Payroll: Are you ready to outsource?
By Robyne Germany, CPA

One of the most frustrating aspects of running a business is dealing with payroll. Most small- to medium-size business owners will agree: everything about payroll is a nuisance. Not only do owners have to be mindful of changes in personnel; deadlines; and federal, state and local tax requirements, but calculating payroll itself can be time consuming and tedious.

Other headaches also exist, from issuing payroll checks and ensuring tax filings are made, to remaining 100 percent error-free. Employees are much more forgiving when errors occur in their paychecks or W-2s. However, continuous mistakes may cause an employee to lose faith. The Internal Revenue Service, on the other hand, is not nearly as forgiving. The IRS estimates that one out of every three employers is charged for a payroll mistake. If a company is not careful, the penalties can severely affect not only its bottom line, but its reputation as well.

As companies continue to grow, many business owners want to know if it's time to consult a payroll expert or service. The take-charge, entrepreneurial spirit that many owners possess often prevents them from recognizing when it's time to leverage certain administrative tasks to other employees, either inside or outside the organization. For this reason, it's important to assess their payroll situation by asking these six questions.

1. Was your company assessed a payroll tax penalty related either to a failure to remit taxes on time or for paying an incorrect amount?
2. Do you find it difficult to remember when to remit unemployment taxes to the various federal, state or local taxing agencies?
3. Does your payroll consist of full- and part-time, hourly and salaried employees who are all paid at varying times during the month?
4. Do you have employees working in multiple states?
5. Have you made multiple errors in calculating your payroll that have been questioned by your employees?
6. Do you spend more time calculating payroll and addressing various payroll issues than you spend concentrating on your core business?

A "yes" answer to at least two of these questions may tell you the time is right to consider outsourcing payroll. A professional payroll service can be an attractive alternative to an in-house function. Not only does a service take the hassle out of calculating payroll and issuing checks, but a service can remit payments to various taxing authorities, and prepares and files annual federal and state tax forms, including 941s and W-2s. A professional service also tracks various benefits such as vacation and sick pay, 401(k) benefits and employee advances.

In the past, many companies shied away from using a service due to the amount of control the company would have to give up. Today, many service companies offer a business owner access to his or her payroll records 24 hours a day through the Internet, allowing the correction of mistakes that were made during the transmission of data or in the calculation itself. While many owners embrace this level of accessibility, others place all confidence in the payroll service company to perform its expected duties. A business owner can choose his or her level of involvement in the process.

According to SurePayroll, a national payroll service company focused on small businesses, some other benefits to using a payroll service company include:

• Accurate payroll tax liability calculations. Most payroll service companies provide a tax guarantee, ensuring that there will be no penalties and taking responsibility for penalties if they do occur.
• Reduction in payroll costs. Outsourcing to a payroll service company can reduce the direct costs of processing payroll. Many payroll services charge an average of $3 per paycheck. For companies with fewer than 100 employees, the cost can be much less than a full-time payroll clerk.
• Creation of more free time. Outsourcing payroll not only allows business owners to concentrate on growing their core business, but it frees up administrative staff to pursue more value-added activities.
• Fewer technology headaches. Business owners no longer have to worry about whether the most recent version of payroll tax tables is updated or if the company's accounting software can handle current payroll needs.

Before deciding whether outsourcing payroll is the right choice for your business, there are some factors to consider. First, the IRS wants business owners to know that the employer is ultimately responsible for the deposit and payment of federal taxes, as well as the timely filing of quarterly and annual reports. While many payroll service companies will deposit and pay taxes on a company's behalf as part of its service agreement, if it fails to remit and file tax reports timely and accurately, the employer will be assessed. The IRS recommends the employer inquire whether the payroll service company has a fiduciary bond to protect the employer in the event of default.

It's important to establish a relationship with a payroll service company that can grow as the business continues to expand. Business owners should obtain references for payroll providers from trusted associates, such as accountants, attorneys and customers. Business owners should then research each payroll service provider as to:

• Communication of payroll information – There should be a choice in transmission via PC, fax, Internet or modem.
• Availability of payroll information – 24/7 access is very important, with the provider offering clear instructions on available reports, procedures for correcting mistakes and customer service inquiries.
• Costs of service – All the costs for processing payroll from the initial setup to the filing of annual W-2s should be reviewed.

The decision to outsource payroll to a third party is not an easy one. It takes a great deal of research to find the right company for your business. But once the decision is made to turn payroll processing over to the experts, business owners can get back to doing what they do best—growing their business. e

Robyne Germany is an audit senior manager at PKF Texas.