Payroll Services: How to Streamline Your Business Finances
1 in 5 payrolls contains errors, each costing an average of $291, according to an Ernst & Young survey. Additionally, the typical organization makes 15 mistakes and corrections each pay cycle, causing lost time and revenue, and the potential for lawsuits.
But it shouldn’t feel this risky and chaotic every time you run payroll. Providing your employees with compensation for the hours they’ve completed is a standard business process and it needs to run like clockwork every time.
This guide covers why smooth and efficient payroll services are integral to your business. We’ll explore the steps involved in running payroll and what to look for in a comprehensive payroll service platform.
What are payroll services?
Payroll services encompass all the processes and tasks involved in compensating employees for their work while remaining compliant with relevant tax and employment laws. These services can be managed in the following ways:
- In-house payroll: A company's HR or payroll team manages all payroll processes. They might use manual processes involving a patchwork of spreadsheets, systems, and paper records.
- Outsourced payroll: A third-party payroll provider, such as an accounting or HR firm, manages all payroll processes on behalf of a company. This can be cost-effective for larger companies with complex payroll needs that want to focus on their core business functions.
- Digital payroll service solution: Cloud-based business payroll software automates payroll processes, eliminating the need for manual work and reducing the risk of errors. This solution can be managed by either in-house teams or third-party payroll companies.
Why are payroll services important?
Payroll services are integral to the smooth running of your business, delivering the following essentials:
Compliance
When compensating employees, payroll teams must adhere to various federal, state, and local compliance laws and regulations to ensure fair treatment of workers, protection of employees' rights, and accurate tax collection. These include:
- The Fair Labor Standards Act (FLSA): Governs minimum wage, overtime pay eligibility, recordkeeping, and child labor standards for full-time and part-time workers in the private sector and in federal, state, and local governments.
- State minimum wage laws: While the FLSA sets the federal minimum wage, many states, cities, and counties have established their own higher minimum wage rates. For example, California has a minimum wage of $16, but fast-food restaurant employees receive $20 per hour. On the other hand, Georgia and Wyoming have a minimum wage of $5.15 per hour, although most workers in these states are covered under the federal minimum wage of $7.25 per hour.
- New hire reporting: The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 is a federal and state requirement for employers to file a report about their new employees to a designated state agency. The law makes it easy to track delinquent parents across state lines and collect relevant child support from their wages.
These are just a handful of the laws and regulations that payroll staff must comply with. Companies that fail to keep up with these responsibilities face legal challenges, financial penalties, and loss of reputation. Clearly, inaction in payroll is not an option.
Efficiency and accuracy
Payroll errors are relatively common, especially in organizations without automated payroll processes. From manual data entry mistakes to misinterpretation of labor laws and miscalculating payroll taxes, there’s plenty of room for inefficiencies to creep into your payroll process. Thomson Reuters reports the top five most common errors as:
- Misclassifying employees
- Incomplete records
- Overlooking fringe benefits
- Wage garnishment noncompliance
- Missing deadlines
Digital payroll services deliver precise, consistent results every time. By entering data into a single system instead of manually entering data into numerous payroll reports, spreadsheets, and systems, you minimize the potential for miskeying. This centralized approach saves time for payroll staff and reduces the risk of errors and subsequent audits or penalties.
Employee satisfaction
In an economic climate where many workers are concerned about the cost of living, 30% of employers are choosing to invest more in financial wellness programs to support their workforce. Online payroll services complement these efforts by recognizing that employees who receive their wages on time and in full have trust and faith in their employer. When payroll works seamlessly, it signals that an employer can afford to pay its employees, isn't trying to cut corners, and is compliant with all relevant laws. These basic details hugely influence employee satisfaction, retention rates, and employer brand.
Case study: PP Control & Automation is an outsourced provider of services to global machinery builders. With 200+ employees, managers had been manually entering their direct reports' vacation information into online forms. The problem? If they forgot to log the details, their employees weren't compensated for the time off. PP Control & Automation's HR and payroll department received an average of 50 monthly pay queries, prompting pay corrections and back payments. The company has now switched to UKG Ready as its new workforce management system, radically improving the overall employee experience.
Strategic financial planning
Sleek and sophisticated payroll applications help you keep tabs on your payroll-to-revenue ratio. To calculate yours manually, use the following formula:
- Payroll to Revenue Ratio = (Total Payroll Expenses / Total Revenue) x 100
On average, most businesses should aim to keep their payroll costs within 15-30% of their total revenue, but this can vary based on industry. For example, manufacturing businesses have higher expenses related to materials, equipment, and other non-payroll production costs. Therefore, their payroll expenses might be between 10-20% instead. Conversely, service-oriented businesses, such as consulting firms, restaurants, and healthcare providers, often have higher payroll-to-revenue ratios. These can range from 30% to 50%, as their labor-intensive operations depend heavily on skilled personnel.
