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Small business owners have three options if they are looking to simplify and enhance their payroll process: acquire payroll software, outsource payroll via professional payroll services, or sign up for online payroll. Choosing the right payroll processing system for your small business can be confusing- especially since they all seem to be offering similar services. The truth is, however, that each one is targeting a different market. Some software solutions are industry specific and offer more than just payroll. Pioneer Interactive for example offers payroll functions as an additional feature to their HVAC dispatching software suite. These types of “vertical” software solutions have become the new trend for small businesses. Although many are available it is important that you determine that payroll function within these software packages meet your companies requirements.

The following is a brief description of each type of payroll service:

Payroll Software

Payroll software can either stand alone or come as part of an accounting software package. Use of payroll software, means that all aspects of the payroll process, including generating checks or sending a direct deposit, withholding taxes, filing tax returns, and making payroll tax payments, are done on-premises by the small business itself. While the software is designed to ease the burden of intricate and cumbersome calculations, the business is responsible for upgrading the software and acquiring any tax table and tax rate changes.

The Benefits:

• You have complete control over your payroll process.
• You can generate reports to aid payroll management and planning.
• It automatically calculates employee earnings and deductions and deducts federal, state, and local payroll taxes.
• You can prepare and print related tax forms.
• It is moderately expensive.

The Drawbacks:

• You need someone who is familiar with accounting to process payroll information.
• There is less customer support and more reliance on your own inner resources.
• Not all software packages allow for direct deposit.

Payroll Services

When using a payroll service, your company outsources its payroll duties entirely. The payroll service will generate and deliver checks or make direct deposits. It is also responsible for withholding taxes, making tax payments, filing tax returns, and calculating, distributing, and filing year-end tax forms. Human resource (HR) services are also sometimes available.

Your contact with the payroll service revolves around telling the service how many hours each employee worked, informing the service of new or terminated employees, or asking questions.

The Benefits:

• Good customer support.
• Easy set-up.
• The payroll service provider eliminates all payroll tax management burdens.
• The payroll service will calculate, file and pay federal, state and local payroll taxes.

The Drawbacks:

• This service is very expensive.
• The business has no control and little involvement in the payroll process.

Online Payroll

Online payroll is a form of payroll services that is provided by an online company. Also known as Internet payroll, it is a mixture of the two previous options. Generally, the kind of services offered will vary depending on the needs of the small business. Those businesses seeking some control over the payroll process can request fewer services or more access to and control over payroll information. Whereas, those who would like to hand over their payroll can get a “full-service” package. Even something between these two options is generally possible.

Benefits:

• A lot of flexibility.
• Generally good customer service.
• The cheapest option.

The Drawbacks:

• Since all information is stored and transmitted online, there is the risk that information can be lost or hacked into.

As your small business begins to grow and your payroll increases, you may consider using direct deposit to pay your employees. Though using direct deposit can improve your business’ efficiency and even reduce costs, it is not for every business. The following is a brief guide to setting up a direct deposit, including its benefits and drawbacks.

How does a direct deposit work?

When it comes to setting up your direct deposit, you have several options. You can set up a direct deposit through your payroll service provider. There are also many banks that provide an option for direct deposit as part of their payroll services. Thus, you could set up direct deposit directly through the bank where you have your business bank account. Alternatively, you can choose one of many popular and easy-to-use accounting or payroll software programs, such as QuickBooks, Peachtree, or ZPay.

Once you have decided which system to use, your employees will fill out a form with their bank account information authorizing you to deposit funds directly into their accounts. After a trial run to verify that all the account routing information is correct, funds can then transferred from your business to your employees’ accounts.

Instead of receiving a paycheck, employees will receive a receipt of payment that specifies how much money was deposited into their accounts and when the transaction was completed. This receipt can be either in paper form or can be sent via email.

What are the benefits?

Depending on how big your company is and which direct deposit option you choose, you can save a significant amount of money on payroll processing costs, including the costs of labor and paper. Moreover, direct deposit is good for your employees who no longer will have to wait for their checks to clear, and who will receive their paychecks automatically whether they are on vacation, sick leave or away on a business trip.

What are the drawbacks?

But despite all of the benefits, direct deposit services may not be for all small businesses. Direct deposits come with processing fees. These fees are usually relatively small compared to the costs of payroll with regular paper checks. If, however, you only have a few employees, then direct deposit may not be cost effective for your business.

You should also do your research before deciding on which financial institution to use. Each institution has its own fee structure that may or may not be favorable to your small business. One bank or institution, for example, may charge a flat monthly fee for unlimited direct deposit transactions, while another might charge a fee for each transfer made.

Small business growth often necessitates hiring additional employees, and with these employees comes the issue of how to pay them. The are three common methods of employee compensation: commission, hourly rate, and salary. Each method has its benefits and limitations, so finding the best way to compensate your workers will really depend on the nature of your business.

Let’s take a look at these three methods and how they would work for small businesses:

Commission

Commission is payment to an employee based on the completion of some quantitative task or the selling of a specific amount of goods or services. Thus, a worker can be paid for each item that is assembled, and a salesman can earn a percentage of completed sales.

By law, an employer does not have to pay minimum wage since earnings are based on the performance of the employee: the more an employee sells or completes, the greater are his earnings. On the other hand, an employer can choose to offer commission on top of an hourly wage or set salary

Paying on a commission will give employees an incentive to be as productive as they can. The business benefits further by only paying for completed work.

The downside is that not all businesses or positions are suited for this method of compensation. It also can discourage workers who may feel that they are not earning enough money, especially if production or sales are slow.

Hourly Rate

The most popular method of paying employees is with an hourly rate. Here, an employee’s income is based on a set amount of money per hour up to 40 yours a week. After 40 hours, and employee paid on an hourly basis in most cases will get time and a half, or overtime pay. This means that a person who earns $7 an hour and works 50 hours in a given week will earn $385 [($7 x 40hrs) + (10.5 x 10hrs)].

Employees who earn money by the hour are entitled to receive an amount equal to or above the federal minimum wage. Currently, the minimum wage is holding at $5.85 per hour.

If you will be paying your employees by the hour then make sure to check with your state’s employment laws. Some states may require a minimum wage that is higher than the federal amount, and some states have further regulations. Vacation, sick leave, holiday and severance pay are not required by federal law. But again, you should check your state’s employment laws to see if there are any differences.

Though an hourly rate is not as motivating to employees as working on commission, it still encourages workers to work for longer. The business also does not have to worry about providing vacation, sick leave, holiday and severance pay.

Employees enjoy the simplicity of earning wages by the hour and being rewarded for the amount of time worked.

Salary

A salary is a pre-determined amount paid to the employee on a regular basis throughout the year. The amount paid generally does not vary from one payment period to the other, irregardless of actual hours worked. Often the salary already includes any bonuses or overtime that the employee is likely to work.

Many of these positions also come with a benefits package that includes some form of vacation, sick leave, holiday and severance pay.

Employers like this approach for its simplicity. Among employees, however, this method is not so popular. Wages are completely disconnected from both the amount of time that an employee works as well as the employee’s productivity. A worker who needs to work overtime, for example, may feel a little cheated when the same standard pay is later received.