Attention Small Business Owners: Don't Make That Payroll Processing Mistake!

One of the more common mistakes I've seen small business owners make is choosing to process payroll themselves. Unless you are also in the business of processing payroll for others, you should not be processing your own payroll. Some "experts" will tell you that it is simple and cheap to manage payroll in most accounting software systems, but words like simple and cheap are relative. Often, there are significant unseen factors that can rise up months or years later, and the $100 a month you had been saving will be of small consolation. Let's look at a few of those factors.

Time

If you are a small business owner, your time is very valuable. Furthermore, you can't hire top talent for every fractional position within your company (e.g., a superb marketing director who only works Tuesdays and Thursdays, then an outstanding PR director who works on Mondays and alternating Fridays, as well as an HR director to handle hiring and training new employees as the need arises). Therefore, your focus should be on only the things relating how you make the products you sell and how you sell them. Support roles that play no part in your company's overall strategy or competitiveness in the marketplace should be outsourced whenever possible. Processing payroll efficiently has no bearing on your firm's success, yet can consume a substantial amount of your (or one of your employee's) time.[1]

Accuracy

If you process your own payroll, you are responsible for ensuring its accuracy. This includes making all federal, state, and local tax deposits on time, every time, generating paychecks and earnings statements for employees, preparing and filing W-2s, 1099's, 940's, 941's and a host of other forms with the various taxing authorities, as well as producing documentation for various audits (yes, there are multiple groups than can and will audit you, including your insurance provider for workers compensation premiums and the local workforce development office for payroll tax compliance). If you choose to process payroll yourself, you are taking on all of these other obligations alone, as well. Missing a filing deadline by even a single day will result in a 10% penalty; a single penalty will in all likelihood obliterate any savings gained from processing your own payroll that year. In contrast, most national payroll processing companies will guarantee the accuracy of their payroll tax filings, up to and including paying any penalties you incur due to their miscalculations.

Costs

Except in rare cases, outsourcing your payroll will save you money. Even if you already have a bookkeeper, I question whether this person's time could be more effectively deployed answering phones, printing customized management reports for your review, or even simply transitioning to a part-time position. Where the real cost saving lies, however, is in protecting you from yourself. Most payroll processors can withdraw funds electronically from your business checking or payroll account to cover both the net payroll amounts to be paid to employees (often via direct deposit, instead of paper checks), and the accrued payroll taxes associated with that payroll.

For example, if I have an employee (let's call him Joe) whom I pay $1,000 per week, the payroll processing company will withdraw approximately $800 for the employee's net paycheck, and approximately $300 for payroll taxes. This $300 amount includes the amount withheld from the employee's paycheck to be paid to the state and federal government, as well as about $100 in employer-paid taxes. If you haven't learned already, you as an employer must pay the government for the privilege of employing people. This amount includes the employer portion of Social Security and Medicare taxes due on an employee's wages, plus any other local, state, or federal taxes that may be applicable at the time (the ever-changing complexities of the tax codes are yet another reason to outsource payroll).

The timing for the withdrawals of these amounts is important. By withdrawing the money immediately, you can sleep peacefully knowing that, no matter what happens, you have allocated funds to pay those taxes. If you process your own payroll, however, the cash flow will look quite different. You will write a check to Joe for about $800, and then a few weeks or even months later, write checks to the state taxing authority and the IRS for the $300. Going back to my example, if cash is really tight and I don't do an accurate daily cash flow forecast, it's possible my paper check to Joe could bounce. I would rather have to explain to my payroll processing company why the funds were unavailable, or rely on my back's overdraft protection to cover the shortfall, than explain to my employee why his check bounced. If I had ten employees, my bank would probably charge me $30 per overdraft or returned item, or $300 in total fees, instead of just two electronic overdrafts to a payroll processing company for a total of $60. In addition, if my bank did not honor the paychecks I had written, I would be morally obligated to pay any and all overdrafts incurred by Joe and my other employees due to their bounced paychecks. This careless mistake could easily cost me $1200 or more (if each employee had three overdrafts, that's 10 x 3 x $30 = $900, plus my own insufficient funds fees of $300).

The more insidious cost, however, occurs much later. What are the odds that I will have set aside $300 for the IRS three months from now? You may roll your eyes and laugh at this, but this situation occurs far more often than you might think. When a small business owner must choose between making a COD payment for materials to fill a customer order right now, or setting that money aside for a payroll tax payment in three months, the 'right' thing to do becomes less obvious. Further complicating this matter is a small business owner's eternal optimism that things will improve, the economy will turn around, and sales will pick up, enabling her to make that tax payment later when it is actually due. Unfortunately, this only digs the hole deeper. What once was a $300 deficiency, has now turned in to a $3000 deficiency, and continues to get worse with each passing pay period. In reality, it will be months before the IRS or state taxing authority attempts to contact the business owner concerning delinquent payroll taxes. A struggling business can dig a tax hole tens of thousands of dollars deep with little or no short-term consequence. As if that wasn't enough, this tax hole never goes away; neither insolvency nor bankruptcy will eliminate this debt, and should the business ultimately close, the owner will be personally liable for this amount.[2]

Options

There are myriad options for outsourcing your company's payroll processing, but broadly speaking, they generally fall into three basic categories: your accounting software provider, your local accountant, and a national processing company.

