Should Your Business Use a Free Payroll Calculator?
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Should Your Business Use a Free Payroll Calculator?
22 February 2016
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man working on his office deskman working on his office desk

Small business owners wear many hats. One of those hats is an accountant’s green eyeshade. Remember those old-fashioned visors that accountants wore? Put yours on now as you sit back and contemplate the myriad tasks associated with your business’ finances.

Not only must you calculate profits and losses, but you’ll have to handle your company’s payroll. Many small business owners turn to free online payroll calculators to make this task easier and faster.

Unfortunately, free payroll calculators can be misleading and potentially dangerous. They’re fine for an eyeball estimate, but if you rely on them for tax purposes, you’re likely to end up in trouble. A third of companies get fined every year for payroll errors, making payroll-related penalties among the most common facing small businesses. Handling payroll can be notoriously tricky, with errors costing billions of dollars every year.

Here’s why we recommend that business owners do not rely on free payroll calculators.

Three Reasons Payroll Calculators Put Your Business in Danger

Using a free payroll calculator can be risky. Payroll calculators can be…

  1. Inaccurate: Payroll calculators offer an estimate. They can’t account for every nuance of your business’ payroll. They are often inaccurate, and an inaccuracy in payroll reporting can be difficult to correct.
  2. Incorrect: State employment and taxation laws vary considerably. If you have employees working in multiple states, or business locations in multiple states, each individual state’s laws govern the taxation in those states. A payroll calculator can rarely account for differences among states’ laws. Using a payroll calculator in such a complex situation can lead to mistakes.
  3. Costly:  There are a lot of taxes to pay. There are federal and state taxes both for your business and for your employees. Make a mistake on one, and the mistake can cascade into other areas, too. For example, only after filing your SUTA taxes correctly can you apply discounts to FUTA taxes. Federal and state laws may overlap, or may differ if you have businesses in different states. Incorrect calculations, mistakes in filing, missing deadlines…these can all lead to IRS fines and penalties. Relying too much on payroll calculators can give you a false sense of security and end up costing your business money.

When Can You Use Payroll Calculators?

If you’re new to running your payroll, or you work with an accountant but would like to have an estimate in hand before the final numbers are due, using a free payroll calculator make sense. It’s a useful estimating tool, and if you plan to have your accountant check your numbers later or hire a payroll processing firm to run the actual numbers for you, it can serve as a simple estimating tool for your business. You can read more in this step-by-step guide to using a payroll calculator.

FUTA and SUTA Compliance

One thing that is always difficult to run on a free payroll calculator is your business’ SUTA tax, or state unemployment tax. SUTA taxes are assigned individually to businesses. You should receive your percent rate through the mail at the start of each calendar year. Because each business has its own tax rate, you’ll have to calculate it separately.

FUTA taxes are federal unemployment taxes. These are paid annually using Federal Form 940. The current tax rate is 6 percent, any and company with an employee must pay this tax. However, if you pay the SUTA tax, the rate is often reduced. This can vary among states, and you’ll have to check it each time you complete your Form 940 to see what the FUTA reduction is based on your state’s unemployment insurance status.  FUTA is calculated on an employee’s first $7,000 in earnings.

Confusing? Yes. But Manageable.

Payroll taxes can be one of the most confusing aspects of running a small business. While it’s tempting to rely on a free payroll tax calculator, you shouldn’t rely on it solely to make sure that you pay all of your taxes correctly. A payroll calculator can’t tell you if a discount applies, or when a filing date draws near. You’ll need to set up separate systems for that.

One simple way to handle payroll processing is to outsource it. As your company grows, you may find it burdensome to don that green eyeshade each month and tally up your taxes. Finding a qualified accountant or payroll processing company can alleviate much of the confusion surrounding payroll taxes.

For those with few employees and low payrolls, you may want to sit down with an accountant and review all of the steps you’ll need to remain compliant with federal and state law. Make a list of which forms to complete and when to complete them. Learn how to fill out Form 940 and other forms. Take your time, and when in doubt, talk to an accountant. 


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