Business owners have a few options when choosing a payroll system, each with distinct advantages and disadvantages. When deciding on a system, consider the nature of the employees and the complexity of the payroll. Companies with a small number of employees paid on a salary basis usually have the simplest payroll processing. Payroll for companies that offer a variety of benefits and fluctuating hourly rates are more difficult to process by hand.

In-House Manual Payroll

New companies may be tempted to process payroll using a manual, in-house payroll system. It's an attractive option to fledgling businesses because there are no expensive service fees or pricey software packages involved. However, manual payroll systems can result in inaccurate payroll processing. Tax regulations are complex and change regularly for both state and federal tax returns. Manual systems have no built in processes to catch mistakes. Manual payroll processing is usually more time consuming than software payroll processing because all calculations must be done manually, opening the door for mathematical errors.

In-House Software Payroll

An in-house software payroll program can simplify the payroll process for some managers. After the user initially enters information, payroll software saves employee and payroll settings to expedite the periodic processing. However, the processor is still responsible for the result. If the user doesn't update the software on the regular basis, payroll reporting could be incorrect when new tax laws are implemented. There are also disadvantages for small companies concerned with confidentiality. Less-committed employees may not take confidentiality measures seriously and leak sensitive pay information. Even if the payroll processor doesn't say anything, he may leave documents with pay information in public places or in unsecured files.

Third-Party Payroll Providers

Third-party payroll companies offer to take the tedious task of payroll processing off a company's plate. These services typically file quarterly payroll returns on behalf of the company so managers don't have to worry about incurring costly late fees. However, service comes at a price. Third-party payroll providers may not be worth the rates they charge if the company already has a good handle on payroll processes. In addition, most payroll companies require the company to electronically submit payroll information. At the point that a representative must enter the information electronically, an outsourced system doesn't offer much time savings over in-house software.

Other Considerations

Many managers view payroll processing as a necessary task that doesn't add value to the company. However, accountants can use payroll information to help managers understand costs. Computerized payroll options are better at providing additional data and analysis to make the payroll information useful. For example, some software breaks down payroll costs in a customized fashion to facilitate accounting entries. Outsourced systems typically offer an electronic portal for managers with the option to search electronically for payrolls or view year-over-year pay trends.