Accounting Software

Some accounting software systems (e.g., Inuit's QuickBooks) offer an outsourced payroll solution that integrates easily with their software. If your business is a time and materials shop where tracking payroll by project or job in your accounting system is critical, this can be a great solution. While often slightly more expensive than a national processing company, this option integrates payroll data with job costing data, enabling detailed job profitability reporting. Be sure, however, that the payroll option selected provides all of the benefits mentioned earlier. An outsourced payroll plan that still requires you to make your own tax payments is far less beneficial than a complete payroll solution.

National Processing Company

A national payroll processing company such as Paychex or ADP usually will have the lowest associated fees and most complete reporting options. Furthermore, both of these companies' names lend credibility to your business processes in the event of a payroll audit, much like a tax return prepared by a reputable accounting firm versus one of your own creation (or even worse, one that purports to make use of quixotic overseas tax shelters and offshore banking loopholes).[3] Based on my own personal business experiences as well as the experiences of dozens of clients, this is the option I most frequently recommend to small business owners. Again, however, be sure to select an option that provides escrowing of tax payments, direct deposit options for employees, automatic filing of payroll tax forms, and generation of W-2's, 940's, and 941's. The less you have to do, the better.

Local Accountant

The third option, using your local accountant, somehow proves to be the most expensive, yet least effective, solution time and time again. The most egregious example I've seen to date was a client with approximately ten employees, yet somehow a local accounting firm was charging this client over $75,000 per year to make tax deposits, file payroll tax forms, print quarterly reports, and prepare corporate tax returns. Paychex quoted the client $2600 per year to take over all payroll processing functions, leaving the local accounting firm with just preparing tax returns.[4] While this example represents the extreme, I have yet to find a local accountant who can process payroll for a lower fee than Paychex or ADP. Furthermore, the payroll reports produced by local accounting firms are often less detailed than those of the national processing companies. I understand the theoretical value that could be provided by a local expert to help answer all of your payroll questions, but in reality, this never happens. You shouldn't have any questions about your payroll; processing payroll should be as seamless and routine as maintaining insurance coverage for your business or paying the electric bill each month. I welcome feedback from accountants who disagree with me on this, but I have yet to hear of an accounting firm that provides payroll services in a manner as cost-effective and efficient as a national provider such as Paychex or ADP.

Conclusion

Ultimately, your choice of payroll solution will depend on your specific needs, but I would always advise either an integrated outsourced solution with your accounting software or a complete outsourced solution with a national processing company. The savings in both money and time are significant with either of these options. More importantly, however, consider the potential long-term consequences of not having an outsourced payroll solution. While you may plan on your company succeeding for many years, do not put yourself in a position where an economic downturn, a new competitor, or even a personal family tragedy will force you to choose between tomorrow's payroll and next month's tax payment. Outsourcing your payroll processing ensures that, if nothing else, all tax liabilities are current and paid, leaving you with one less thing to worry about.

END NOTES:

[1] Even not-so-small companies outsource payroll. A national consulting firm with over 1000 employees outsourced its payroll to ADP, despite having numerous attorneys and CPAs on staff.

[2] Much like student loans, most tax debts are not dischargeable through bankruptcy, and business tax debts attach to their owners/officers - even if the business closes, the individual is still liable. The best an individual can hope to do is create a low-interest repayment schedule under Chapter 11 or Chapter 13 of the U.S. Bankruptcy Code.

[3] According to the IRS, under-reporting by small businesses and others who report business income on the individual income tax return accounts for more than a quarter of the $385 billion annual tax gap in the U.S. While overall audit rates average 1 in 100 returns, 1 in 8 returns with incomes over $1 million were audited in 2010.

[4] On average, a company of this size spends a little over $7,000 annually in non-payroll accounting fees, including tax preparation services. Upon discovering this, my client promptly changed accounting firms.

Marshall Waters II, a management consultant and former small business owner himself, has traveled extensively throughout the United States and Canada, advising over 70 small and mid-sized businesses on topics such as sales and management training, strategic planning, marketing strategy, and turnaround management. You can reach him via his website at: http://www.altonconsultinggroup.com

Benefits of Outsourcing Payroll Against Payroll Software

The essentials element of payroll administration in the UK is to accurately calculate the income tax and national insurance contributions deducted from the employee each pay period, produce payslips for each employee and account to the tax office for the payroll deductions.

Running a payroll system is natural for medium and large companies who may employ specialist payroll staff to perform these functions. Many medium companies may still choose to outsource the payroll function leaving many of the technical issues that might be encountered to a specialist payroll service.

Small businesses may choose to outsource the payroll function because they are not familiar with the paye system although HMRC do run seminars to assist employers. The payroll system not only calculates the tax and national insurance deductions but also has to deal with tax code changes, new employees and changes to existing employees plus taxable benefits and allowances such as statutory payments for sickness and maternity leave, contracting out of the state pension scheme and student loans.

