Computerized Payroll System for Small Business: A Definitive Guide

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Computerized payroll system

Computerized Payroll System: Choosing and implementing a payroll system is a major undertaking for a company, not to mention an expensive one.

There is a tremendous amount of staff time as well as money invested in selecting, implementing, and maintaining the payroll system.

It is a never-ending cycle as well. Once the system implementation is complete, all the bugs are finally worked out, and the system is running smoothly, it is time to begin installing the upgrade.

Payroll System

Very few companies continue to process their payroll without the aid of a computer. Even small companies with only one or two employees can purchase a “payroll system” in boxed software that runs on the owner’s PC. But why process payroll on a computer system?

Why should a company, especially a small one, take the time, effort, and money to find the software, implement it, learn how to use it, maintain it, and eventually upgrade or improve it?

The answer to that question is simple. History and experience have shown that it is more efficient to process payroll on a computer. Why? This is a question that many payroll departments no longer ask or perhaps have never had the chance to ask.

Why use a computerized payroll system?

What are the objectives of implementing this method?

What should a good computerized payroll system do?

In the late 1960s through the 1970s, in-house computer systems and the buildup of payroll processing service bureaus became widespread. Switching from the tedious manual computations and report building to computerized payrolls made sense.

It was a time saver and was certainly much more efficient and accurate, even with all the many bugs that had to be worked out. But customization was not really an option in those days.

Computerized Payroll System

The payroll manager could not say, “L wants the payroll system to do X.” It was more along the lines of, “this is what the system can do—work around that.” With the changeover to PCs in the late 1980s and early 1990s, in-house payroll systems became more customized and software pack-

Ages began to offer more tools. To remain competitive, the service bureaus began offering more services and more sophisticated systems.

Today, with WindowsTM and web-based programs and applications available to the payroll manager, the possibilities are virtually unlimited as to what a payroll system is capable of accomplishing.

However, even with today’s technology, the astute payroll professional still needs to ask the same question as all those years ago—”what is the objective of a computerized payroll system?”

An efficient payroll department must understand all the nuances of every facet of the department and this includes the payroll processing software.

It is not enough to comprehend the basics of doing the input and producing the checks; the staff must be able to see how everything is tied together.

If a deduction is set up, how does this setup relate to taxable wages? If a payment code is created, how should the computer system report it on Form W-2?

This is why it is important to understand what the system is supposed to do and compare that to what it actually does do.

The job of the efficient payroll department is to make sure the system does what it should when it should.

What Must a Payroll System Have?

To answer this question is to ignore all the fancy bells and whistles of today’s technologically advanced computer systems and get back to the basics of processing payroll. In essence, the objectives of any payroll system computerized or otherwise must include (in no particular order):

Basic Calculation of Straight Time Following the Appropriate Federal or State Regulations.

The system must be able to calculate this amount based on every state in which the company pays its employees.

Calculation of Overtime or Premium Pay According to Federal and the Appropriate State Regulations.

This requirement is difficult to find in a computer system. Overtime or premium pay requires the use of the regular rate of pay in order to perform the calculations.

This rate is calculated whether or not bonuses or payments are included in the payroll that could trigger the special calculations.

The regular rate of pay calculations can be difficult to produce on a computer system because of all the parameters that are needed if the overtime or the payment that triggers the calculations span more than one pay period. These regulations were, of course, created long before the introduction of computers.

Calculation of Gross Wages.

This involves being able to include bonuses, additional pays, piecework, commissions, tips, or imputed income amounts.

Calculation of Taxable Wages for All Tax Categories Including Federal Income Tax, FICA Taxes, and Sales Taxes.  

This also includes the requirement to take the amounts for benefits such as deferred compensation or cafeteria plans into account when calculating taxable wages for each tax category.

It should also have the capability to allow the payroll department to determine the taxation of each of those benefits, for example, whether or not it is subject to unemployment insurance and the like.

Calculation and Deduction of Taxes.  

These include the basics of federal income tax, social security, and Medicare taxes, and all applicable state taxes. It should be able to do this based on formulas or percentage rates. It must be able to calculate supplemental taxes. It must also be able to calculate both types of taxation on one check.

Calculation of Employer Taxes

The system should be able to calculate the employer portion Of taxes and employer taxes such as unemployment insurance. The rate for use in the calculation should be adjustable to accommodate changes in the rate from year to year.

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