Articles and White Papers
PAYROLL OUTSOURCING
Taxes
The number one reason that businesses outsource payroll is to ensure that they withhold, report and pay their employer taxes appropriately. Many business owners believe that they can manage the calculations, remember the quarterly and annual filings, and make the payments on schedule; but a great many businesses don't get it right. The numbers are staggering. In 2002, the IRS reported that they assessed ten times more penalties for employment tax noncompliance than for corporate tax violations, and of the 29 million employer tax returns filed, 7.8 million were assessed employment tax penalties. Some businesses try to defraud the government (or their employees) and get caught. But the vast majority of employment tax penalties result from basic payroll mistakes, such as accidentally providing incomplete, inconsistent, or late information. Entering the wrong taxpayer ID number on a W-2 is a $50 fine per employee.
A great number of common mistakes are prevented when your company's withholdings, filings and payments are automated by a payroll service. A payroll service won't necessarily prevent you from making a data entry mistake, but a good payroll service will take responsibility for an infraction due to a mistake or miscalculation on its part. Although your computer can calculate payroll withholdings and tax payments, it doesn't guarantee that you will file and pay your taxes on time. Nor does it guarantee that you will comply with all the federal and state regulations related to your payroll, such as filing W-2's, registering new employees with state agencies, and so on.
Convenience
Besides the "safety net" of withholding, filing and paying payroll taxes, many business owners choose a payroll service simply because they're too busy running their business to spend time on payroll. Although accounting applications like QuickBooks can calculate payroll and withholdings, they can't automate the cash transfers for withholding or the filing and payments that must be made to state and federal agencies each quarter. Tax rules change constantly throughout the year. Do you have time to monitor these regulations? Payroll services stay abreast of local, state and federal tax laws and employment regulations, so their clients are less likely to miss an important payroll processing change.
Another advantage of a payroll service is the simplicity and convenience of making a single withdrawal from your bank account for each payroll run. If you manage payroll on your own, you'll have a separate transaction for each employee's paycheck and each tax payment. The automation provided by a payroll service eliminates the lengthy reconciliation of accounts with your bank records.
Security
Outsourced payroll also ensures better security, privacy and confidentiality. A payroll service offers offsite backup of payroll data, as well as security measures to keep employees' payroll information private. The business owner using a payroll service doesn't have to worry about payroll data being lost in a hard-drive crash or compromised from a stolen laptop. Additionally, having a single person at an organization handling payroll can leave a company vulnerable. What if that person has an accident or illness that takes them out of the office for an extended period of time? Working with a payroll service provides security that your payroll will remain timely and accurate.
Record Keeping
A payroll service will be responsible for keeping accurate records on each employee and for keeping those records for the required length of time. Tax laws require that basic demographic data be kept along with detailed records about compensation - such as the date paid, pay period, tips, non-cash payments, compensation subject to withholding and payroll taxes, and fringe benefits. Recordkeeping isn't just required under tax laws. A number of federal, and possibly state, laws require some or all employers to retain certain records. For example, your company may have responsibilities under the Fair Labor Standards Act, the Age Discrimination in Employment Act, the Family and Medical Leave Act, the Immigration Reform and Control Act, the Occupational Safety and Health Act and the Employee Retirement Income Security Act. A payroll service will know what is required and what is not.
Big Company Benefits
Another reason businesses use a payroll service is to make it easier to offer employees the benefits they would typically enjoy in a larger company. It has become increasingly important for businesses to offer health and disability insurance, retirement plans, pre-tax withholding for medical and childcare expenses, and other benefits. However, all of these benefits make payroll more complex. The difficulty of managing withholdings from employees' paychecks and making transfers to the appropriate accounts should not be a limiting factor in providing these benefits. A payroll service will manage the transfers of funds to insurance providers and fund companies managing employees' retirement accounts. They can also facilitate other withholdings such as garnishments and special savings plans.
Conclusion
You should weigh the pros and cons of a payroll service for your business, and choose accordingly. Outsourcing payroll should save your business time and money, and enable you to spend more time focused on your core competency. If you choose well, you will not have to consider your payroll needs again for a long time. With the convenience of a payroll service, what could you achieve with the additional time to focus on your core business?
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