If you operate a growing business, you probably invest a great deal of time processing payroll. Payroll requires you to calculate, report, and submit payments for taxes and worker benefits. If you’re using Excel to process payroll, you’re spending far more time than is necessary.
How Payroll Is Processed
To understand why it’s not a good idea to manage payroll in Excel, it’s important to understand a few of the components of payroll. It includes a lot more than simply paying your employees. Companies must also deal with insurance payments, retirement plan contributions, and other required payments.
Here is an overview of the steps required to process payroll and other contributions:
- Collect Data: Each employee completes a W-4 form to determine the amount of taxes that must be withheld from payroll. Business owners must also determine the benefits that they will offer employees.
- Withhold: Businesses use the data they collect to calculate withholdings from pay. A company must withhold federal and state tax payments, along with FICA payments (Social Security and Medicare). Firms may also withhold insurance premium payments and retirement plan contributions.
- Pay Taxes, Insurance and Benefits: Once all of the amounts are calculated and withheld, a business must submit the payments to several different entities. Taxes, benefit contributions and insurance premium payments all require separate reports that are submitted with each payment.
If any worker information changes, the data collection forms must be changed. New data also means that the withholdings and reporting will be different. A firm with dozens or hundreds of employees may have multiple changes every pay period.
The Problems with Using Excel for Payroll
Payroll is a dynamic process—things are always changing. Using Excel to process payroll will become more difficult to manage as your grows. Here are just a few of the issues that Excel users face.
1. Data is scattered.
Using Excel makes it difficult to automatically link the steps needed to process payroll. For example, the data you collect about withholdings will not post automatically into your payroll calculation spreadsheet. Each employee’s withholdings will be different and can change for many reasons, creating lots of error-prone, manual work. The process involves more steps than an automated system, which also makes adding employees difficult.
2. There is a high risk of human error.
Many businesses use linked spreadsheet tabs to process payroll. If the calculation of net pay is in tab number one, for example, the spreadsheet will require additional tabs to compute federal and state withholdings, FICA, and other amounts. Using a large number of linked spreadsheet tabs increases the risk that a link has an error.
3. Manual data entry is a pain.
The data you collect from employees must be input into any payroll system. An automated system only requires you to enter the data in one location. If you use Excel, you may need to manually enter data into multiple locations to process payroll. More manual entry increases the risk of error.
4. Your workflow probably isn’t documented.
As your business grows, you may need to hire and train new people to handle your payroll process. An Excel-based system is more complex and requires more steps. A complex process is also more difficult to document and to explain. Using Excel will require you to spend more time explaining your payroll process to new employees.
5. Investors and accountants don’t like it.
Finally, using Excel for payroll may communicate that your company is not investing in the right tools to grow the business. If you need to attract investors, you need to demonstrate that your company operates efficiently. Using Excel for payroll may inhibit your ability to grow the business over time.
Here’s How Running Payroll with Spreadsheets Goes Awry
Assume that Jill operates a Kerman Landscaping, which has three locations in town. During the winter months, Kerman handles leaf removal and snow removal, so Jill’s business requires a staff of workers year-round.
Kerman manages payroll using Excel. When a new employee is hired, Jill manually inputs the W-4 information and other data into the tabs of an Excel spreadsheet. The spreadsheet contains formulas to calculate taxes and other withholdings for each worker. Once Jill calculates each staff member’s net pay, she pays employees and sends the information to her CPA. The CPA firm completes each of the reports and returns them to Jill. Finally, Jill sends each payroll report with the required payment.
During the month of May, Kerman has several payroll changes that must be addressed:
- Tax withholding schedules: Jill’s CPA emails her new withholding schedules for state taxes. Kerman must change the tax withholding formulas in the spreadsheet to comply with the tax law change.
- Insurance premiums: Kerman’s insurance company raises the monthly premiums for health insurance coverage. Jill changes the spreadsheet so that each employee’s premium payments reflect the change. Kerman’s company expense for the employer’s share of premium payments must also be updated.
- Retirement contributions: Three workers change their percentage of gross pay that they contribute to the company retirement plan. The Excel document must also reflect these changes.
In addition to updating the spreadsheet, Jill must document the changes so that her payroll records for each employee are correct. Kerman must also change the information in each form it must send. Since these steps are not automated, the changes must be entered manually.
If Jill grows her business, she will deal with even more changes each month.
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