Payroll Software

by Jennifer King
HR Analyst, Software Advice
May 9, 2012

Payroll is an essential function for every company, and the more employees a company has, the more critical it is to have a reliable system that processes payments and information quickly and easily. But with hundreds of accounting and human resources (HR) software systems designed to manage expenses, selecting the right one can be a challenge. This guide is designed to help you find the best payroll system by providing buyer information and payroll software reviews.

Here’s what we’ll cover:

What Is Payroll Software?
What Type of Buyer Are You?
Market Trends You Should Understand

The Vendor Landscape
Benefits & Potential Issues

What is Payroll Software?

Payroll software tracks all kinds of information related to employee paychecks and benefits. This includes everything related to salaries, bonuses, and raises; paid vacation; and benefits like educational assistance, moving expenses, and retirement plans. In preparing payroll, the system will calculate federal and state taxes, print checks, automatically execute direct deposits and generate direct deposit slips, and export data to accounting software. It should also support reimbursements for mileage and other travel expenses, as well as any other company expenditures fronted by employees.

A strong employee payroll software program will have tax information preloaded and automatically updated, so the system automatically calculates net pay and federal and state taxes (including Social Security, Medicare, unemployment, and disability insurance). It should also prepare payroll and tax forms (940, 941, 944, 1099, W2, W3, etc.), support all different pay types and frequencies (hourly or salaried, weekly or monthly, overtime and bonuses), and include password protection and secure database functionality to ensure that the data is secure and accessible only by those who need it.

What Type of Buyer Are You?

For many companies, payroll is just one part of their software needs, but not always. There are several different levels of buyers, and these categories will help you determine the software that will best fit your needs:

• Payroll-only buyers. Smaller companies simply looking to streamline their process will want a solution dedicated 100% to payroll. Paycheck software systems will provide major support in paycheck processing, but at a very affordable price point.
• HRMS buyers. Human resources professionals at medium-sized companies or larger (50+ employees) will benefit from more than just basic payroll functions. At this level, recruitment, workforce management, and other features like scheduling and attendance tracking become much more valuable, and for that the buyer will want a more comprehensive human resources management system.
• Enterprise buyers. These buyers are looking to expand beyond the human resources department into an all-inclusive enterprise resource planning (ERP) package. This will help the company manage much of its operations, including accounting, project or supply chain management, and CRM. For these buyers, the best solution will be a bigger player in the industry that has multiple modules that can be added to specification.

The Vendor Landscape

Market Trends You Should Understand

• Software as a Service. Because tax laws change frequently – and with them insurance, retirement, and other employee benefits – any payroll service software you buy will need to be updated at least annually. Online payroll software systems provide an excellent answer to that concern, since the vendors update the software automatically without any additional worries on the part of the user.
• Employee portals. Look for more functionality – particularly web-based – that’s targeted toward employees: for example, access to pay history, personal benefits, bank account details, attendance and timesheet data, absence planning and reporting, and other relevant information.
• Consolidation. HR software companies have focused in recent years on developing integrated suites that move beyond individual features into more of an enterprise-level functionality. As part of this trend, payroll companies are merging with complementary systems and being bought out by enterprise buyers. This can offer great expandability, but can also lead to disruptions as acquired companies are integrated and product offerings rationalized. In anticipation, buyers should look for systems that already offer expandability for when they need it, and they should lock in rates and services wherever possible.

Benefits & Potential Issues

The biggest and most obvious benefit of payroll management software is that it saves time and money. These systems are designed to be highly intuitive, so the learning curve to set up and operate basic paycheck software is very low. And once the system is set up, it practically does everything for you, saving considerable sums of time and money on paycheck and benefits processing. These systems also come with robust tracking and reporting capabilities, making it easy to bring up audit trails or any other kind of employee or financial data report.

One potential issue to consider is integration with other legacy software. Companies selecting a dedicated payroll processing system will want to ensure that the software can send data directly to the accounting software – or at the very least exports the data in a format that’s compatible with current systems in order to prevent any hassles in accounting or other process integration.

Conversations in the Market

The following topics have been part of recent discussions within the HR market:

• Increased demand for outsourced services. In-house processing isn’t always the most cost-effective option for payroll. In addition to having to adopt HR/payroll software, businesses have to invest in trained professionals with extensive knowledge about payroll tax software regulations and procedures. To avoid mistakes and costly IRS penalties, more businesses are beginning to outsource payroll functions to third-party services. According to the ADP Research Institute, companies with 50-150 employees and in-house payroll processing functions decreased from 59 percent in 2007 to 48 percent in 2011.
• Expanding web-based payroll to mobile apps. Workers are becoming more mobile and virtual teams are on the rise. According to a 2010 study by Forrester Consulting, 56 percent of the Fortune 500 companies surveyed indicated that virtual departments will increase within their company, and 61 percent will let more employees telecommute in the next three years. To support remote workers who are on the go, ADP released the first mobile payroll app for Apple devices in October 2010. The tool lets customers remotely manage important aspects of their paycheck processing, such as employee information, direct deposits and reporting. In 2011, ADP released a free version of the app for iOS, Android and Blackberry users. ADP Mobile Solutions offers more employee self-service functionality including access to paycheck information, 401K balances and time and attendance.
• Updates to the International ACH Transaction entry. IAT, or the International ACH Transaction entry, replaced the CBR and PBR SEC codes in September 2009 to allow the U.S. Treasury Department to more closely monitor ACH payments from foreign financial agencies. Payroll processors were forced to incorporate the updated data requirements according to the 2009 IAT definition. Payroll system software users continue to rely on their providers to implement system changes as the U.S. Treasury Department releases additional IAT updates.

Have an opinion on this guide? Email the authors. We appreciate the feedback.