The main benefit of manually producing the employee payroll is the reduced cost although the time spent on the payroll function by the proprietor may be better spent running the business. The cost may not be the cheapest option if an employee is required to produce the payroll. Purchasing payroll software can save significant time and costs for the small business that chooses to prepare and control its own payroll function. Although time is more important as the payroll production cost is not usually a big issue.

Outsourcing payroll adds a small additional cost to running the business but would normally carry worthwhile benefits in reducing the time spent on the function and reduces the paye administrative burden.

Main benefits outsourcing the payroll function.

1. Frees up time in calculating the payroll deductions and dealing with different and sometimes complex employee circumstances.

2. Using a professional outsourcing service to advise on potential payroll problems and difficulties.

3. The cost of outsourcing payroll should be compared against the cost of employing specialist in house payroll staff.

4. Payroll services use payroll software and are more likely to produce accurate tax and national insurance deductions and pay records reducing the prospect of problems with the tax authorities.

5. Payroll administration such as preparing the tax deductions schedules, dealing with starters and leavers, year end certificates for employees and the employer annual returns are normally all automated as part of the payroll service

6. The outsourced service company should also be responsible for producing employee payslips, advising tax and deductions liability and in larger businesses also provide a payroll analysis for accounting purposes.

Alternatives to outsourcing payroll functions.

Finding a suitable outsourced payroll service is not difficult. Local telephone directories or searching the internet would produce many potential payroll service providers.

Many accountancy firms offer payroll services to their clients and although the prices may struggle to be competitive price is always negotiable. Using the business accountant for the payroll has advantages since a substantial cost area for most businesses is already known to the accountant since they prepare the numbers.

Choosing payroll software.

The major alternative to outsourcing the payroll is for the business to acquire and use payroll software.

Larger companies require payroll software that has incorporated within it all the potential pay scenarios and also be capable of dealing with high numbers of employees. Large comprehensive packages can be complex to operate and require specialist wages staff.

Small business may choose simpler less complex payroll software packages that meet the basic needs of the business. It is important the person running the payroll within the wages function understands the payroll essentials and legal payroll administration requirements.

The advantages of choosing payroll software is basically the cost should save the business money against outsourcing the payroll, should retain control over the function and liabilities and ideally should take no more time that supplying employee details and gross wages to the payroll service.

If the business chooses to adopt a payroll software package then the complexity of the package should be considered and also the attributes and capabilities of the chosen software to produce all the payroll requirements in relation to pay and wage deductions, paye administration and employee payslips.

Terry Cartwright is a qualified accountant in the UK producing Accounting Software and Payroll Software packages for self employed and small limited companies. The payroll spreadsheets are suitable for up to 20 employees, produce the tax and insurance deductions, automate payslips and provide the employer with a full automated paye administration system

Choosing Essential Small Business Payroll Software

Large organizations have full time accounting staff to prepare the payroll. Full time professionals employed or the payroll function may be outsourced to a payroll bureau. The payroll task in a small business often falls to the proprietor demanding even more time to familiarize with current payroll legislation and a not insignificant amount of administration time that could be better spent making profits than number crunching. Small business organizations with up to ten employees producing the weekly payroll can easily take an hour or more each week calculating the income tax and national insurance contributions . An hour that could be better spent earning profits or at the very least having an extra hour of free time each week. Free time that small business owner's value at a premium since the majority of small business owners either work or think about work from dawn to dusk 7 days a week. Payroll software to satisfy the PAYE requirements can be just one part of making that small business more efficient.

Small businesses that fail to operate a sound payroll system can produce a negative effect on the employees. Employees expect to be paid and provided the amount is a competitive rate would only rarely have an effect on staff relations. However operating a payroll system that does not provide each employee with a payslip is like telling your employee he has received a personal letter that was opened for him and discarded as not important. To the employee a payslip is very important. Every employer has a legal responsibility to provide employees with payslips and a P60 End of Year Employees Certificate. A payroll software solution satisfies employee's essential needs and fulfills the legal requirements. Failure to provide employees with payslips can only reduce the respect hat employee has for his employer. Every employee must receive a payslip that shows the amount of income tax and national insurance deducted from the gross pay. Employers must also calculate the employer's national insurance contribution. Employers not using a payroll software package such as available from DIY Accounting Payroll Software must design their own payslip to give to employees to satisfy legal requirements.

In the UK producing a weekly or monthly payroll can be a burdensome task to comply with the HMCE requirements. Employers operating a PAYE system without the use of payroll software need to be familiar with evolving requirements of HMCE through their website and the extensive payroll notes contained on the CD-Rom which is sent out annually. To fully appreciate all the technicalities and complete all the correct documents such as the P11 Deductions Working sheet is time consuming. It doesn't have to be a problem. Payroll Software can automate this knowledge and functions and is available at insignificant cost. DIY Accounting Payroll Software package is available for up to 20 employees at a cost of £15 to £25. That is a payroll software package that could save a small business over an hour a week, for twenty employees more like two hours, for less than 50p per week. All small business owners should at least consider suitable efficient payroll software.

