Payroll Software: What It Does, What to Look For and What an Employee Really Costs

Short answer: payroll software turns hours and salaries into accurate paychecks, withholds and reports payroll taxes, and pays employees on schedule. For businesses with hourly employees, the software is only as accurate as the hours it receives, so the best setup pairs payroll software with a time clock that sends clean, approved hours.

Choosing payroll software is one of the first real systems decisions a growing business makes. This guide explains what payroll software does, which features matter for small and hourly teams, what drives the cost, and how to make sure the data going in is right. Use the calculator to see what one hourly employee costs once employer taxes and benefits are added.

What payroll software does

• Calculates gross pay from hourly time, salary, overtime, tips, bonuses and commissions.
• Withholds taxes and deductions: federal income tax based on the employee’s Form W-4, Social Security and Medicare, state and local taxes, benefits and garnishments.
• Pays employees by direct deposit, pay card or check, on your pay schedule.
• Handles employer taxes such as the employer share of Social Security and Medicare, FUTA and state unemployment. Many plans also deposit taxes and file returns such as Forms 941 and 940.
• Produces year-end forms such as W-2s and keeps payroll records.

The true cost of an hourly employee

Wages are only part of the cost. Drag the sliders to see the employer side your payroll software has to calculate.

Features small businesses should look for

1. Automatic tax calculations and filings for every state where you have employees.
2. Multiple pay rates for employees who work different jobs or locations.
3. Overtime support for federal rules and, where needed, state daily overtime.
4. Easy import of hours from your time clock, so nobody retypes timesheets.
5. Employee self-service for pay stubs, W-2s and tax forms.
6. Clear pricing for your headcount and pay frequency, including any year-end or off-cycle fees.

Payroll software vs. time tracking: how they fit together

Payroll software is built to pay people correctly once it knows how many hours they worked. It is usually not where hourly employees clock in, swap shifts or fix a missed punch. That is the job of a time and attendance system. The common setup is:

1. Employees clock in and out with a mobile time clock app, an NFC tag or a kiosk.
2. Managers fix exceptions and approve timecards before the cutoff.
3. Approved hours, overtime and PTO are exported to the payroll software.
4. Payroll calculates pay, taxes and deposits.

When step 2 is skipped, payroll runs on wrong hours, and every fix becomes a correction after the fact.

How to choose payroll software

• Count your states. Multi-state payroll adds tax registrations and filings. Make sure each state is supported.
• Decide how much you want done for you. Some businesses only want calculations; others want the provider to deposit taxes and file every form.
• Test with real data. Run one pay period with your actual hours, overtime and pay rates before you switch.
• Check the import. Ask how hours come in from your time clock, and test the file format.
• Read the fine print. Look for fees for off-cycle runs, year-end forms, additional states or support.

Where EZTime fits

EZTime is not payroll software. It is the time and attendance system that sits in front of payroll: employees clock in from the app, NFC or kiosk, managers approve hours and fix missed punches in one place, and you export payroll-ready hours, overtime and PTO to the payroll software you already use. Clean hours in means fewer payroll corrections out.

Frequently asked questions

What does payroll software do?

Payroll software calculates employee pay from hours or salary, withholds and tracks payroll taxes, pays employees by direct deposit or check, and produces tax forms and reports. Many products also file and deposit payroll taxes for you.

Is time tracking the same as payroll software?

No. Time tracking records when hourly employees work and produces approved hours. Payroll software turns those hours into paychecks, taxes and filings. Most businesses use both, with approved hours exported from the time clock into payroll.

How much does payroll software cost?

Pricing models vary. Many providers charge a monthly base fee plus a per-employee fee, and full-service plans that file taxes cost more. Compare total monthly cost for your headcount and pay frequency, not just the advertised base price.

What employer payroll taxes do I pay on top of wages?

At the federal level, employers pay Social Security tax of 6.2% (up to the annual wage base) and Medicare tax of 1.45% on wages, plus federal unemployment tax (FUTA), which is 6.0% of the first $7,000 per employee and usually 0.6% after the state credit. Most states add state unemployment tax, and some add other payroll taxes.

What causes most payroll errors?

For hourly teams, many payroll errors start before payroll: missed punches, unapproved edits, overtime that nobody noticed and wrong pay rates. Clean, approved hours from your time clock remove a large share of the corrections.

This article is general information for US employers, not tax or legal advice. Tax rates, wage bases and state rules change; confirm current figures with the IRS, your state agency or a payroll professional.

Related guides

• Hourly payroll timekeeping workflow
• Attendance reports for payroll
• Timecard approval workflow
• Free overtime calculator