Learn More About Payroll Software
What is Payroll Software?
Payroll software allows companies of all sizes to manage and streamline payroll processes and ensure employees are paid timely and accurately. It accounts for the pay rate and calculates what an employee should be paid for a pay period. These systems help human resources (HR) departments automate payroll processes, track the number of hours worked, track time and attendance, and allow employees to submit time-off requests. Accounting teams use payroll software to support accurate bookkeeping and manage expenses. This software also calculates wages, taxes, and pre- and post-tax deductions, along with helping organizations comply with various state and federal taxes and social security requirements. Customers who use payroll software often leverage multicountry payroll software. Payroll tools also integrate with a variety of other tools such as core HR software, accounting software, benefits administration software, and time and attendance software.
What Types of Payroll Software Exist?
There are two main types of payroll systems based on installation and operation. These are cloud-based and on-premises solutions. It is also important to distinguish between payroll management and payroll processing software.
Cloud-based payroll software
Cloud-based, or online payroll software, can store programs and data on a remote database or cloud system that can be accessed by any computer with an internet connection. Payroll software helps with calculating paychecks from hours logged in time and attendance tracking systems. Companies gain more flexibility in features, control, and cost compared to using an on-premises system or having payroll outsourced to an agency. Cloud payroll solutions also allow businesses to handle their data, enabling them to better protect their employees’ information. Since these tools are cloud based, data integrity is reliable as vendors are known to use security technologies that are top of the line along with regular backups.
On-premises payroll software
On-premises payroll software has a lot of the same features as cloud-based solutions, except it is normally installed and implemented on a company’s server or employee computers. In turn, an IT team is needed to maintain and manage the system, which leads to higher operating costs than a cloud-based platform.
Payroll management or processing
Payroll management software defines and manages pay rules, tracks time worked, accrues and manages employee vacation time, calculates bonuses if applicable, and manages payroll deductions, to name a few. Payroll processing handles all of the tasks involved with actually paying employees, such as cutting checks or transferring funds via direct deposit.
What are the Common Features of Payroll Software?
There are several features included in payroll software that benefits HR, accounting teams, employees, and the company as a whole. The most important features are further discussed below.
Calculate and pay employee salaries: Probably the most crucial function of any payroll system is to manage and run payroll. At the core of this function, this involves ensuring every employee is compensated correctly and on time via their preferred method of payment. This feature provides the foundation for all other additional features of payroll software. HR teams can accurately pay employees in a variety of ways with just a few clicks. Payroll teams manage and process payroll through one platform, rather than switching between different programs.
Calculate and deduct withholdings: A good payroll system processes tax information and helps organizations comply with tax obligations and laws. Payroll software calculates and deducts withholdings, such as payroll taxes, insurance, retirement contributions, etc. This type of software adjusts employees' pay based on the withholding status they provided on their IRS W-4 forms and generates a W-2 form at the end of the year. Payroll software also calculates the amount of payroll tax owed and automatically makes payments to taxing authorities. It processes other payroll deductions as well, such as wage garnishments and voluntary deductions.
Process time and attendance data: For businesses that pay employees an hourly wage, the ability to track time and attendance can be the most beneficial capabilities of payroll software. This software combines payroll and timekeeping which eliminates all the hassle created by tracking employee time cards. This type of system monitors absences, sick days, hours worked, overtime, and other factors. Then, the software seamlessly syncs this information to efficiently process payroll.
Generate payroll reports: Payroll must always be accounted for in business records. Payroll software enables these businesses to export financial reports, therefore reducing the time spent on payroll processing. Furthermore, they use other accounting software that integrates with payroll software to automatically create a new expense item when running payroll, eliminating duplicate entries. Accounting artificial intelligence (AI) and automation technologies also assist in reducing supplier and employee fraud. Payroll software helps by generating various reports and summaries. This software is often able to generate reports such as salary statements, benefits reports, or leave summaries. Even more useful are systems that allow employees to access and print forms like their payslips or W-2 statements. Payroll software generates a multitude of reports for hourly and salaried employees, while also providing reporting templates so managers can quickly and easily find out what their payroll costs are for any given period. These features allow payroll teams to review and analyze other important facts such as headcount, vacation balances (PTO), and the highest and lowest paid employees.
Comply with local and national workplace laws and privacy regulations: Tax compliance poses a real problem for companies whose staff and contractors are located across the United States or abroad. There are thousands of tax jurisdictions in the United States alone, with taxes coming in a variety of forms, making compliance with tax rules a complicated and time-consuming job for payroll staff. Compliance management features automatically update payroll software when any local, state, or federal employment law changes are enacted to help ensure time entries, payroll data, and tax returns are in line with the laws in the areas a company does business in. This feature also has the ability to update rules in the payroll system to automatically flag non-compliant entries and explain what is needed to fix them with every payroll run. Additionally, for filing tax forms, some payroll software is able to fill out the forms automatically and send reminders when it’s time to file. This feature saves payroll teams from the tedious task of filing for extensions or paying penalties for missing a deadline.