Many payroll software packages are written using databases and can put many small business owners off using them due to both the cost and the fear of the unknown complexity of using such a payroll package. Many payroll software packages written on a database provide an excellent solution but have a tendency to be extremely politically correct and cover all potential rules and regulations and consequently become more complex to operate as they can demand at least a minimum knowledge of the payroll system. There are other PAYE solutions. The DIY Accounting Payroll Software is written on excel spreadsheets requiring no payroll experience and a minimum of entries to produce all the essential calculations of income tax and employees and employers national insurance. In addition excel copies of the time consuming P11 Deductions working sheet, P60 Employees Certificate and the P35 Annual Employers Return are all automated to save the small business valuable administration time. A payroll software solution written on excel can also be used with an open office spreadsheet package but not least all the entries are visible and therefore transparent. Errors and mistakes can be easily corrected simply by changing the numbers on the payroll ensuring the payroll is produced both quickly and accurately. Payroll Software is an effective tool that should receive serious consideration by all small business proprietors.

Payroll Software also has the advantage because it can be simple and fast to use of avoiding late payments to the revenue and the consequent unwanted letters and potential fines this can invoke. By having all the information required for the monthly or quarterly revenue payments late penalties can be avoided and by producing the Annual Employers return on time small business owners can submit their returns online and receive a tax free online filing bonus. The current online foiling bonus being £150 and substantially more than the payroll software might have cost. And it's Tax Free. As they say in Yorkshire. "If thar you ever gets owt for nowt, Tec it"

Terry Cartwright is a qualified accountant in the UK designing accounting and payroll software packages for small to medium sized business through his website DIY Accounting, Payroll specifically produced for up to 20 employees providing simple Payroll Software written on excel spreadsheets.

How Easy is Payroll?

The Institute of Pension and Payroll Management (IPPM) has a saying developed and used by its members: "We don't simply do payroll, because payroll isn't simple". Recently the Inland Revenue has introduced major changes which affect payroll and include legislation covering extended maternity leave, new paternity leave and payment rules, student loan repayments and many more.

Any company offering Stakeholder Pensions to its employees needs to be aware of the rules governing the application of pension through payroll.

Payroll becomes a juggle of paying employees, understanding the legislation and how to apply it and then ensuring compliance with the PAYE and National Insurance audit groups.

Over the next few years there will continue to be changes in legislation applicable through payroll. The IPPM and other organizations constantly lobby the government departments to ensure that new laws do not make the job of the payroll managers more and more difficult. The IR is in the process of introducing electronic filing which should make a big difference at the end of the tax year, especially to large organizations, but also throughout the year when form will be downloaded and returned electronically. All organizations will be expected to file paperwork and to pay the Inland Revenue electronically. This will be phased in with large organizations initially and smaller ones by 2008.

One major change recently has been the increase of National Insurance contributions. Not only has the percentage increased but the upper limit 1% has resulted in most people paying more NI. National Insurance does not only apply to the gross pay provided for employees but also to many employee benefits. A number of companies have been caught out by this change because it complicates the completion of P11Ds, often produced alongside payroll.

It sometimes seems that the Inland Revenue takes delight in finding ways to complicate tax and benefit legislation and there are some of these that catch out smaller companies.

The problem is that should any of these be picked up in a PAYE or National Insurance Audit, the company is responsible for payment, rather than the employee.

Here are some examples:-

o Any amount of money paid to the employee, except where it is explicitly for business expenditure, is liable for tax and national insurance and should be paid through the salary.

o If the company gifts an employee with virtually anything, the value is liable for tax and national insurance.

o Fortunately paying the costs of employee's business mobile phone is no longer seen as a benefit but any home phone paid by the company is a benefit in kind.

o Any fuel for private mileage paid by the company is a benefit and is liable for Tax and National Insurance.

All businesses need to ensure that the payroll and benefits are handles by a competent person, or otherwise outsourced to the accountant or a payroll bureau. Payroll bureaus can be expensive, but they don't need to be so it is best to shop around. It is no longer necessary to do a manual payroll although surprisingly large numbers of companies do just that. There is excellent and reasonably priced software around, both for payroll and P11ds but in buying software, do ensure that the Inland Revenue has approved it and that it is supported, improved and updated every year. Administrative or payroll staff who have some knowledge of the PAYE and NI legislation are invaluable to an organization.

Payroll is seldom simple but it is vital to every business. Ask the employees! If the payroll is a day late everyone knows about it!

Paul Green, FInstIBI - Director | Thames Valley Business Advisors Limited | (e) paul.green@tvba.co.uk | (w) http://www.tvba.co.uk |

Payroll Essentials for New Employers

When should an Employer Register for PAYE

An employee is anyone who works on a full time, part time or casual basis for the business and includes company directors. Employers should register as soon as possible when a qualifying employee is appointed and may register up to four weeks prior to the first employees pay day. You should register as an employer and operate a PAYE system if your employee already has other employment, or if the employee's earnings are equal to or above the PAYE threshold. The PAYE threshold for 2007-08 is earnings of £100 per week or £435 per month at which point income tax and national insurance deductions may be required. These limits include the value of any benefits in kind that may be paid.

