Should I run my own payroll or can my accountant do it?
Whether you run your payroll in-house or through an outsourced provider is an important decision to make.
To run the payroll yourself, you’ll need to know the basic elements of setting up PAYE, employee records and managing pay, holiday and other employee pay issues – find out more about how to set up a payroll system here
- For small business with only one or two employees, it’s possible to manage your payroll yourself – but remember it will eat into your business time each month.
- For businesses with more than a couple of employees, or where you’d rather hand over the reins of running your payroll to a third party, signing up with an outsourced payroll provider makes a lot of sense. You spend less time on payroll admin and more time focusing on the things that matter to you as a business owner.
Working with an accountant who offers payroll services, or a specialist outsourced payroll provider, takes the payroll admin weight off your shoulders. When you have payroll expert on board, your systems will be set up right, your processes will be efficient and you’ll always have someone at hand to ask any tricky questions relating to employee pay and benefits.
With your payroll outsourced to a specialist, you can forget about this and let the professionals take care of all the checks, updates and payroll procedures.
Ways to run payroll
The three main ways to run payroll are manually, using payroll software, or outsourcing your payroll to a specialist service provider. Here is a brief description of the pros and cons of each of these options:
- Manually: This can look attractive as it means you don’t incur the cost of paying a payroll service provider. However, operating payroll manually can be risky as it is error prone especially if you are not experienced in payroll. Also, payroll legislation can be complicated and it is not easy for any one individual to keep up to date tax and employment law changes that can affect employee pay and deductions.
- Payroll software: Depending on your business structure and how many employees you have, payroll software can be cost-effective. There are various cloud-based solutions available — e.g. Thesaurus, BrightPay and Sage Payroll to name just a few. It is important to choose the right solution, checking carefully that it integrates with your accounting software and is compatible will Revenue’s systems. You also need to understand how to operate the software correctly. Training is usually required especially if you do not have previous payroll knowledge and experience.
- Outsourced payroll: This is where you use a specialist like GroForth to manage your payroll on your behalf. While outsourcing can save you time and is often more cost effective than trying to manage payroll in-house, you need to choose your payroll service provider carefully making sure that they have the resources and skills to deliver the services you need. Similar to choosing payroll software, don’t forget to check that the service provider’s systems and processes integrate reliably with your accounting software and Revenue’s systems.
How to do payroll manually, without software
Here are the steps you need to follow each pay period if you want to go it alone and run payroll manually.
Step 1: Calculate your employees’ wages.
Add up all the hours each employee worked, subtract any break time, and multiply the result by their hourly pay rate. Assuming you use paper time sheets, this step will be easier if you transcribe the hours into Excel and do the calculations on your computer. Microsoft even offers a ready-made template you can use. And remember, depending on your local laws and each employee’s classification, you may need to calculate overtime wages as well.
Step 2: Calculate how much to withhold for taxes.
The next step is to subtract the appropriate amount to withhold from each employee’s paycheck for taxes such as:
- Federal, state, and local income taxes
- Social security
- Medicare
- Federal and state unemployment taxes
The exact amount will vary for each employee based on the allowances outlined on their W-2. You can use the IRS’ tax withholding calculator to determine the right amount to withhold for individual employees. The Excel template we linked to in Step 1 also allows you to input withholding percentages for different types of taxes. Either way, be sure to double check your math, as you can incur big fines for any mistakes you make.
Step 3: Pay your employees.
Now that you’ve calculated how much to withhold for each employee, subtract that amount from their total wages and you’ve got their take-home pay. Provide a document stating each employee’s take-home pay to your direct deposit provider –they can let you know how to format it — and the money will be deposited into their bank account.
Step 4: Pay your taxes.
Next, you need to pay your taxes by periodically depositing the money you withhold to the IRS. You won’t necessarily be making these payments on the same schedule you pay your workers, so this step may not be part of your payroll process per se. Instead, you’ll pay your taxes on either a monthly or semi-weekly basis depending on your tax liability in the previous year. The IRS explains more here.
You need to make make your tax deposits electronically using the Electronic Federal Tax Payment System (EFTPS), which you can register for here.
After that, you’re done with payroll! There are other tax-related tasks you’ll need to complete throughout the year, such as your quarterly returns and annual filings, but these are the steps you need to complete to pay your workers and do your taxes each payroll period. Please also note that there may be additional steps depending on what state you’re in.
10 things you need to know about running your own Payroll
Whether you’re employer or employee, payroll can, at times, seem like a dark art. Indeed the most frequent questions I receive are always prompted by the pay packet being a little lighter than expected. Here’s a list of 10 things you need to know about payroll.
- If you pay anyone over £109/wk (£473/m) OR this is their second job, you must report Real Time Information to HMRC. This follows rules which came into force in April 2013. If one employee falls within RTI, they all do; even the paperboy!
- Payroll details must be reported each time you pay the staff, at or before the point you pay them
- If a new employee starts and doesn’t (yet) have a P45, you should work out their tax code using a starter checklist (or equivalent)
- You must issue payslips to your staff, detailing any deductions made (they can be sent by email)
- In addition to the gross pay, employer’s National Insurance is an extra cost to the employer. Factor in an extra 10% if you’re thinking of employing someone
- Statutory Sick Pay cannot be claimed back unless it exceeds 13% of your monthly NI bill, and then you can only claim the excess
- If you qualify for Small Employers’ Relief, Statutory Maternity Pay (and other parental pay) can be claimed back in full with an extra 3% compensation
- For PAYE purposes, tax month 1 begins on 6th April and ends on 5th May
- Each tax month begins on the 6th and ends on the 5th, with month 12 ending on 5th April
- As a normal year includes 365 days, which is 52 weeks and 1 day, a weekly pay date that falls on the last day of the tax year is treated as week 53
Should you use payroll software to run your company’s payroll?
Are you feeling a little overwhelmed right now?
If so, you may want to consider using payroll software to manage payroll, track taxes, and pay your employees.
There are plenty of benefits to using payroll software or services including:
- Reduced workload: Using a payroll service, all you typically need to do is enter pay information for each employee and the software or service does the rest.
- Reduction in mistakes: Though mistakes can still be made, the number of payroll errors drops dramatically when you use payroll software.
- Calculation and filing of all payroll taxes: This is the number one reason why small businesses turn to payroll software or services to manage their payroll. All you need to do is provide the service with the appropriate tax ID numbers, and it does the rest. For instance, payroll software providers such as RUN Powered by ADP and Paycor include complete tax calculation and filing with all of their small business plans.
- More free time: Instead of spending hours and hours running payroll, completing reports, and remitting tax payments, you can spend that time growing your business.