doing payroll by hand, you might forget to calculate some things. You might forget to subtract a deduction or add in some employee hours.
Watch out for incorrect calculations. You could multiply, add, or subtract the wrong numbers. You might type the wrong number into your calculator. Or, you might write down the wrong number.
Incorrect calculations can cause you to pay employees the wrong amount. If this happens, your employees might sue you. You’ll have to pay back wages and legal fees.
You might also incorrectly pay employment taxes. If you don’t pay payroll taxes or pay them incorrectly, you will have to pay penalties. In fact, during the IRS’s 2016 fiscal year, it assessed almost 5.9 million civil penalties for employment taxes, amounting to about $6 million.
There are possible legal fees and criminal penalties, too. Messing up your payroll tax payments can also lead to imprisonment.
Payroll software is programmed to prevent mathematical errors. The software can calculate the gross wages of each employee and subtract all the payroll taxes and other deductions. The program will tell you exactly how much you must pay toward each employment tax. You don’t have to worry about incorrect calculations and financial consequences.
When you manually calculate payroll taxes, you have to constantly research and update your payroll tax rates. You must update federal tax rates, and many employers must update state and local employment tax rates, too.
Out-of-date tax rates can lead to incorrect calculations. Perfect math can’t save you if you start with the wrong numbers.
Payroll software automatically updates with the newest payroll tax rates, which saves you time and potentially money you would spend on errors.
For example, an employee gives you a new Form W-4 to update their withholding allowances for federal income tax withholding. You take the form, but the next time you run payroll, you forget to implement the new withholding allowances. As a result, you withhold the wrong amount of federal income tax from the employee’s wages.
Or, let’s say you promise a raise to an employee. With payroll software, you can go in your account and adjust the employee’s wages for the next payroll. But with manual payroll calculations, you must remember the raise or hope you see where you wrote down the information. If you forget about the raise, you’ll have an upset employee, spend more time on payroll, and might have to pay penalties if you pay taxes incorrectly.
Manual payroll isn’t cheaper
No matter what, payroll is an expense. You have to pay your employees and you have to pay for payroll-related administration.
While manual payroll might be enticing with its initial look of being free, the costs can add up quickly. Especially because you are not a payroll expert. Odds are, you’ll make mistakes and waste time.
Payroll software can reduce the expenses that are associated with running payroll. You can save time and cut out costly errors.
There are plenty of inexpensive payroll tools on the market, so don’t have to go for a pricey enterprise package, especially if you have a small business with a simpler process.
Kaylee Riley is a content writer for Patriot Software Company, the parent company of Patriot Software, LLC and Top Echelon, LLC. Kaylee writes about payroll, accounting, recruiting, and other small business topics.