Employer Registration Information Required

Generally the information to be provided includes the business name, trading address, type of business, name and address of the employer, national insurance number and tax office reference of the employer, contact telephone number and email address if applying by email., In addition details will be required of the likely number of employees, frequency of payment, the date the first employee was appointed and the first payment date. Also have available the address where the payroll records will be kept and the contact details of the person responsible for the payroll. Where partners are involved details of each partner's names, addresses, national insurance numbers and tax office references will be required and the LLP number for Limited Liability Partnerships. Limited Companies will be required to supply the address of the company's registered office, date of incorporation and company registration number plus details of the directors; names, addresses, contact telephone numbers, national insurance numbers, tax office references

How to register as a PAYE Employer

Employers can register for PAYE online at the HMCE website. Click Employers - Register as an Employer - First steps as an Employer - scroll down the page until you can click email which then presents you with online registration form to complete and send. Alternatively contact HMCE Employer Helpline at 0845 6070 143.

PAYE and Payroll Records

Accurate payroll records are essential, full stop. Employers must keep payroll records for both HMCE purposes and employees. The employee records must include the name and address of the employee, national insurance number, date of birth, income tax code, all payments and benefits made and all deductions for income tax, national insurance and voluntary deductions. When registering to operate a PAYE system immediate arrangements should be made to ensure these records are maintained either by setting up the records yourself using the help and advice contained in the Revenue CD-ROM provided to all new and existing employers or employing a payroll service to produce the records or using a payroll software package. Various payroll software packages are available with different degrees of complexity. The DIY Accounting Payroll Software is an ideal solution for small employers being written on excel spreadsheets and in addition to producing the deduction calculations and payslips the payroll software also automatically completes an excel copy of the compulsory HMCE forms significantly easing the administrative burden.

Paying Employees

Employees must be paid the national minimum wage which for adults was raised on the 1st October 2007 to £5.52 per hour. Every employee must receive a payslip that shows the amount of income tax and national insurance deducted from the gross pay. In addition every employer must also calculate the employer's national insurance contribution. If you are an employer and not operating a payroll software system such as the DIY Accounting Payroll Software then you must design a payslip to give to your employees to satisfy legal requirements.

HMCE Payroll Forms

P11 Employees Deductions Working Sheet

The working paper is a record of the weekly or monthly pay for each employee and the income tax and national insurance deductions.

P14 End of Year Employees Deductions Summary

Summary of the employee income tax and national insurance deductions recorded on the P11 deductions working sheet

P35 Annual Employers Return

Summary detailed by employee of the annual totals of income tax and employee's national insurance deductions and employers national insurance liability

P45 Details of Employee Leaving

Only available from the Employer's helpline the P45 is a certificate of the amount paid to the employee and the income tax deducted during that employment. Every employee that leaves the employers employment should be issued with a P45.

P60 End of Year Employees Certificate

The P60 is a certificate of an employees total earnings and total income tax deducted during the tax year including previous those of previous employers and also the amount of national insurance deducted by the current employer and should be issued to every employee the employer has at the 5th April each year.

Each of these HMCE PAYE forms are automatically completed by the DIY Accounting payroll software which produces excel copies of the HMCE forms making the package highly suitable for both inexperienced employers and those wishing to minimise the administrative burden payroll can place on an employer.

PAYE Payments and Online Bonuses

Deductions of income tax, employees national insurance and employers national insurance must be paid to HMCE each month, the standard final payment date being the 19th of the month following the payroll month. If monthly payments of income tax and national insurance deductions including employer's national insurance are under £1,500 per month then employers have the option to pay the amount due to the HMCE on a quarterly rather than a monthly basis. Payments of income tax and national insurance to the HMCE can be made online electronically. At the end of each financial year, 5th April, every employer must submit the P35 Annual Employers Return .to HMCE detailing the amounts paid to each employee and the deductions made for income tax, employees national insurance and employers national insurance with the amount that has already been paid to HMCE in respect of the income tax and national insurance contributions. Employers with less than 50 employees are eligible for a tax free online bonus when the P35 Employers Annual Return is submitted online which has been a tax free £250 and £150 in recent years.

Terry Cartwright is a qualified accountant in the UK designing accounting and payroll solutions for small to medium sized business of Accounting Software and Payroll Software specifically for self employed and limited companies in the UK that produce a fully automated final set of accounts on excel spreadsheets.

How Payroll Software Can Reduce The Paye Administration Burden

If you are an employee your employer has a legal responsibility to operate a paye scheme and provide the employee with regular payslips a P60 end of year certificate and a P45 showing details of gross pay and income tax deducted during the employment if you leave.

An employer needs a paye system that satisfies both these payroll requirements and the additional paye records required by the Inland Revenue.

Calculating an employee gross pay is not difficult for most employers as the rates and hours are usually preset or subject to known information such as a timesheet for example. Calculating the income tax and national insurance can present problems to employers inexperienced in payroll matters who are not familiar with the revenue requirements. Payroll software can automate this part of the paye administration reducing both the time and knowledge required.

