Automation helps you complete more work in less time, and moving away from a manual process can help you scale the business. Payroll is often the most time-consuming accounting task, and your payroll data may change every month.

To understand the benefits of payroll automation, start by thinking about the steps you must complete to pay workers. Is the new hire an independent contractor, or an employee?

Determining worker classifications

The IRS distinguishes independent contractors from employees by using three criteria:

  1. Behavioral control: Does the company have a right to control what the worker does and how they perform the job?
  2. Financial control: Does the company have a say in the material aspects of a worker’s job? In other words, does the business decide which expenses are reimbursed, or who provides the necessary tools and supplies?
  3. Contractual Relationship: Is there a written contract? Are benefits, such as pension, insurance, and vacation days, part of the contractual obligation?

FICA taxes are paid by workers and employers to fund Medicare and Social Security. When the three criteria above are met, the IRS considers the worker to be an employee of the company, and the firm is responsible for filling out a W-4 and paying a share of the FICA taxes.

If any of the criteria are not met, the worker is an independent contractor who is responsible for paying his or her own taxes, including income tax and FICA tax.

If the new worker is an employee, you must have the individual complete a W-4.

Completing Form W-4

Information submitted on the Employee’s Withholding Allowance Certificate (Form W-4) is used to determine the dollars withheld for tax purposes. Employers must keep a worker’s most current W-4 form in his or her payroll file, and the IRS may request a copy of the form. The tax withholding amounts are calculated using the number of allowances on the W-4.

You need additional information before you can process payroll.

Gathering information for payroll processing

Determine this information for each employee and independent contractor:

  • Wages: Wages may be based on a salary, or calculated using an hourly rate of pay. Gross pay, less withholdings, equals the net pay amount due to the worker.
  • Payroll cycle: The number of pay periods determines how much salary is paid on each payroll date. It also determines the start and ending days for computing hourly payroll.
  • Tax withholdings: Federal, state, and possibly local amounts withheld for taxes. In most cases, the employer does not withhold taxes from a contractor’s pay.
  • Benefit withholdings: Amounts withheld for the worker’s share of insurance premiums, or funds to be invested in a retirement plan.

When workers are hired, promoted, or let go, your payroll changes. Employees will change their withholding information over time, and some businesses have to calculate overtime and other benefits based on union contracts. Payroll is a moving target, and using spreadsheets to calculate payroll increases the risk of error.

Why spreadsheet are a bad idea

Spreadsheets are time consuming to create, and require constant manual review for accuracy. Using spreadsheets for payroll calculations leads to more errors, for a number of reasons:

  • Input: When you manually input data, you’re bound to make an error. The only way to catch errors is to invest more time, and review each cell in the document.
  • Formulas, links: A formula error can generate dozens of mistakes in a single spreadsheet. You can also make mistakes when information is linked between spreadsheet tabs.
  • Version control: Have you ever started working on a spreadsheet, then learned that it’s the wrong version?
  • Security: Emailing a spreadsheet increases the risk of cyber theft.

Automate payroll to avoid the problems caused by manual work and spreadsheets.

Using integrated systems

You can use automation to collect data, calculate payroll, post accounting entries, and to submit tax reporting. At a minimum, use an accounting software package to move away from manual work. You may also hire an outside payroll processor to take on most of the work for you.

Here are some of the benefits of using an automated system:

  • Accuracy: Once you input salary and the employee’s allowances, the tax calculations are made electronically. Accounting software can be updated, as payroll tax laws change.
  • Speed: If you submit data to a payroll processor electronically, the processor can calculate withholdings, and pay workers using a link to your bank account. The outside firm will send you the amounts to post in the accounting records for wage expense and withholdings.
  • Tax reporting: Once payroll is processed, accounting software or a payroll processor can generate the reports you need to submit tax withholdings to the IRS and to state revenue offices.

Use an automated payroll process to save time, increase accuracy, and to set your business up for future growth.