Other Features of Payroll Software: API / Integration Capabilities, Automatic Tax Payment Capabilities, Mobile Capabilities, Tax Filing Capabilities
What are the Benefits of Payroll Software?
Payroll software solutions usually include the following features, all of which can improve the company’s processing, workflows, and systems:
Calculates payroll calculations and deductions: Payroll software calculates gross wages and payroll deductions by managing and processing payroll while ensuring every employee is compensated correctly and on time via their preferred method of payment. This software also calculates and deducts withholdings, such as payroll taxes, insurance, retirement contributions, etc.
Generates accurate payslips: Payroll software should generate a digital, hard copy, or both of employee payslips or pay stubs, that generally display gross wages for the pay period, taxes, and any other deductions the employer is required to make by law. This also includes any other personal deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable contributions.
Automates tasks: Payroll automation can simplify day-to-day operations such as data collection, validation, protection, and year-end reporting.
Stores data: Another benefit of payroll software is the ability to store data, such as payslips and annual reports in a secure and easily accessible database.
Who Uses Payroll Software?
Payroll software is mostly used by HR, accounting, and finance teams. The most important and relevant reasons for these teams using payroll software are given below.
Human resources (HR): HR teams rely on payroll software to automate the complicated payroll processes and to assure that their employees are paid accurately and on time, every time. Accounting teams need to support accurate bookkeeping while navigating diverse tax codes, configuring payroll models, issuing off-cycle checks, and making post-payroll changes. Payroll software assists HR teams in all of these tasks, more efficiently and accurately.
Accounting and finance: Accounting and finance teams use payroll software mostly for processing and reporting. This software gives them an all-in-one application that helps to eliminate duplicate data entry and ensures that the general ledger reflects the most accurate and recent activity. Most payroll software syncs with accounting software, which allows payroll information to automatically be entered, ensuring proper tax reporting and remittance tracking, which is money that is sent or transferred to another party.
Employees: Most payroll software provide online portals that give employees access to their paycheck information on demand. Some examples of this information include tax deductions, 401(k) withholdings, and other breakdowns of benefits. In some cases, employees are enabled to set up their own accounts, review, and sign new hire paperwork directly through the software.
Software Related to Payroll Software
Several software solutions benefit accounting and finance departments, which also integrate with, or provide similar features of payroll software. A few examples of these software categories are listed below:
Core HR software: Core HR software, also referred to as human capital management (HCM) software, stores employee information within a central system of record. Core HR systems are used to manage employee information, such as payroll and benefits data, within an easily accessible, centralized HR database. These HR technology systems have long been marketed as human resource information systems (HRIS) or human resource management system (HRMS) but have recently been replaced by the popular term, HCM.
Companies use core HR software to maintain employee profiles, store relevant employee documents, and identify trends with a holistic view of the organization. Core HR systems are most commonly implemented in HR departments, enabling HR managers to track employee records and report key trends to management. Many core HR solutions offer self-service options so that employees can update their benefits or contact information without interrupting HR workflows. Core HR software is often implemented as part of an integrated HR management suite or offers integrations with third-party HR applications to increase its value across multiple HR functions.
Benefits administration software: Benefits administration software helps organizations plan and administer employee benefits packages and ensure compliance with government regulations. Benefits administration systems are used to manage employee benefits, such as insurance plans and stock options, and facilitate open enrollment periods through an administrative dashboard. Organizations also use these programs to view and adjust employee benefits packages. Benefits administration products frequently offer employee portals and self-service options to enable employees to view, manage, and update personal information and documents.
These systems are most commonly used by HR departments, enabling HR managers to administer benefits packages and encourage healthy usage among employees. With benefits administration software, organizations identify the benefits that provide the most value to employees and reduce overall costs. Benefits administration software also helps companies remain compliant with federal and local regulations, including the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act (HIPAA).
Time and attendance software: Time and attendance software is used by companies and HR departments to simplify time tracking. These solutions manage company time and attendance data by automatically calculating all hours worked as well as vacation time, holidays, sick days, and overtime. Time and attendance solutions offer a variety of methods for clocking in and out including clocks, web, phones, and tablets, to name a few. Some solutions might provide added features including scheduling and visibility into overtime causes and trends. Meanwhile, some time and attendance tools also offer employee self-service portals for employee visibility into all timecard details.
Accounting software: Accounting software helps businesses streamline and automate finance management processes, ensuring accurate records and increasing operational efficiency across recurring processes such as invoicing and reconciliation. Accounting products vary in complexity and functionality; many solutions are optimized for use by companies of a certain size. Depending on the scale of the product, accounting software can include features for payroll processing, invoicing, reconciliation, bill and expense management, and financial reporting. Additionally, some accounting solutions include industry-specific features, such as project accounting for professional services companies or fund accounting for nonprofit organizations.