When an employee joins a new business they must provide the new employer with a P45 which contains specific essential information that employer needs. The P45 contains details of the employee name and address, previous earnings and the amount of income deducted by the previous employer. The P45 also states the employee tax code and any special conditions that may have been in force such as being deducted tax on a week one or month one basis.

These details on the P45 are necessary as the new employer needs to initially set up a set off paye records for each employee which can be obtained from the P45. Rather than filing the P45 under a pile of papers or the back of a drawer a payroll software solution adds discipline to this process and permits a permanent record to be kept which can prevent serious paye deficiencies inb the future.

Documents and notes on scraps of paper can get lost while employee details kept on a proper package rarely do and can be backed up as required.

The P45 does not contain details of national insurance contributions as the new employer does not need to know what the previous national contributions were. This is because national insurance contributions are always calculated on a week by week or month by month basis and so previous deductions are not relevant while previous details of income tax deducted are relevant because income tax is deducted on a cumulative basis.

Having established the employee records the main work of the paye system begins. Each pay period the employer needs to calculate the income tax and national insurance to be deducted. This can be done manually or the employer can laboriously enter the employee and previous pay details into a paye calculator to obtain the information. This is a better choice as these paye functions are automated by that payroll software.

The employer is required to keep accurate records of the breakdown of the calculation which are recorded on a P11 deductions working paper. This part of the paye administration is a burden for many small employers and payroll software can automate this task saving hours of work during the year.

Next the payslip which is highly important to employees and the employer has a legal responsibility to provide one. Designing a payslip and ensuring it meets all legal requirements is much easier if a standard legally correct format is adopted as part of an automated payroll software system rather than manually preparing the payslip each period.

When an employee leaves they must be given a P45 to take to their next employer and the paye system adopted must provide the information to complete the P45 accurately. It is a foregone conclusion that using it to generate this information can ease the administrative burden and provide accurate information satisfying the legal requirements of the paye system.

At the end of the financial year the paye administrative burden is increased if manual records are kept as the employer needs to produce a P14 showing the employee deductions and provide each employee with a P60 certificate showing the employee gross pay and deductions. Payroll software can automatically generate the gross pay totals and the income tax and national insurance contributions providing the information required.

The payroll records must also produce the information for the P35 annual employer return showing the income tax and national insurance deducted from each employee and if an employer is operating a manual payroll system then this task is often put aside and can lead to returns a filed late and incurring late filing penalties. With a solution the information is available immediately the final pay period has passed and the figures can easily be submitted online not only saving late penalty fines but also gaining a tax free online bonus.

Using payroll software can not only save time and reduce the paye administration burden but save the employer money too.

Terry Cartwright, qualified accountant in UK designs Payroll systems providing Paye solutions for small to medium sized business with Payroll Software written on excel spreadsheets for up to 20 employees.

Product Review - UK Paye And Payroll Software

DIY Accounting Payroll Software is written on a series of excel spreadsheet templates.

Small business payroll solution available in the UK for up to 5 employees, up to 10 employees and a third version of the payroll for up to 20 employees.

The basic details of each employee are entered on an Employee Details worksheet including personal details such as name, address, starting date, income tax code and national insurance details. Details which every employer needs to maintain anyway to satisfy the requirements of operating a paye scheme. The payroll software then uses the pay data entered such as income tax code and dates and national insurance dates to calculate the income tax deductions and national insurance contributions of both employee and employer. Once the employee details have been entered running a paye system couldn't be easier.

The payroll software pre-enters each employee's name on the payroll each week or month and simply entering the employee gross pay triggers the payroll to automatically calculate income tax and national insurance contributions including the employers' national insurance contribution using the standard income tax and national insurance tables which are embedded within the files supplied with the payroll software system.

Having calculated the net pay the payroll software then goes that extra step and automatically completes the time consuming paye deduction sheets, all arranged in the same appearance as the official inland revenue deductions sheet for recording income tax and national insurance deductions. In addition also included in the employee paye section are copies of the employee P60 certificate, P45 if required and the P14 which is a summary of the pay, income tax and national insurance contributions made by each employee. This feature of the payroll software is extremely valuable in saving employers using the small business payroll solution a great deal of time in paye administration.

Many payroll software systems require the purchase of payslip stationery. The DIY Accounting payroll software is different in this respect. First of all the payslips are all generated automatically from the information in the payroll file which shows the weekly or monthly gross and net pay, income tax and national insurance and the gross numbers to date. The Payslips all preset on payslip templates can be printed at any time on normal A4 copy paper being another money saving feature of the paye solution.

The income tax and national insurance deducted throughout the financial year are automatically collected by the payroll software on an excel copy of the Employers Annual return, the P35. An excel copy in the same format as the inland revenue form which can be simply printed out enabling the payroll figures to then be entered and filed online for employers to both avoid late penalties and receive the online tax free bonus available.

The DIY Accounting Payroll Software is easily integrated into the DIY Accounting Software solutions for both self employed and limited companies when the payroll software files are saved in the same folder as the accounting files providing a complete accountancy solution for clients.

