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Should You Be Outsourcing Your Payroll Function?

Business owners are constantly challenged with reducing costs to maximize profitability and with simplifying their operations to give them more time to focus on the strategic side of their business.  If you’re not doing these things, you’re destined to continue feeling like your business is running you instead of the other way around.  One way to easily achieve these goals of simplification and cost reduction can be through outsourcing.

Most business owners outsource many functions of their business including tax preparation, legal counsel, and hiring personnel.  It’s fairly obvious that it’s cheaper to hire a tax expert once a year than to retain a tax accountant on staff or to stumble through the process yourself.  Let’s look at a slightly less obvious function that can be outsourced: payroll processing.

Scenario 1: You’ve finally hired enough employees that there’s just no way to justify them as “contractors” and your tax preparation fees have tripled as you try to sort things out at the end of the year.  Your business is growing and you need to get some basic structure in place.

Scenario 2: You’re a healthy mid-sized company with a couple of million in annual revenue and a single staff accountant whose time seems to be completely monopolized with processing bi-weekly payroll for your 20+ employees.  It’s a miracle when bills are paid on time and don’t even talk about collections on those old invoices.  You’d like to refocus that accountant on activities that actually bring cash in the door.

Scenario 3: You’ve grown still further into the lower middle market and you now have a dedicated AP clerk, AR accountant, and a controller.  Unfortunately, your controller’s time is still wrapped up in that pesky payroll though you’d really rather have their help analyzing your financials to prepare management reports and budgets.

Scenario 4: You’re in negotiations to sell your company and the buyer’s due diligence reveals you owe $75,000 in payroll withholdings from Scenario 1…

Each of these scenarios highlights a decision point in the typical small business where outsourcing payroll should be considered.  Before that last scenario becomes your reality, take a look at whether you should be outsourcing payroll.

What is Outsourced Payroll?

Outsourcing payroll simply means utilizing a payroll service provider to handle the calculation of payroll checks; perform tax calculations, deposits, and filings; and to assist with payroll tax law compliance.  This third party serves to insulate the company from liability and risk associated with doing any of these things incorrectly.

What are my options?

Your CPA is the first place to look since they may offer the service or they may have a preferred method that fits with their year-end process to save you money on tax preparation.  They might recommend a software-based service such as QuickBooks or Peachtree, or they might have a relationship with a company that specializes in payroll processing such as Paychex.  You bank might also offer a software package or a service, or they may also have a relationship with a third-party provider.

What kind of business should consider Outsourcing Payroll?

Unfortunately, a company that has one employee will have the same compliance requirements and penalty percentages for late payments to the State and the IRS as a company with a hundred employees.  This means that your company is never too small to worry about payroll.  In fact, businesses of all sizes should periodically analyze the cost-benefit of maintaining a full internal payroll department versus utilizing an outsourced option.

What kinds of benefits can I expect from Outsourcing Payroll?

First of all, the knowledge that all payroll related tax deposits and returns are filed timely and properly and that the IRS will not be knocking on your door tomorrow should help you to sleep soundly at night.  Other immediate benefits include more time back in your day, reduced compliance/audit risk, and happier employees.

Companies that use a payroll service provider should maximize their relationship to take advantage of even more benefits including worker’s compensation reporting, 401k administration, human resources compliance, time & labor tracking, and more.  Outsource more than just payroll and reduce administrative burden even further by using the third-party provider for all the ancillary services that rely on payroll data.  For example, ask them to help with the annual Worker’s Compensation Audit.  This annual audit ensures that the insurance company was paid all the premium money owed for the previous year.  Since the outsourced payroll provider knows what each employee was paid, they can help with the premium calculations to generate the annual report for the audit.  More importantly, they can generate a monthly report to alert you if you are tracking higher or lower than your estimate for the year.  This means, no more Worker’s Compensation Audit surprises and a great budgeting tool.

But I’ve heard there are problems with outsourcing…

Some of the perceived concerns with outsourcing payroll include losing control and access to information, fears that your payroll is too unique or complex, or the assumption that it is less expensive to do everything yourself.   However, today’s technology continues to enhance payroll processing capabilities and make it even more cost effective.  It is worth exploring whether these concerns are real or whether your situation would be simplified and streamlined with an outsourced solution.

If I decide to go down this road, what will the transition process be like?

A good payroll provider will strive to make the transition as seamless and easy as possible. Generally, your representative should be able to get everything they need to configure your new system from your existing records and will take care of all the data entry as part of their service.  During the initial setup process, errors may be identified and appropriate steps presented to you for fixing them.  The first outsourced payroll should be ready for processing within 3-4 days of data collection.

Ok, sounds like something I should look into.  What will this cost me?

Your cost will depend on your specific situation including your payroll frequency, number of employees, and types of services requested.  As an example, a one person S-Corporation, with the owner as the only employee paid monthly, is $39.00 per month at Paychex and includes direct deposit, payroll processing and tax payment/filings.  By way of comparison, the IRS estimates it should take nearly 3 hours just to complete one of the quarterly forms!  Of course, it costs nothing to call an expert and ask them to analyze your business and give you a quote.

Meike Alberts
This article was prepared with input from:
Meike Alberts
Paychex, Inc.


One Comment

  1. Vicki Gramm says:

    Good info to know. You guys make a great team!

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