In any case, payroll services are integral to your financial planning. Understanding your position in real-time allows you to adjust your operations and hiring practices as needed. With the right payroll system, you can also forecast future labor costs using your current financial data and projected growth trajectory. This allows for better decision-making when it comes to budgeting, expansion planning, and resource allocation.
Pay transparency
As society strives to bridge the gender and racial pay gaps, compensation transparency is no longer taboo—it’s a hot topic. In 2018, California became the first state to enact a pay transparency law, preventing employers from asking about a person’s salary history, including compensation and benefits. California’s example caused many other states to follow suit with similar laws aimed at enhancing pay equity and transparency within the workplace. Such legislation aims to prevent wage discrimination and encourage a more open dialogue between employers and employees about salary expectations and compensations.
Payroll systems are at the heart of this push, providing access to pay data for every employee in an organization. By implementing digital payroll services, employers can ensure all salaries are fair and equitable across different demographics, helping to advance women and people from underrepresented groups in the workplace.
Payroll also provides employees with detailed breakdowns of their wages, including benefits and deductions, to better understand their overall compensation. This level of transparency builds trust and fosters a more inclusive company culture where pay is determined by skill and experience rather than gender or ethnicity. It also protects against potential legal action related to unequal pay practices.
What are the steps involved in processing payroll?
Processing payroll is a meticulous task involving the following key stages:
Determining your payroll cycle
Decide how often to pay your employees; common payroll cycles include weekly, bi-weekly, monthly, or semi-monthly. Your decision impacts cash flow management and employee satisfaction.
Collecting essential employee information
Gather and verify all necessary details from employees, such as their social security numbers, bank account information for direct deposits, tax withholding preferences, and any other personal details required for payroll.
Attendance and time tracking for contractors or hourly employees
Keep accurate records of the hours worked by each employee, especially for contractors or those paid hourly. Time and attendance tracking might involve manual timesheets, digital clocking systems, or automated tracking software for a more efficient process.
Calculating gross and net pay
Determine each employee's gross pay based on their salary or hours worked, including any overtime, bonuses, or commissions. Then, calculate the net pay by deducting taxes, Social Security, Medicare, and other withholdings or benefits (e.g., insurance premiums, retirement contributions).
Paying employees
Pay your employees using your chosen method, such as direct deposits or checks. Ensure all payments are processed on time to maintain trust and compliance. Depending on your location, you may also need to generate wage stubs for employees. It's worth knowing that some states require paper statements, while others make electronic statements accessible. Check your state's specific requirements, including whether there is an opt-in or opt-out preference.
Tax filing and payments (Withholding taxes)
Accurately withhold the correct amount of federal, state, and sometimes local taxes from employees’ paychecks. Regularly submit these withholdings to the appropriate tax authorities.
Record keeping and reporting
Maintain detailed records of all payroll transactions, including hours worked, pay rates, deductions, and payments for each employee. This is essential for auditing purposes and compliance with state and federal regulations.
Completing year-end processes
At the end of the fiscal year, prepare and distribute year-end forms, such as W-2s, to employees and file them along with other required documents to the IRS. This process also involves reconciling year-end payroll records and ensuring you accurately report all withholdings and contributions (e.g., retirement plan contributions.)
Carefully executing these steps enables employers to manage their payroll efficiently, meet statutory requirements, and maintain a positive relationship with their employees.
What to look for in a payroll service solution
A payroll service is an investment that will save time and money for your business while reducing errors and the risk of noncompliance. With numerous solutions in the market, here's what you should be looking for before you commit to a particular platform:
Features and functionality
Each payroll service platform will offer different bells and whistles that may appeal (or not) to your organization. Consider your organization size, industry, compliance requirements, and any other features you may need during your vendor research process. Some popular features include:
- Direct deposit options to eliminate the need for paper checks
- Tax filing services to streamline your tax withholding and reporting processes
- Customizable pay schedules to fit your payroll cycle preference
- AI-driven tools for automated time and attendance tracking and efficient and accurate processing
- Multi-country and multi-currency processing for organizations operating globally
- Real-time reporting to keep track of payroll expenses and identify any discrepancies or issues
Cost
Payroll service pricing can be confusing, with different options available based on company size, headcount, or any optional extras you want added to your package. Some common pricing structures offered by payroll service providers include:
- Per employee per month
- Per payroll run
- Fixed base price for unlimited payroll runs plus variable fee for optional bolt-on services
When evaluating different vendors, ensure you understand if any extra charges are applicable for payroll setup, training, or customer service. A free demo from a sales team and a limited trial period are also useful to help you navigate the platform and assess its value for your organization.
Integrations Syncing your payroll platform with other tools in your tech stack enables simple data transfer across multiple software programs. For example, you might connect your payroll solution to your HCM or HRIS, meaning that you’ll enter your employee data into one system, and it will automatically sync with your payroll system. Automation recipes also allow you to auto-enroll employees into a company benefits scheme using payroll data to register for different perks.