Payroll Software Weaknesses

The DIY Accounting payroll system does not deal with income tax K codes. The income tax code K is used infrequently being applicable to those employees whose taxable expenses exceed the income tax allowance and is often never seen by most employers.

Employer statutory sick pay and maternity leave require to be entered manually. Considered to be a minor weakness since these figures when applicable can be easily looked up on the employers CD-Rom as required.

The quoted package sizes of 5 employees, 10 employees and 20 employees include all employees during the year including new starters and leavers and it is important then to obtain a package likely to be in excess of the total number of expected employees to avoid changing the payroll solution during the financial year.

Pricing

At £14.99 the small business payroll software for up to 5 employees including starters and leavers is almost a giveaway price with many competitive products priced much higher. The 10 employee payroll version is £19.99 and the 20 employee payroll version just £24.99. Considering the paye administrative work the payroll systems save. The packages are not upgraded each year with employers purchasing the new package each financial year.

Conclusion

Exceptionally good value, the payroll system is very quick and easy to use and produces exactly what every employer requires from a small business payroll solution. Accurate income tax and national insurance contribution calculations, significant reduction in paye administration time, regular payslips for each employee, compliance with paye administrative requirements and the satisfaction and valuable tax free bonus prize of producing the payroll on time.

Terry Cartwright is a qualified accountant in the UK designs Payroll Software solutions for small to medium sized business that automates the calculation of Income Tax and National Insurance contributions producing a complete Payroll solution for 1 to 20 employees.

Product Review - UK Paye And Payroll Software

DIY Accounting Payroll Software is written on a series of excel spreadsheet templates.

Small business payroll solution available in the UK for up to 5 employees, up to 10 employees and a third version of the payroll for up to 20 employees.

The basic details of each employee are entered on an Employee Details worksheet including personal details such as name, address, starting date, income tax code and national insurance details. Details which every employer needs to maintain anyway to satisfy the requirements of operating a paye scheme. The payroll software then uses the pay data entered such as income tax code and dates and national insurance dates to calculate the income tax deductions and national insurance contributions of both employee and employer. Once the employee details have been entered running a paye system couldn't be easier.

The payroll software pre-enters each employee's name on the payroll each week or month and simply entering the employee gross pay triggers the payroll to automatically calculate income tax and national insurance contributions including the employers' national insurance contribution using the standard income tax and national insurance tables which are embedded within the files supplied with the payroll software system.

Having calculated the net pay the payroll software then goes that extra step and automatically completes the time consuming paye deduction sheets, all arranged in the same appearance as the official inland revenue deductions sheet for recording income tax and national insurance deductions. In addition also included in the employee paye section are copies of the employee P60 certificate, P45 if required and the P14 which is a summary of the pay, income tax and national insurance contributions made by each employee. This feature of the payroll software is extremely valuable in saving employers using the small business payroll solution a great deal of time in paye administration.

Many payroll software systems require the purchase of payslip stationery. The DIY Accounting payroll software is different in this respect. First of all the payslips are all generated automatically from the information in the payroll file which shows the weekly or monthly gross and net pay, income tax and national insurance and the gross numbers to date. The Payslips all preset on payslip templates can be printed at any time on normal A4 copy paper being another money saving feature of the paye solution.

The income tax and national insurance deducted throughout the financial year are automatically collected by the payroll software on an excel copy of the Employers Annual return, the P35. An excel copy in the same format as the inland revenue form which can be simply printed out enabling the payroll figures to then be entered and filed online for employers to both avoid late penalties and receive the online tax free bonus available.

The DIY Accounting Payroll Software is easily integrated into the DIY Accounting Software solutions for both self employed and limited companies when the payroll software files are saved in the same folder as the accounting files providing a complete accountancy solution for clients.

Payroll Software Weaknesses

The DIY Accounting payroll system does not deal with income tax K codes. The income tax code K is used infrequently being applicable to those employees whose taxable expenses exceed the income tax allowance and is often never seen by most employers.

Employer statutory sick pay and maternity leave require to be entered manually. Considered to be a minor weakness since these figures when applicable can be easily looked up on the employers CD-Rom as required.

The quoted package sizes of 5 employees, 10 employees and 20 employees include all employees during the year including new starters and leavers and it is important then to obtain a package likely to be in excess of the total number of expected employees to avoid changing the payroll solution during the financial year.

Pricing

At £14.99 the small business payroll software for up to 5 employees including starters and leavers is almost a giveaway price with many competitive products priced much higher. The 10 employee payroll version is £19.99 and the 20 employee payroll version just £24.99. Considering the paye administrative work the payroll systems save. The packages are not upgraded each year with employers purchasing the new package each financial year.

Conclusion

Exceptionally good value, the payroll system is very quick and easy to use and produces exactly what every employer requires from a small business payroll solution. Accurate income tax and national insurance contribution calculations, significant reduction in paye administration time, regular payslips for each employee, compliance with paye administrative requirements and the satisfaction and valuable tax free bonus prize of producing the payroll on time.