Challenges with Payroll Software
Even with all of the benefits and features that payroll software solutions provide, they can still come with their own set of challenges.
Human error: While payroll software eliminates much of the time-consuming, manual work, there is still room for human error. Much of the initial data needs to be entered manually to get the system up and running, therefore, when onboarding new employees, the occurrence of human errors is a possibility. Payroll software can help to eliminate many of the chances for payroll error, but it is not absolutely foolproof.
Learning curve: Many payroll systems strive to be user friendly, but there is still a learning curve to using this software. The more advanced features that a software possesses, the more there is to learn and the longer it will take to become totally efficient using the system.
Which Companies Should Buy Payroll Software?
Companies of virtually any size, in any industry, can find payroll software that fits their budget and their needs. There are numerous platforms that are built exclusively from small to medium-sized businesses, or large, enterprise-sized companies. Some payroll software is even available for free, or offer a free trial period so companies with smaller budgets can benefit from payroll software.
How to Buy Payroll Software
Requirements Gathering (RFI/RFP) for Payroll Software
When selecting payroll software, it is important to first look at the size of the company, what functionality is needed, and then familiarize oneself with the different types of software available. There are a variety of options when it comes to payroll software products, including those designed for the business needs of small- and medium-sized businesses.
Compare Payroll Software Products
Create a long list
The main purpose of payroll software is to make everyone's life easier; this includes the creation of pay stubs, reporting, data collection, and paying employees salaries. It’s important to first create a long list of solutions that bring all of these functionalities and tasks together in one system. Buyers may consider including software that offers a mobile app for managing payroll on the go.
Create a short list
After reviewing and researching the software on the long list, the buyer can shorten this list based on the available budget. Payroll software is available to suit all budgets while some general payroll applications can possibly be downloaded for free or bought off the shelf at a lower price.
Buyers must keep in mind, however, that the more specialized a software is, the more expensive it gets. This is the case because the user base for specialized software is usually relatively small. If the company wants something specific to their industry or customized for the business, they should be prepared to pay a premium.
Conduct demos
As a rule of thumb, companies should make sure to demo all of the products that end up on their short list. During demos, buyers should ask specific questions related to the functionalities they care most about, for example, one might ask to be walked through how to run payroll, create customized reports, or add a new employee to the payroll system.
Another factor to consider is how user friendly the software is in managing and tracking payroll. Oftentimes, payroll software built for small businesses is more user friendly but has fewer features than enterprise software.
Selection of Payroll Software
Choose a selection team
It is important that members of the accounting, payroll, and HR team, as well as managers who will be using this software are involved in the selection process. Every business is different and the users are most likely in the best position to offer an educated opinion about which one is the best choice for the particular needs of the business.
After choosing a software, buyers must remember that they don’t have to be stuck with this selection forever; most platforms allow for add-ons or modifications. However, this decision shouldn’t be made lightly because no matter what software is chosen, it will be a big time and money commitment. In order to see a return on investment (ROI), buyers can’t change their minds a few months later and switch software again.
Negotiation
Negotiating a software contract is important to minimize risk, whether it is in terms of performance protection, security protection, or simply making sure that both parties are in complete agreement with what to expect from the other.
If the business has the cash flow, they could ask for a discount in return for annual upfront payment, and many software providers are happy to make that deal. Other times, a software provider may offer unlimited usage if the buyers pay upfront instead of paying a monthly or quarterly package price.
Buyers should also determine if they will need help implementing the payroll software or integrating with another system. Usually, a software provider's first offer will include some implementation services in a given timeframe. Buyers can ask for these services to be removed if they can manage it themselves, or if a third party can do it at a lower fee.
They also need to decide for how long they will need this software. If the company will use the software for years and years, the buyer can negotiate longer terms which sometimes results in more favorable pricing.
Final decision
The final decision should be based on all the information gathered previously. Businesses should try to prioritize needs and select the solution that meets most of, if not all of, their requirements. Companies must remember that there is no one perfect software, but there is one that is best for their business.
Payroll Software Trends
Artificial intelligence (AI)
AI and automation could change payroll in the coming years and may take over the entire payroll process. Chatbots are currently leading the way in AI. These conversational programs conduct online conversations with employees to answer questions, resolve issues, complete transactions, or serve as a payroll helpdesk. AI also assists in automating wage and hourly calculations and simplifies the tax deduction calculation process. This automation frees up time for employees and handles mundane tasks such as reviewing countless spreadsheets and performing numerous calculations.
Cloud adoption
Payroll is the most data-intensive aspect of HR. Companies using a cloud-based payroll system can access their data and software platform from anywhere, rather than using an in-house software system. All the company needs is an internet connection to get into the cloud. Payroll software in the cloud simplifies processes and reduces manual effort, as its systems are backed up constantly. Cloud-based payroll systems are also easily scalable as a company grows. If an organization experiences rapid growth, they don’t have to worry about replacing their existing payroll system. Investing in cloud-based systems that grow with a company allows them to continuously benefit from its functionality.
