Wanna change payroll software? Be careful.
The TL;DR
Changing payroll software mid-stream can trigger tax, 401(k), benefits, ACA, and HR issues that lead to penalties and hours of rework. Before you move to a new software, consider reaching out to your accounting team first to help plan the timing, reconcile YTD data, map codes correctly, and make sure the switch supports your strategy — not increase your stress.
Thinking about switching payroll software for your business? Better tools can simplify your life for sure—but making the move without a full plan can create costly headaches.
Mid-year changes are especially tricky: wage bases may reset (think Social Security, FUTA/SUTA), tax deposit schedules can shift, and state/local IDs or nexus rules can be overlooked. If the new system doesn’t bring over year-to-date earnings correctly—including S-corp owner health, imputed income, and taxable fringe benefits—you risk W-2/W-2c problems and penalty notices from IRS and states you didn’t see coming.
Retirement and benefits add another layer. 401(k) deferrals, employer matches, loan repayments, and Roth vs. pre-tax coding must map perfectly—or you could blow annual limits or fail ADP/ACP testing. The same goes for Section 125 deductions (HSA/FSA), garnishments, workers’ comp reporting, PTO balances, and ACA tracking (1095-C data and measurement periods). Integrations matter, too: if your new payroll software doesn’t sync cleanly with your bookkeeping software, sales software, 401(k) provider, or timekeeping software, you’ll trade “quick easy automation” for hours of manual cleanup and sadness.
Does all of this sound overwhelming? It can be. It is easier to obtain solid guidance on the front end….and always less expensive in time and money. Cleanup and rework is costly.
The safest path is a coordinated transition with clean cut-off dates, reconciled YTDs, and a checklist that covers registrations, deposit calendars, earning/deduction code mapping, and test runs before the first live payroll. Regardless of the new software salesperson’s promises, a knowledgeable CPA team will help you evaluate whether a switch is worth it, pick the best timing (often year-end), consider impacts on 401(k) plans, align settings with your tax strategy, and help you confirm payroll numbers that follow your people—from first check to W-2. Your staff will be grateful and your life will be less stressful.
Here are some costly pitfalls we’ve seen happen to business owners…
Poor timing for the change (paychecks messed up at Christmas is not a good look).
Failure to consider employee benefits like 401(k) contributions and matching, timekeeping and sales software integration, and countless HR issues.
Failure to understand federal, state, and local tax compliance implications and proper tax rates.
Failure to select accurate dates for cutoff of the old and startup of the new.
Failure to properly carryover prior months of payroll into the new software causing inaccurate W-2 data.
Messed up PTO and sick accruals.
Messed up ACA (Marketplace) and other healthcare insurance waiting times and eligibility for employees.
Failure to understand accounting implications causing messy issues in the books…and then your bookkeeper is sad at you.
Clients of Pathway:
Reach out to us first before you pull the trigger on new payroll software.
Do not feel pressured by the sales rep to make a hasty decision, regardless of their promises of a quick easy transition.
