Choosing a Payroll Method Rated:

As a business grows, it may come time to expand your workforce and hire one or more people to work for you. However, before you engage an employee or an independent contractor, it is time to start thinking about how you will meet your federal, state and local tax responsibilities on these workers.

There are a few different ways of handling payroll: you can do it yourself by hand or by using employee payroll software, you can hire an accountant to manage it or you can outsource the entire process.

What does payroll involve?

Payroll accounting. This generally involves calculating how many hours an employee works each week, determining their rate of pay, making tax deductions from the employee's wages and paying the employee.

Payroll administration. These are higher-level tasks, such as managing employee personnel, managing payroll information and filing tax forms. This aspect also includes staying up-to-date with and ensuring compliance with federal, state and local employment laws.

What are my responsibilities?

Regardless of which payroll method you choose, it is the business owner's responsibility to ensure taxes are both reported and deposited accurately, in a timely manner. There are penalties for late deposits.

How do a choose a payroll method?

Each employer should take into account the business' particular circumstances and their own preferences when choosing a payroll method.

Here are descriptions of some of the most common techniques:

Doing it yourself by hand

Some business owners prefer to do payroll themselves, by hand.

Paying employees: In order to pay your employees, you would have to keep track of the time they work, calculate taxes and create paychecks manually.

Paying the government: When it comes time to pay taxes, you would calculate these yourself, fill in the forms by hand and send in a check by mail or electronically.

Best for: Small firms with only a handful of employees, with a cost-conscious and financially savvy owner. Those who enjoy administrative tasks and like to have full control of financial records may opt to do payroll by hand. This technique is best-suited to business owners who have a bit of know-how about tax matters and can ensure their knowledge is up-to-date.

Pros: Processing payroll by hand is the least expensive option

Cons: Preparing payroll manually can be extremely time-consuming and may seem tedious to some owners. You have to keep up with the latest changes in payroll regulations and changes in withholding tables in order to ensure it is done accurately. Doing payroll by hand also increases the chances of making a mistake - and potentially incurring a fine for your business.

Using employee payroll software

With this method, the business owners is still in control of entering tax and employee information, but most tasks are automated.

Paying employees: In order to make sure workers get compensated, you enter the time they worked into the employee payroll software. The program then automatically calculates how much tax should be deducted in various categories. Finally, you can print the checks from your computer.

Paying the government:Employee payroll software can remind you when your taxes are coming due, so you don't have to keep track of these dates manually. You can use it to fill out your tax forms very quickly, automatically calculating what you need to pay. At the end, you have the choice of filing taxes electronically or printing them and sending them in.

Best for: Business owners who want a faster method of completing payroll without error, while still maintaining control.

Pros: You get improved accuracy and the guarantee that the software is using the latest information on taxes and payroll updates. Using payroll software can free up your time to concentrate on running your business and handling higher-level responsibilities.

Cons:Employee payroll software costs money, but many business owners feel the cost is worth it, considering the amount of time it frees up.

Outsourcing payroll

Outsourcing payroll involves hiring an outside company to complete the same tasks that would be performed either by you or by employee payroll software.

Paying employees: To pay workers, you report the time they have worked to the outsourcer, who calculates taxes and delivers paychecks.

Paying the government: Similarly, the outsourcer will keep tabs on when your taxes are due, prepare the forms and file on your behalf.

Best for: Businesses with a larger number of employees and owners who are comfortable removing themselves almost entirely from the payroll process.

Pros: Choosing this method will free up your time to concentrate on other aspects of running your business. Using a payroll service also helps ensure your firm is following the most up-to-date federal and state laws for tax withholding.

Cons: Outsourcing payroll typically costs more than using employee payroll software and is definitely more expensive than doing it by hand.

Assisted payroll

Assisted payroll is a hybrid of employee payroll software and outsourcing, with some tasks handled by you and other by the software company.

Paying employees: To pay employees, you enter the hours they have worked into your employee payroll software to create paychecks or use direct deposit.

Paying the government: The software company handles tax payments and files tax forms on your behalf without being prompted to do so.

Best for: Employers who would like to maintain control over payroll data and have uninterrupted access to this information but who also want freedom from worrying about tax responsibilities.

Pros: You can count on the assisted payroll service to provide accurate information to the government without having to prompt them. At the same time, employee payroll data is instantly accessible to you for running reports and issuing checks.

Cons: This service tends to be more expensive than using employee payroll software alone, but is less expensive than using an outsourcer.