Manual vs Automated Payroll System: What’s Best for Startups

Manual vs Automated Payroll System: What’s Best for Startups

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Your startup’s success or failure hinges on, among other things, its employees’ motivation, happiness, and productivity levels. One way of ensuring that employees are happy and motivated is to pay their salaries, pension funds, and other benefits accurately and on time. In other words, you have to prioritize payroll management services for your startup to grow and excel.

What is Payroll Management?

Payroll management is a highly sensitive and demanding job where trained accountants calculate a company’s entire monthly/annual payroll. The accountants calculate the payroll either manually or using computerized software. If you cannot afford an in-house accounting department, you can also outsource payroll management systems to a professional accountancy firm.

In the payroll processing process, accountants:

  • Maintain an up-to-date and accurate database for each employee. The database has important information such as each employee’s bank details, job group, salary bracket, etc.
  • Track each employee’s vacation days, overtime, and sick leave and make all applicable payroll adjustments as per the individual employee’s employment contract.
  • Ensure that each employee complies with all applicable levy taxes and other statutory deductions.
  • Generate a comprehensive payroll report and submit it to the company management for verification and approval.
  • Make salary payments upon verification and approval by management.

Risks Associated with Payroll Management

Startups have to contend with a ton of costly risks in the payroll processing process. These include:

  • Hour padding: This happens when employees fraudulently exaggerate their overtime hours, so you end up paying them more than they worked for.
  • Classification confusion: You probably have permanent and pensionable (P&P) employees, freelancers, and contractors working for you. Classification confusion happens when some contractors or freelancers end up in the P&P category. Your company ends up paying taxes and P&P benefits to short-term contractors and freelancers.
  • Ghost employees: These are people who receive a salary from your startup every month but don’t actually work for you. They’re mostly ex-employees who remained on your payroll even after they stopped working for you.
  • No compliance: When processing payrolls, you have to comply with all employment and tax laws in your state or country. Failure to do this can attract unwanted fines and lawsuits.
  • Buddy punching: Sometimes employees clock in for their absent co-workers in an attempt to cheat the system.  
  • Data insecurity: Data thieves, some of whom could be your employees, are always trying to hack passwords to your payroll system.

Manual vs Automated Payroll Systems: Which Way To Go?

A manual payroll system is a one-on-one approach to payroll management. You or your accounting department track and figure out employee salaries and benefits without the assistance of payroll software. All you have is a calculator, blank checks, and Microsoft Excel if you’re going for a little sophistication. You do all calculations by hand, including tax and statutory deductions for each employee. That means you must stay abreast of wage laws, labor laws, and payroll tax laws to avoid noncompliance

Automation, on the other hand, is when you use payroll software with minimal human intervention. You can integrate the payroll software with other useful software (e.g. time-tracking software). This enhances the tracking of employee attendance, leave requests, and overtime. The software can also calculate tax and statutory deductions depending on your state or country.

With this in mind, and without forgetting the payroll risks we mentioned earlier, which one between manual and automated payroll systems would work best for your startup?

Benefits of Using a Manual Payroll System

  • It’s almost free: All you need for manual payroll processing is a calculator, blank checks, paper, and maybe a typewriter (optional). None of these items require constant updates or upgrades. This means once you buy them, you don’t need to spend a dime on payroll management ever again.
  • It gives you an intimate understanding of the payroll process: Doing everything by hand means you have to acquaint yourself with every nook and cranny of employee benefits, payroll taxes, etc. This makes you a master of the payroll game, not just a mere spectator.
  • It’s tailored for startups and small businesses: If you have 5 employees or less, it becomes less justifiable to spend your limited resources on an automated payroll system. Microsoft Excel or even a calculator would suffice in such a case.
  • Unlimited customization possibilities: Manual payroll processing gives you all the freedom you need to do things your way. You get to customize every little aspect of the process as per your personal preferences, business requirements, and employees' preferences.

Shortcomings of Manual Payroll Processing

  • Unreliable database management: When you’re doing everything by hand, it becomes hard to maintain up-to-date and accurate employee information. That’s how you end up with ghost workers on your payroll. Unreliable database management also leaves your business exposed to hour padding, buddy punching, and classification confusion.
  • Error-prone: Doing payroll calculations manually, checking Microsoft Excel spreadsheets, and writing checks by hand exposes your business to costly human errors. A simple error in employee compensation, tax filings, or compliance can precipitate significant reputational damage, legal repercussions, or hefty fines.
  • Tedious and time-consuming: A significant amount of your time (or accountant’s time) goes to updating employee records, writing checks, checking compliance, and doing complex calculations, among other repetitive tasks. You would be better off using this time to pursue new business leads.
  • Lacks reporting or analytics capabilities: This means you don’t get insights into your startup’s financial metrics, tax trends, employee data, etc. It’s almost impossible to make data-driven payroll decisions in the absence of these insights.
  • Compliance risks: Keeping up with labor laws, tax regulations, and employment standards without the help of a computerized program becomes challenging at some point. You don’t want this to happen when your startup has to stay compliant to avoid penalties.

Benefits of an Automated Payroll System

  • Minimal human input and errors: Your payroll automation software will calculate tax withholdings, process direct deposits, calculate employee bonuses & expenses, track overtime & leave days, track employee hours, etc. for you. It pays employee salaries, pensions, insurance, and other benefits automatically and correctly. This eliminates the human errors that manual payroll management is susceptible to.
  • Enables employee self-service: Quality payroll software gives you the option of handing employees some access or control over their own information. You can, for example, allow them to update their personal information (e.g. academic/personal information or payment preferences). You can also give them access to their payment history to enhance transparency.
  • Frees up your time: Your payroll software will streamline the payroll process for you by doing all the heavy lifting. You’ll be spending most of your time handling the core aspects of your business, which can greatly improve your startup’s bottom line.
  • Assured compliance: You will no longer struggle to keep up with the ever-changing state and federal tax/employment laws when you invest in a quality automated payroll system.
  • Payroll recordkeeping and database management: Your payroll software will keep all relevant records and documents in a centralized database. This makes it easy for you to retrieve and use these records whenever necessary.
  • Reporting and analytic capabilities: Your software will give you payroll analytic reports that you, investors, and your lenders can use to evaluate employee compensation vis-a-vis performance.
  • Better data security: An automated payroll process slams the door to employee payroll data theft and distortion. You can lock data access using conditional system access or a password, which makes it hard for data thieves to as much as sniff around your payroll data.
  • Payroll management beyond borders: If you intend to expand your startup internationally, you may need to hire employees from around the world. Technology has also made it possible for international talents to seek employment and work remotely from anywhere in the world. You can integrate a global payroll calculation tool into your payroll software to ensure your remote employees are paid on time. On top of boosting your startup’s operational efficiencies abroad, the software also reduces compliance risks that come with a distributed international workforce.
  • Better employee monitoring: You will easily stay abreast with staff schedules through your payroll system’s employee calendar feature. The calendar will monitor the hours that each employee is active, their leave & overtime hours, and their vacation days.

Cons of Automated Payroll System

  • High upfront cost.
  • Like any other IT system, an automated payroll system can have cyber vulnerabilities and fraud. You can overcome this challenge by keeping the software up to date at all times.

Final word

If you have the time and expertise, it’s best to handle the payroll process manually. You can also delegate the task to an in-house accountant or outsource to a professional accountancy firm.  However, if you have more than 5 employees, you’d be safer working with payroll automation software. The upfront cost of an automated payroll system may be high, but the resulting financial savings and operational efficiency in the future make it worth every penny.