Terry Cartwright is a qualified accountant in the UK designs Payroll Software solutions for small to medium sized business that automates the calculation of Income Tax and National Insurance contributions producing a complete Payroll solution for 1 to 20 employees.

Payroll Essentials for New Employers

When should an Employer Register for PAYE

An employee is anyone who works on a full time, part time or casual basis for the business and includes company directors. Employers should register as soon as possible when a qualifying employee is appointed and may register up to four weeks prior to the first employees pay day. You should register as an employer and operate a PAYE system if your employee already has other employment, or if the employee's earnings are equal to or above the PAYE threshold. The PAYE threshold for 2007-08 is earnings of £100 per week or £435 per month at which point income tax and national insurance deductions may be required. These limits include the value of any benefits in kind that may be paid.

Employer Registration Information Required

Generally the information to be provided includes the business name, trading address, type of business, name and address of the employer, national insurance number and tax office reference of the employer, contact telephone number and email address if applying by email., In addition details will be required of the likely number of employees, frequency of payment, the date the first employee was appointed and the first payment date. Also have available the address where the payroll records will be kept and the contact details of the person responsible for the payroll. Where partners are involved details of each partner's names, addresses, national insurance numbers and tax office references will be required and the LLP number for Limited Liability Partnerships. Limited Companies will be required to supply the address of the company's registered office, date of incorporation and company registration number plus details of the directors; names, addresses, contact telephone numbers, national insurance numbers, tax office references

How to register as a PAYE Employer

Employers can register for PAYE online at the HMCE website. Click Employers - Register as an Employer - First steps as an Employer - scroll down the page until you can click email which then presents you with online registration form to complete and send. Alternatively contact HMCE Employer Helpline at 0845 6070 143.

PAYE and Payroll Records

Accurate payroll records are essential, full stop. Employers must keep payroll records for both HMCE purposes and employees. The employee records must include the name and address of the employee, national insurance number, date of birth, income tax code, all payments and benefits made and all deductions for income tax, national insurance and voluntary deductions. When registering to operate a PAYE system immediate arrangements should be made to ensure these records are maintained either by setting up the records yourself using the help and advice contained in the Revenue CD-ROM provided to all new and existing employers or employing a payroll service to produce the records or using a payroll software package. Various payroll software packages are available with different degrees of complexity. The DIY Accounting Payroll Software is an ideal solution for small employers being written on excel spreadsheets and in addition to producing the deduction calculations and payslips the payroll software also automatically completes an excel copy of the compulsory HMCE forms significantly easing the administrative burden.

Paying Employees

Employees must be paid the national minimum wage which for adults was raised on the 1st October 2007 to £5.52 per hour. Every employee must receive a payslip that shows the amount of income tax and national insurance deducted from the gross pay. In addition every employer must also calculate the employer's national insurance contribution. If you are an employer and not operating a payroll software system such as the DIY Accounting Payroll Software then you must design a payslip to give to your employees to satisfy legal requirements.

HMCE Payroll Forms

P11 Employees Deductions Working Sheet

The working paper is a record of the weekly or monthly pay for each employee and the income tax and national insurance deductions.

P14 End of Year Employees Deductions Summary

Summary of the employee income tax and national insurance deductions recorded on the P11 deductions working sheet

P35 Annual Employers Return

Summary detailed by employee of the annual totals of income tax and employee's national insurance deductions and employers national insurance liability

P45 Details of Employee Leaving

Only available from the Employer's helpline the P45 is a certificate of the amount paid to the employee and the income tax deducted during that employment. Every employee that leaves the employers employment should be issued with a P45.

P60 End of Year Employees Certificate

The P60 is a certificate of an employees total earnings and total income tax deducted during the tax year including previous those of previous employers and also the amount of national insurance deducted by the current employer and should be issued to every employee the employer has at the 5th April each year.

Each of these HMCE PAYE forms are automatically completed by the DIY Accounting payroll software which produces excel copies of the HMCE forms making the package highly suitable for both inexperienced employers and those wishing to minimise the administrative burden payroll can place on an employer.

PAYE Payments and Online Bonuses

Deductions of income tax, employees national insurance and employers national insurance must be paid to HMCE each month, the standard final payment date being the 19th of the month following the payroll month. If monthly payments of income tax and national insurance deductions including employer's national insurance are under £1,500 per month then employers have the option to pay the amount due to the HMCE on a quarterly rather than a monthly basis. Payments of income tax and national insurance to the HMCE can be made online electronically. At the end of each financial year, 5th April, every employer must submit the P35 Annual Employers Return .to HMCE detailing the amounts paid to each employee and the deductions made for income tax, employees national insurance and employers national insurance with the amount that has already been paid to HMCE in respect of the income tax and national insurance contributions. Employers with less than 50 employees are eligible for a tax free online bonus when the P35 Employers Annual Return is submitted online which has been a tax free £250 and £150 in recent years.

Terry Cartwright is a qualified accountant in the UK designing accounting and payroll solutions for small to medium sized business of Accounting Software and Payroll Software specifically for self employed and limited companies in the UK that produce a fully automated final set of accounts on excel spreadsheets.