Best payroll software for small business: grade it by the jobs it leaves you

What is the best payroll software for small business

The honest answer is that it depends on the jobs a brand-new employer still owns. The right fit does those jobs, or it says plainly which jobs stay on you. A login is not those jobs.

The IRS is the Internal Revenue Service, the federal tax agency. Publication 15 (Circular E) is the IRS Employer’s Tax Guide. It says you stay responsible for employment taxes if a third party misses a deposit or a return. The IRS employment taxes page names the federal taxes on a paycheck: federal income tax, Social Security and Medicare taxes, and federal unemployment tax. Software can do the arithmetic. It does not erase that duty.

The homepage scorecard gives each tracked product three letters. Those letters cover a California tax account, California returns, and the California new-hire report. The methodology page explains the letters. Do not use a California letter as a grade for another state.

What payroll software must do

Ask these seven questions of any product. A “no” is still a useful answer when the product says the job stays on you.

1. Figure pay and tax withholding

   Gross pay is the wages the person earned before taxes. Withholding means money you take out of a paycheck and send to a tax agency. Form W-4 is the Employee’s Withholding Certificate. Your employee fills it out to set federal income tax withholding. The product should figure gross pay, federal income tax, Social Security tax, and Medicare tax. Social Security tax and Medicare tax are the two federal payroll taxes that you and the employee both pay. Withhold state income tax only if that state taxes wages. The dollar amounts for the federal taxes are in Publication 15.

2. Pay people

   Net pay is what is left after the taxes you withhold. The product should pay that amount on the payday you set. Your own tax share stays off that check, except where a state also takes an employee share. Do not assume that share. Read the state page.

3. File and pay payroll taxes

   A deposit is the payment of withheld federal income tax, Social Security, Medicare, and your share of Social Security and Medicare. Form 941 is the quarterly federal return for those taxes. Form 940 is the annual federal unemployment tax return. FUTA is the Federal Unemployment Tax Act. Only the employer pays FUTA. Ask whether the product deposits and files these forms, or whether you still do. You remain responsible either way.

4. Handle new-hire reporting

   A new-hire report is the notice you send when someone starts work. Child support offices use it to find a paycheck. The Administration for Children and Families says the federal deadline is 20 days after the hire, unless the state sets a shorter clock. Ask who sends the report. A quarterly wage report is not that notice.

5. Register state unemployment tax

   State unemployment tax is often called SUTA or SUI. SUTA means state unemployment tax. SUI means state unemployment insurance. It funds state unemployment benefits. It is a separate account from FUTA. The state assigns the rate. Ask whether the product opens that account, or whether you still register and then type in the rate from the state’s notice.

6. Handle workers’ compensation

   Workers’ compensation is workplace injury insurance. It pays medical care and part of lost wages when someone is hurt at work. The U.S. Department of Labor tells a private employer to contact the state board. People also call that agency the DOL. There is no single national policy. A payroll login is not that policy.

7. File year-end Form W-2

   Form W-2 is the Wage and Tax Statement. The About Form W-2 page says you file it for each employee you pay for services. You give a copy to the employee and you file the forms with the Social Security Administration. Ask whether the product prepares and files them. The form follows the year’s wages. It does not open the state account.

Choose by the shop you have

One employee

One employee still starts the seven jobs above. You also open the accounts for the one state where that person works. A product that only does the paycheck math can fit if you will file the returns yourself. A product that claims to file still needs the account number the state assigns. Read that state’s page before you treat a checklist as done.

A few employees in one state

The same state rules apply to each person who works there. The new-hire clock and the workers’ compensation headcount can change as you add people. Those rules are not national.

Georgia wants the new-hire report in 10 days. That is shorter than the federal 20. Withholding and unemployment sit on two portals. Workplace injury insurance starts at three regular employees.

Florida does not take state income tax from a paycheck. The Department of Revenue collects reemployment tax. Reemployment tax is Florida’s name for the employer tax that funds unemployment benefits. Most shops must have workers’ compensation at four employees. The new-hire report can also include a contractor paid $600 or more in a year. Do not use Georgia’s 10 days in Florida. Do not use Florida’s four-employee line in Georgia.

Employees in several states

Each state is its own set of accounts. A product that files in one state can still leave another state’s account on you. These examples are different shapes. Do not paste one state’s rule onto another.

In California, a commercial employer registers with the Employment Development Department within 15 days after paying more than $100 in wages in a quarter. The Employment Development Department is the state payroll-tax office. Workplace injury insurance is due before the employee starts work.

In Texas, there is no state paycheck-withholding account. Unemployment tax goes to the Texas Workforce Commission. The new-hire report goes to the Attorney General, not to that commission. Workers’ compensation is optional for most private employers.

In New York, one registration can cover unemployment, withholding, and wage reporting. The new-hire report goes to the Tax Department. That report can include some contractors.

In Washington, there is no state paycheck withholding. One business-license file starts unemployment with the Employment Security Department and industrial insurance with Labor and Industries. The new-hire report goes to the Department of Social and Health Services. Ordinary shops buy that insurance from the state fund.

In Ohio, unemployment and withholding use two portals. City income tax is a separate account. The new-hire report can include many contractors. That report is not the test for whether the person is an employee.

Contractors only

If you pay only independent contractors, employee payroll software may be the wrong tool. An independent contractor is a person in business for themselves. You generally do not withhold income tax, Social Security, or Medicare. Independent contractor vs employee is the label check. A software button that says contractor does not settle that label.

Some states still want a new-hire line for certain contractors. Ohio, New York, and Florida are examples above. That line is not the IRS test. Do not copy it onto a state that does not say it.

An accountant runs it

An accountant can prepare the returns while software figures the pay. Publication 15 still applies. You stay responsible if the accountant or the software misses a deposit or a return. Ask who holds the state account number, who enters the rate from the state’s notice, and who files the new-hire report.

How to set up payroll for small business

Setup is the work before the first payday. Can I do my own payroll? is the map for the federal accounts, the deposit schedule, and the choice to do each payday by hand, use software, or hire an accountant. This page does not repeat that map.

How does payroll work for a small business

Payroll is the repeating job after those accounts exist. Hiring your first employee is the list for the first cycle. It covers the federal employer number, the work forms, the new-hire report, and the payday. Start there if you have not hired yet.

The homepage scorecard names Gusto and Patriot. Read each product’s own help page before you treat a letter as a promise. This page does not rank either one as the best.