Integrations eliminate manual data entry and the associated risk of human error. Check which integrations are available before choosing a payroll service to ensure compatibility with your existing systems and processes.
Scalability
Future-facing organizations will also think one, three, five, or even ten years ahead. As a profit-driven business, scaling your company in terms of headcount, branches, or international reach is always in the cards. If this is a likely scenario, find a flexible payroll service that can grow with you. It's also worth considering if any extra fees are associated with scaling up.
Case study: Yoga Joint is an example of a company that has scaled rapidly, opening as a single yoga studio in 2010 to eight studios employing 170+ people throughout South Florida. The company eventually plans to expand nationwide. To address its growth, Yoga Joint selected UKG Ready to manage its payroll, benefits, talent, and HR needs for a predominantly hourly workforce. Christine Carr, vice president of human resources at Yoga Joint, explains:
“We struggled with payroll in the past. So, when we selected UKG, we leveraged the step-by-step navigation to process payroll seamlessly, testing two full payrolls that were both perfect, down to the penny. This level of accuracy is essential to keeping our people happy and engaged, and it gave us confidence that we made the right decision when we decided to partner with UKG.”
Customer support
Whether experiencing teething problems during setup or experiencing an outage during an end-of-year payroll run, every company wants the reassurance they’ll receive timely, quality support from a customer service department that cares.
Check out customer reviews from platforms like G2 which make it easy to understand how other companies have experienced a particular software product and the quality of service they’ve received. You can also view a direct, head-to-head comparison of two or more products.
Accessibility
In a world where we expect access to data on tap, many companies will benefit from a payroll system with 24/7 access for your HR team, remote workers, and employees on-the-go via mobile apps. Consider whether the functionality of any mobile service is comprehensive compared to desktop versions, including any delays in updating transactions on-the-go.
Similarly, ensure accessibility features cater to a range of user needs.
Employee portal
Integrated employee self-service options enhance your basic payroll processing while removing the need for them to contact HR with every single query.
Staff can check their pay stubs and benefits information, update personal details, and make changes to tax settings directly through the platform. They might also access crucial records to validate their income or employment history to rent, buy a home, or apply for loans.
Security
Storing and processing personal employee data carries significant responsibility. Research vendor security policies carefully to ensure they offer the level of protection your business needs. Look for the following to minimize the risk of any breaches or disasters:
- Robust encryption methods
- Two-factor authentication processes
- Regular data backup routines
Always cross-check a payroll service's specific security features with the compliance standards you must meet.
How to choose payroll services according to company size
Understandably, there are differences between running payroll for a small and midsize business and running payroll for an enterprise organization. Here's what you should consider based on your company size.
Payroll services for small businesses
Small business payroll services focus on simplicity, user-friendliness, and affordability. These providers typically offer essential features such as:
- Direct deposit payments
- Tax calculations and filing
- Basic reporting capabilities
- Time and attendance tracking
Small business owners looking for the best payroll solution will undoubtedly be driven by affordable prices but must be aware of the “false economy.” A low-cost solution that introduces errors into your payroll cycle could cost you financial penalties and damage your employer brand. Avoid this by seeking recommendations from other small business owners to ensure your service is reputable and reliable.
Payroll services for larger enterprises
Larger companies require more advanced capabilities to manage a larger number of employees, locations and compliance responsibilities. To handle these complex requirements, enterprise-level payroll services offer solutions such as:
- Customizable reporting
- Multi-state tax filing and regulatory compliance support
- Integration with HRIS or HCM systems
- Scalability for future growth
- Employee self-service
- Dedicated customer support
When considering an enterprise-level payroll service, it's essential to research the vendor's track record with similar-sized companies and their ability to handle your specific needs. Look for case studies, customer testimonials, and industry recognition to understand the product's capabilities and limitations better.
Implement superior payroll services with UKG
UKG’s payroll services are designed to transform your back-office operation into a people-centric, future-racing workflow. Choose from the two available options:
UKG Pro is a distinguished payroll management solution for medium to large-scale enterprises. Focused on enhancing operational efficiency and precision, it makes easy work of intricate payroll operations by:
- Smoothly conducting payroll computations in both US and Canadian currencies, eliminating the need for extra conversions or bespoke coding
- Staying up-to-date with the fluid regulatory and compliance environment
- Delivering fair and consistent pay for every employee in every cycle
- Providing employee self-service so workers access their payroll details from any device at any time
- Fostering a workplace culture that emphasizes financial wellness and equitable compensation
UKG Ready presents a bespoke solution for smaller to medium-sized businesses where resource optimization is key. This dynamic tool streamlines payroll, compliance, and HR with:
- Efficient resource management
- Fair and consistent timekeeping rules
- Error-free payrolls
Ready to level up your payroll operation? Book a product demo or connect with one of our payroll specialists to see UKG's award-winning payroll services in action.
