top view of coworkers sitting around a table From ensuring proper tax withholdings to integrating with your other business software, the experts at ADP explain why payroll automation is essential for all businesses. — Getty Images/JohnnyGreig

Payroll is an essential administrative task for most businesses. Whether you employ W-2 employees, contractors or both, you need to not only figure out how to pay your workers, but how to track their income and report it to the IRS.

While you can file payroll taxes on your own, there's always the risk of mistakes — and, with it, the potential for hefty non-compliance fines from the IRS. When you automate your payroll processes through a third-party vendor, you mitigate this risk and reduce your own administrative burden as a business owner.

Not familiar with payroll automation, or unsure if your business is ready to invest in a solution? CO— recently spoke with Kyle Boettke, DVP of Small Business Services Strategy and Operations at payroll, HR and tax services provider ADP, to help you understand what's involved in the process and what to look for in a payroll service.

What is payroll automation and how does it work?

Payroll automation is as simple as it sounds: You provide your business and employee information to a payroll service provider, and they handle the payroll and tax filing responsibilities.

Your payroll company will request the following information to set up your service:

  • Your Employer Identification Number (EIN)
  • Your state/local tax ID number (if applicable)
  • Your state unemployment ID number
  • I-9 and W-4 forms for all employees
  • Your state withholding allowance certificate
  • Your Department of Labor records

You will also need to define your pay periods (e.g., weekly, biweekly, twice monthly or monthly) before you can run your first payroll.

"Once the payroll company has that information, then all you need to do is either update it [as needed] or communicate [any] changes to your payroll," said Boettke. "After that, your payroll company will take care of running the payroll and filing the tax liability with the taxing agencies that you would've had to do on your own."

Boettke noted that your responsibility as an employer each payroll period is to make sure the gross pay calculation is correct for each employee and approve the payroll on time. Other than that, your payroll provider will handle all the back-end operations, including issuing payments, collecting and filing tax payments and preparing employee tax forms at the end of the year.

Most payroll services give you the option of paying employees in a variety of different ways, such as paper check, direct deposit or pay card, said Boettke. Depending on your provider, you may also be able to take advantage of software integrations or ancillary products that tie into payroll deductions, such as retirement plans and health insurance.

It's a big moment, writing your first payroll check. [You want to] make sure you're doing it the right way.

Kyle Boettke, DVP of Small Business Services Strategy and Operations, ADP

When and why to consider payroll automation

So how do you know if you're ready to invest in a payroll automation solution? According to Boettke, the best time is when you're hiring your first employee.

“It's a big moment, writing your first payroll check," he told CO—. "[You want to] make sure you're doing it the right way."

Of course, not every business can afford a payroll service right from the get-go. In this case, Boettke advised looking into payroll automation as soon as your business starts growing enough for you to outsource the task.

There are a few key benefits of automating your payroll processes, and the most important one is that it decreases your responsibilities as a business owner. Instead of worrying about whether you've accurately calculated your employees' tax withholdings and filed your tax payments on time, you can pass that responsibility off to your payroll company and rest easy knowing that the rest has been taken care of for you, Boettke said.

What to look for in a payroll service provider

There are tons of payroll companies out there, all offering different things. Some are more "DIY," while others send a company representative to your office to walk you through it. The right solution for you depends on your needs.

Boettke said there are three primary factors to consider when you're choosing a payroll partner:

Trust

First and foremost, it's essential to fully trust the company you choose to handle your payroll and know that they have enough experience to do the job right. Boettke reminded employers that their employees rely on their paychecks to earn a living and provide for their families.

"If a company does it incorrectly, that impacts your employees," he added.

Service integration

Next, you should evaluate how payroll can be integrated with other parts of your business to be as efficient as possible.

"Does that payroll provider integrate or automate other things about your business to make life better for you as an owner and for your employees?" Boettke said.

Some possible areas of integration to look for include your general accounting ledger, payroll-related benefits (insurance deductions, 401(k) contributions, etc.) and time clocks.

The full value of the service you're paying for

While cost is an important consideration for any business service, Boettke said it's essential to consider the overall value you're receiving from your service provider. Consider the level of customer support you're receiving, as well as any integrations and additional products your vendor provides.

"Not all [payroll companies] are equal," said Boettke. "Look at the value versus the cost."

Most importantly, consider the value of the time you'll get back by automating payroll and taking that burden off your shoulders.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published June 06, 2019