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Outsourcing payroll has many pros and cons. Credit: Payroll image via Shutterstock |
One of the most important decisions you can make as a business owner is whether or not to outsource your payroll. Processing payroll can be complicated and overwhelming, especially for small businesses, and there are pros and cons to doing it yourself.
While managing your own payroll may save you money in the short term, it could cost you in the long run if you make a mistake and end up owing the IRS back payments and penalties.
"Failure to properly comply with filing, reporting and paying requirements may result in large penalties and interest owed to the IRS and state taxing authorities," said Michael Raanan, president of Landmark Tax Group and a former IRS revenue officer. Raanan added that the biggest payroll-related mistake a business owner can make is not properly sending payments to the IRS.
To successfully process payroll yourself, you must you know what you're doing so you can avoid those issues.
"If a small business owner has a good background in accounting and is willing to research all the laws, remember all the deadlines and has a very simple payroll, then they could consider doing the payroll themselves," said Clare Wherley, CPA and co-founder of accounting firm Lassus-Wherley. Only sole proprietorships and partnerships are exempt from payroll filing obligations, she said.
What's involved
Wherley warns, however, that managing payroll isn't just about writing paychecks and calculating withholdings. An employer's payroll responsibilities often also include:
- Filing quarterly reports
- Withholding employee taxes
- Paying withholdings to government agencies
- Issuing W-2 forms at year's end
- Making summary filings at the state level
- Managing employees' health and pension plan contributions
- Handling state disability, unemployment and family leave assessments
- Notifying the government when employees are hired or leave the company
The ever-increasing complexity of managing payroll and navigating the tax system has led to an increase in payroll services that offer a wider range of features, including everything from filing quarterly and annual payroll reports with the IRS to taking full responsibility for workers by technically "hiring" them as employees of the payroll service company. These services can also offer benefits, such as vision and dental plans, as well as retirement investment plans that your employees can choose to participate in.
When it comes to cost, some companies will charge based on the total payroll amount per pay period, while others charge by the check. The basic cost for a payroll services varies, but a good estimate is $2-$3 per check for basic check-issuing services and up to $5-$7 per check for more in-depth services.
Choosing the right system
"The type of payroll service that works best for each company depends on the needs and circumstances of the business," Raanan said. "Businesses with a large amount of employees and more frequent payroll may be better served by payroll companies with a more robust payroll system, such as ADP and Paychex."
If your business is smaller or you'd prefer to do payroll yourself but just don't have the time, try meeting in the middle. One option is to try to strike a balance between outsourcing and keeping payroll services in house, said David L. Gray, assistant professor of accounting at North Central College in Naperville, Illinois.
"There are several options for small businesses who need some assistance with payroll but don't want to outsource it completely," Gray said. Accounting programs such as Intuit's Quickbooks offer payroll services that allow you to print out your own paychecks, but calculate withholdings and prepare reports for quarterly and annual filings. Banks are also now offering varied levels of payroll services, Gray said, adding that the cost for some of these more basic services can be as little as $1 per paycheck.
"Whether you go with a more comprehensive service or a more basic service, many people find it's worth paying a premium for the peace of mind," Gray said.
But Gray, Raanan and Wherley all warn that regardless of which payroll service a business uses, the company itself is ultimately responsible for the withholdings and filings. So be sure to monitor payroll reports for the first year and consider having your accountant keep an eye on the reports that are being filed on your behalf.
"A payroll company will not take responsibility for the data the owner provides, and it will not make sure the owner understands what data is required," warned Wherley. "So a lot of attention needs to be paid to payroll in either case."
Before deciding whether to outsource your payroll, consider contacting a few payroll service companies to get an idea of what they do and what it will cost. You also need to make sure the payroll service you use is reputable. Raanan advised business owners to check that their payroll company is bonded and insured, and that it provides clients with a way to track all of their payroll transactions.
You can also read reviews of online payroll services on our sister site, .
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