Doing payroll by hand can save your business money—if you do it correctly. There are all sorts of laws, calculations, and taxes that you have to implement with precision. But, small business owners are busy, and many who do payroll by hand often make costly mistakes.
If you make a mistake, you may owe back wages or taxes, penalties, and court fees. In fact, the IRS assessed nearly $7 billion in civil penalties for the tax year ending in 2021, thanks to failure to comply with filing, reporting, and payment requirements.
Here’s the bottom line: Doing manual payroll calculations can be dangerous and cost you more in the long term. Read on to learn about five dangers of doing payroll by hand and how to avoid.
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 you’re handling all the calculations on your own. You might:
- Forget to add or multiply something
- Record a number incorrectly
- Type a wrong number into your calculator
Some payroll miscalculations are small. But regardless of the size of the error, 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, which may require you to give employees retro pay or correct a payroll overpayment.
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, 48% spend at least three hours per month on payroll taxes. What could you do with an extra three, five, or 10+ hours each month?
If your information is disorganized, you could waste even more time. Constantly searching for information in many places easily eats 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 paper, the paper 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. Or, computers could get 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 must make sure you use updated tax rates. It’s easy to use out-of-date rates. Taxes are constantly changing, after all.
If you run payroll by hand, make sure to constantly check 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 dangers
According to Geni Whitehouse, CEO at Even a Nerd, having someone else calculate and handle your payroll 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 to help you mitigate the dangers of manual calculations. You can:
- Hire a professional
- Use payroll software
Hire a professional: You can outsource your payroll to a professional, such as an accountant or a payroll services company. Payroll professionals will handle all parts of the payroll for you but they typically cost more than other options. Also, you won’t have much control over your payroll.
Use payroll software: You can also use online payroll software. Payroll software will handle payroll calculations so you don’t have to. And if you use cloud-based payroll, the system should automatically update with new tax rates and laws. Payroll software is typically less expensive than hiring a professional. You can sign up for full-service payroll if you want the software company to handle your employment taxes.
Let the experts handle your payroll. Try Patriot’s Full Service Payroll software for free. We guarantee accurate calculations and tax deposits!
This article has been updated from its original publication date of August 15, 2016.
This is not intended as legal advice; for more information, please click here.