Keep your focus on your main business
If your organization has one or more employees, you need a payroll strategy. Chances are, you fall within that definition. As a CPA with more than thirty-five years of experience in public practice, industry, and selling payroll software, I have some pretty strong opinions about this topic and would like to share those with you.
We’ll get into more details but there are two primary reasons why I believe, with a few exceptions, you should outsource your payroll.
1. If payroll is not your core business, you shouldn’t be devoting key resources and time to solving the payroll problem.
You should be focused on developing strategy, executing marketing activities, and other things to help grow your business.
2. You simply cannot afford the risk that comes with trying to do payroll yourself.
The IRS has noted that 40% of small businesses pay fines and interest in any given year. As well, in-house payroll is simply not very secure, no matter what you do.
You don’t need to track exact payroll costs for operations
People sometimes seem to regard running a payroll group as a critical function in the business. In most cases, it’s not. An argument I have often heard from people keeping payroll in-house is that they want control over their data so they can integrate it with other systems such as job costing or manufacturing. An interesting rebuttal to this argument is for confidentiality reasons I have rarely seen anyone use actual payroll numbers in these systems. They use standard rates combined with timesheet hours to estimate the labor costs for the activities they are trying to track. The real issue is whether you can track an employee’s hours and apply a standard labor rate.
Focus on capturing timesheets in your systems and exporting the data for submission to the outsourced payroll company. Save your precious time and resources to concentrate on those things necessary to grow your business.
The risk is very high and expensive if you run afoul of regulatory compliance
Keep in mind that there are hundreds of payroll laws to stay on top of and they keep changing. Not only do regulatory compliance issues cost you significant time when they happen, but they can have severe monetary consequences. They can also happen at the most inconvenient times, such as years later if you are actually audited. If you get assessed penalties for something that happened years ago and you happen to be in the middle of a downturn, it could cost you your business.
In-house data is NOT more secure
There are two major aspects to this. First, in-house payroll and accounting systems are involved in nearly all employee fraudulent activities. Outsourcing the payroll doesn’t eliminate the possibility of this happening but it does significantly reduce the risk by removing the ability to fiddle with the payroll results, misdirecting the custody of payroll funds, and suppressing payroll reporting. Many a business has struggled with survival after finding out an employee had taken funds due to the government and misdirected them for personal use. I don’t know how they thought they wouldn’t get caught.
The second point is you would expect a large payroll service bureau to have a much higher quality of security on its systems compared to an individual company. Which do you think would be more likely to be hacked?
These reasons alone are enough for you to outsource payroll but here are a few more points to consider.
- The payroll service bureau not only does the payroll calculations but they will generally submit the payroll withholdings amounts, for free, to the appropriate tax authorities. The reason for the free service is they take the money from you when they calculate the payroll and then earn interest on it until they have to give the money to the government.
- They will also submit the necessary reports and provide the various forms to your employees, getting rid of several headaches.
- If you are operating in multiple states, the complexity of payroll goes way up. It is much simpler to let the payroll service bureaus keep track of everything.
- Today’s employees expect a modern payroll system, which will allow them to utilize technology, such as mobile devices, to access their payroll functions. They are all about self-service.
- You need to properly vet the quality and stability of a payroll service bureau. If they go broke, the employer is still liable, even if the service bureau ran off with the money. Are they bonded? The IRS has some tips for you in this area.
- Check the prices carefully and don’t by mislead by short-term discounts. Some companies have a low base price and a very high transaction unit cost after you figure in all of the extras. The transaction cost per employee is generally between $.80 and $2.00. Pricing can be negotiable.
- How fast can the company re-calculate a payroll? Can you drive to their office in an emergency to pick up the payroll checks? Remember, a properly paid employee is generally a happy employee!
- Many service bureaus will not be able to handle local or city payroll levies. You still might need to that manually.
- Even using an outside accountant has some risks as he may still have difficulty keeping up with all of the possible changes in regulatory compliance. Using only a bookkeeper has its own set of risks.
There are a few circumstances when you might want to keep payroll in-house.
- You need to customize your payroll system.
- You have very complex payroll calculations that would otherwise need to be calculated manually before giving them to the service bureau.
- Very stable payroll and low turnover, ideally, everyone is on salary.
So do you have to outsource payroll? Not if you are confident you can do it well and are comfortable with the risks involved with an in-house system. The majority of us take the safe road.
What do we do with our payroll here? Even though we sell payroll software, we outsource our own. It’s simpler, keeps us up-to-date automatically, and reduces our risk by having the payroll provider do all of the government submissions and filings. There are fewer errors, our employees are happier, and they can access key information remotely.
Outsourcing payroll keeps your staff happy and you can focus on growing your business instead or worrying about getting the checks out on time.