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Payroll Frequently Asked Questions

Payroll tax has existed for decades. Payroll software, however, is a relatively new concept.

Our users send us a lot of questions about payroll software. Today, we’re going to answer those questions and identify the pros and cons of payroll software.

What are the advantages of payroll software? Why should I use it?

Payroll software is one of the greatest timesaving tools available to today’s business owners. Payroll software calculates state taxes, federal taxes, and other deductions for each employee in your company. It directly deposits funds into bank accounts and issues paychecks to employees. Paychecks include all required deductions and some payroll software even guarantees these deductions are accurate.

Which types of deductions are processed by payroll software?

Payroll systems automatically calculates all deductions which are legally required in your city, state, or locality. It also calculates federal taxes. Specific payroll taxes include income tax, social security tax, Medicare, and unemployment taxes. State tax rates vary across the country, with some states requiring no income tax deductions at all.

What are some examples of voluntary deductions outside of state and federal payroll taxes?

Payroll taxes are only part of the deductions on some employer’s paystubs. There are many other reasons why a company might deduct money from an employee’s gross earnings. Those deductions could include:

  • Health insurance or life insurance premiums
  • 401(k) and other retirement fund contributions
  • Workman’s compensation
  • Sick days and vacation days
  • Union dues
  • Employee loans
  • Child support payments and court-ordered wage garnishments

Most payroll solutions lets employers manually enter these deductions and automatically deducts payments from employee wages each month.

What are the penalties of failing to pay payroll taxes?

Avoiding payroll taxes is a really bad idea. When people say that the only two sure things in life are ‘death and taxes’, they really mean it: the penalties for failing to file taxes are harsh. If you don’t pay federal payroll taxes on time and accurately, you will automatically be assessed a penalty of 2% to 10%. Your state and local jurisdiction may also apply penalties of their own. Failing to file W-2s will lead to an automatic penalty of $50 for each form improperly filed. The most severe taxes are reserved for federal income tax withholdings: failure to accurately file federal income tax results in a penalty of up to 100% of the amount not paid. Both the employer and employee may be responsible for this penalty.

Which forms are processed by payroll software?

The specific payroll forms processed by payroll software differ between programs. Some software only tells you which forms you need to download, while other software actually prepares these forms, requests your signature, and then files those forms on your behalf. Payroll software typically covers W-2s – which are required for all employees – and 1099s – which are required for all contracted employees.

A good payroll software program would allow users to print or file all of the following payroll forms: 941, 943, 944, 940, W2, W3, 1096, and 1099. Some software also prints and tracks vendor checks. Of course, if you don’t have any employees in these classes and don’t expect to add any employees in the near future, then you may not need software with all of these features.

How should I compare payroll software?

Payroll software varies widely. Some payroll software takes all of the work out of your hands and only requires you to click a few buttons every two weeks. Other payroll software simply guides you and still requires a lot of work on your part. You should compare payroll software based on the following qualities:

  • Types of forms submitted (W-2s and 1099s)
  • Whether or not the program guarantees payroll tax accuracy
  • How many deductions are calculated by the software, including state, federal, and local taxes
  • Whether or not the software allows for additional deductions (according to company stock buying plans and other company-specific policies)
  • Cost, including the monthly subscription price, cost per user, and any additional upgrade features
  • Web based software versus traditional PC software
  • Type of security used, including password protections, number of administrative users allowed, and disaster recovery plans or data backup
  • Compatibility with your existing software, including bookkeeping software and any other in-house accounting tools
  • Flexibility of the payroll software to grow and expand with your business

By carefully balancing all of these factors, you can find the payroll software that works best for your needs.

How much should payroll software cost?

Payroll software varies widely in terms of price and quality. However, there are some general assumptions we can make about pricing. Typically, payroll software costs between $25 and $100 per month for subscription-based online services. Add between $2 and $10 per employee to that price and double that amount if adding employees who work outside of the state in which your business is based. Some payroll software is also available as fixed price PC software, in which case you can pay anywhere from $200 to $500.

Should I download a free trial?

Many payroll software programs offer free trials. Free trials are an excellent way to preview software before you buy it. However, free trials are rarely as ‘free’ as they may look. When signing up for a free trial for payroll software, be aware of a few things. First, did you input your credit card information? If so, then the payroll provider may automatically charge you as soon as the trial period is complete (say, after 15 days or 30 days). Cancel your account before that date. If you enter your email, expect to receive a lot of marketing emails in the near future as the company tries to convince you to become a paying customer.

What are the advantages of cloud-based payroll software?

“Cloud” computing is a popular buzz word these days. What does “cloud” anything actually mean? It basically means that your information is saved in internet-connected server space. You can access that information from any internet-connected device. When your payroll data is saved “in the cloud” or “cloud-based”, it means you can access payroll data anywhere you go. Cloud storage may also be more secure than locally storing data on your hard drive, since you won’t lose important payroll data if your computer crashes.

Should I use payroll software apps?

A number of popular payroll software programs have developed apps for mobile devices like smartphones and tablets. Using these apps is no different than using payroll software on your desktop or laptop computer. In many cases, apps are an easy way to manage your business on-the-go or easily handle business management tasks while you’re out of the office.

Do I need payroll software?

Not all business owners use payroll software. Some business owners enjoy crunching numbers. Others don’t trust computers or software programs for whatever reason. However, even in companies with just one or two employees, payroll software can add up to considerable time savings every month.

What is FUTA?

FUTA stands for Federal Unemployment Tax and, unlike other payroll taxes, it is only paid by employers. As an employer, you report FUTA to the IRS using form 940.

What is SUTA?

SUTA is similar to FUTA and stands for State Unemployment Tax. It is also only paid by employers. State unemployment taxes range from 0.10% to 5.4%. However, in states where SUTA is applied, companies often pay different SUTA rates. Companies which regularly lay off employees who ask for unemployment benefits end up paying higher SUTA tax rates than companies with relatively stable employment.

How does payroll software pay my employees?

Payroll software pays employees in two different ways: first, it can print off paychecks and paystubs. And second, it can issue direct deposits to connected bank accounts.

Can any organization in any city use payroll software?

The vast majority of payroll software works across America. Since federal tax is standardized and state tax is clearly defined, there are very few situations where payroll tax cannot be used for an organization. Payroll tax is often used by churches, nonprofit organizations, factories, accountants, shop owners, colleges, and many more. If you’re ever unsure whether or not you can use payroll software in your city, town, or village, be sure to contact the payroll software company.

Which states have no income tax?

Companies based in some states will pay absolutely no state income tax. Payroll software simply deducts federal payroll taxes. States with no income tax include:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

What happens if tax laws change after I purchase payroll software?

Payroll software is constantly being updated to patch bugs and, more importantly, add recent tax law changes. When these changes occur, your software will automatically update itself to reflect these changes as soon as they’re applied. If you’re using desktop payroll software, then you may need to apply this patch yourself, while cloud-based payroll software will automatically apply all changes to the next payroll period.

What can’t payroll software do?

Payroll software won’t do everything for employers. It’s a huge timesaver, but some work still needs to be done each payroll period. Employers still need to enter any additional deductions beyond state and federal payroll tax, for example. The employer will also need to physically print and deliver the paychecks. When tax season rolls around, the employer will still need to sign employment tax forms and send them in.

About Johnson Hur

After having graduated with a degree in Finance and working for a Fortune 500 company for several years, Johnson decided to follow his passion by embarking on a path to the digital world. He has over 8 years of experience with large companies setting marketing strategy.

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