Doing payroll by hand can save you money—if you do it correctly. There are all sorts of laws, calculations, and taxes that you have to implement with precision. But, many small business owners that do payroll by hand make mistakes.
Payroll mistakes can be costly. You might owe back wages or taxes, plus penalties and court fees.
The IRS issued 6.3 million penalties related to employment taxes totaling $4.3 billion for the tax year ending September 2015.
Doing manual payroll calculations can be dangerous for your business.
The 5 dangers of doing payroll by hand
Below are five of the dangers of doing payroll manually. Have you experienced any of these?
1. Incorrect calculations
Manual payroll calculation errors are probably the biggest danger of doing payroll by hand.
It’s easy to make errors when using a manual payroll system. You might forget to add or multiply something, record a number incorrectly, or type a wrong number into your calculator.
While a payroll miscalculation might be small, it’s still wrong. You might pay your employees the incorrect amount. Or, you might accidentally skimp on taxes.
If you make a mistake while doing manual payroll calculations, you probably won’t catch it until it’s too late. You likely don’t have payroll internal controls to check the accuracy of your payroll.
2. Wasting time
Doing payroll by hand can take a lot of time—valuable time that you could spend working on your business.
When you do manual calculations, you have to plan your time carefully. If you don’t, you might run out of time before you have to hand out paychecks.
Of small businesses who handle payroll internally, 30% spend 1-2 hours per month on payroll taxes. And, 27% spend 3-5 hours per month on payroll taxes. While the number of hours seem small, they add up.
If your information is disorganized, you could waste even more time. Constantly searching for information in many places can easily eat up time. Even if you aren’t disorganized, you probably still have to reference many documents while doing payroll. It takes extra time to switch between notebooks, spreadsheets, tax documents, and charts.
3. Losing information
You might lose or misplace information when doing manual payroll calculations.
If you use papers, the papers can become lost or damaged. Something as simple as knocking over your coffee cup can ruin your payroll.
Payroll information stored on your computer can be ruined too. Hackers and viruses can damage and steal your payroll records. Computers have errors and die, erasing your files. If you don’t back up your computer, your payroll records could be gone forever.
4. Out-of-date tax rates
When you run payroll yourself, you have to make sure you use updated tax rates. It’s easy to use out-of-date rates. Taxes are constantly being changed.
If you do run payroll by hand, you need to check constantly for tax rate updates. Missing one update will cause you to withhold and remit the wrong amounts. Using incorrect employment tax rates can result in penalties.
5. Wrong numbers
You probably have payroll numbers in multiple places. A spreadsheet here. Tax rates there. Time cards somewhere else. With your information spread out, you might get mismatched numbers.
You need to make sure all numbers are updated. If you update a number in one place, you need to update that number everywhere. If you forget to update a document, or incorrectly update a document, your payroll will be off.
How to avoid the dangersHaving someone else handle your payroll is the only way to avoid danger.
According to Geni Whitehouse, CEO at Even a Nerd, outsourcing is the only way to avoid the dangers of doing payroll by hand.
“As a small business owner, you are forced to do a little bit of everything. You need to prioritize where you can and outsource when it makes sense. The first place to start is payroll,” says Whitehouse. “The risks and complexities associated with calculating, withholding, and depositing federal, state, and local payroll taxes make it a no-brainer to outsource this task. Leave payroll and the associated taxes to the experts. Do it now.”
You have several payroll options. You can hire a professional, such as an accountant or a payroll services company. Payroll professionals will handle all parts of the payroll for you, buy typically cost more than other options. Also, you won’t have much control over your payroll.
You can also use online payroll software. Payroll software will still take a little bit of your time, but not as much as running payroll by hand. Payroll software can be cheaper than hiring a professional. If you want the software company to handle your employment taxes, you can purchase a software package that will do so.
Let experts handle your payroll. Try Patriot’s Full Service Payroll software for free. We guarantee accurate calculations and tax deposits.