How Payroll Systems Work

By: Dave Roos

Payroll Software

Computer software can make it easier for small businesses to manage payroll.

Payroll software does a lot of the heavy lifting of payroll management for you. Like outsourced payroll services, payroll software requires very little input from the employer, just employee wage information and hours. All of the tricky calculations and withholdings are calculated by the software, which receives automatic updates every time tax laws are changed. The software can also fill out employment tax forms for you and remind you when to file them.

You can add as many optional withholdings or deductions to each paycheck as you want. Just specify the reason for the deduction (insurance premium and 401(k) contribution, for example), set the parameters (5 percent of each paycheck, $10 every time, or other factors) and the software will calculate that withholding for every check.


Even with all of that help, payroll software can't do everything for you. The employer still needs to be the one to physically print and deliver the checks. And even if the software prepares employment tax forms, the employer still needs to sign them and send them in.

You also need to personally enter all pertinent information. For example, if you offer your employees health insurance, you need to provide all of the information about the insurance provider so the software can not only withhold premiums from each check, but write checks to the insurance company when they're due.

That's not to say that payroll software isn't a huge time-saver. With payroll software, it's much easier to handle complicated withholdings, constantly changing tax laws and keep all your payroll data in one place.

Like payroll services, some payroll software is ditching the physical software and going Web-based. This option streamlines the process even further. A product like Intuit Online Payroll allows you to manage your payroll process from any Web-enabled computer. It offers free direct deposit and free E-PAY of all federal and state tax forms, so you can handle key payroll duties even when you're away from the office. The program will even send you reminder e-mails when deadlines are approaching for tax filings.

Some higher-end payroll software includes a service component. For example, if you don't trust the computer to fill out your tax forms, you can have real people assemble and file your taxes for an extra fee. They'll even guarantee their filings against any possible fines or penalties from the IRS.

Software requires more work than a payroll service, but the price is competitive. For Web-based software, you can pay as little as $10 a month. For the most comprehensive software that includes a full-service tax preparation component, you can pay up to $80 a month for a 10-employee business with two pay periods a month. That's cheaper than most payroll services, but remember, you're still doing some of the work.

So how do you decide which payroll system is the best for your company? Keep reading to find out.