Most business owners think of attorneys’ fees for legal advice or accountants’ fees for financial advice or tax prep as a cost of doing business. But they don’t put the cost of payroll processors in that category. According to a payroll-industry report, more than 3.8 million small businesses process their payrolls manually rather than rely on a payroll professional. That’s surprising, given the advantages of using an outside payroll processor. Not so surprising if they don’t know what the advantages are—time, convenience, peace of mind, and money.
Small businesses spend about two hours every time they issue payroll, says Aubrey Matulevich, marketing manager at E-chx, a payroll processor operating out of Atlanta. If you issue checks weekly, that’s eight hours a month—nearly a day’s work; or four hours a month if you pay biweekly. And that doesn’t include the time it takes to stay up to date on IRS rulings. That’s too much time for small-business owners to invest in a complex process that has costly consequences if they make a mistake.
But good news: payroll processing services aren’t expensive. Starting at around $30 a month, it’s easy to justify using one based on the time savings alone. And when you factor in the tax liabilities for miscalculations—the cost of one tax penalty can easily run into the hundreds of dollars, plus interest—the value of an outside payroll processor skyrockets.
The tax-liability advantage
Business owners who aren’t interested in being steeped in tax law or who don’t have hours to spend calculating and issuing paychecks each week may want to consider outsourcing their payroll to a company that specializes in it. Some numbers:
- It takes 54 steps to process and issue payroll.
- The IRS issues an estimated 400 tax-law changes a year, according to Matulevich, which small businesses have to comply with. That’s more than most companies can keep up with, much less understand and implement.
- One-third of all businesses get hit with a tax penalty costing an average of $800, says Walter Turek, senior VP of sales and marketing at Paychex, Inc. (Rochester, NY).
So in addition to the time saved and the convenience of hiring an outside payroll processor, there’s the tax-liability issue. Most payroll companies offer a tax-filing service in addition to issuing paychecks. They’ll debit your account for the amount of tax they calculated for that pay period, and then take full responsibility for paying it for you: they send your tax to the appropriate tax agencies on the due date. The only thing you, the small business owner, are responsible for is providing the payroll company with accurate data up front. Once they take over filing your payroll taxes, any miscalculation or error that results in a tax penalty is their responsibility. “It’s an insurance policy” for the client, says Steve Sarowitz, president and founder of Ameripay (Elk Grove Village, IL). “We take the liability for penalties and interest.” In other words, if they cause it, they pay it.
If you decide that having someone else take care of your payroll would be helpful, carefully evaluate your options. Asking questions will give you a sense of how sophisticated a company’s system is—and whether you can trust them with your money. Here are the topics you need to cover with each company you look into:
If a company doesn’t have a strong financial footing, your business’s funds could be used to prop up their financials. To reduce the risk that a payroll company will take your money and run, ask if they’re profitable and how long they’ve been profitable. Many large, national payroll processors are publicly held companies, which means they provide almost an open book on their financial health (quarterly and annual reports, for example). But privately-held and/or smaller companies may play it close to the vest and be more difficult to assess. If a company doesn’t give you enough information to go on, find companies that will. Get quotes Usually the base cost of doing your payroll is on a per-check basis. The cost usually drops as the number of employees or paychecks increases, so ask what the quantity break-points are. Also ask if there are any extra services you need and their costs. Some companies may quote low base fees but then drive up your costs with charges for things like extra reports, custom reports or HR-related services, says Sarowitz. If you get a quote that’s far below what other payroll companies quoted—say, less than 50 percent of the next higher quote—question it. “It’s much more important in payroll to go with a stable player than to save $20,” he says. By the way, you may discover that quotes from large national payroll companies are often competitive with smaller ones.
To be confident that a payroll company is actually making scheduled tax payments on behalf of its clients, ask, “How do you balance your tax account, and how often?” The more frequent, the better. Daily electronic balancing is best, but at least monthly is acceptable. The company should also document that the tax payments were made, so ask about that, too.
Find out what kind of disaster recovery plans and precautions the company has in place, to ensure that your payroll is processed no matter what. Ask if they have multiple sites to which they can transfer data. And how many times, and for how long, has the company experienced a computer shutdown? Safeguarding your business’s continuity should be a key part of their business plan.
How service-oriented are they, and how comfortable are you with their approach? Some larger firms assign each client to a group that’s handled by a team; other companies give each client a dedicated specialist to talk to when issues arise. Weigh your requirements for personalized service to see if there’s a match.
Finally, evaluate your own plans for growth and future payroll needs. If you intend to stay at the same size and staffing level over the next few years, you may only need basic payroll services. In that case you may want to use a small payroll company or a local tax accountant who processes payroll. But if your business plan is for significant growth in the next few years, you may want to go with a national company from the beginning. They service clients of all sizes, including out-of-state accounts, and can keep up with your growing needs.
The little extras
The depth and breadth of payroll-related services will likely vary according to the size of the company you hire. Small, local providers may have lower fees but fewer ancillary services, whereas large, national companies will likely be able to handle everything, including tax filing, health insurance, retirement plan and other services. You may not need help managing a SEP or 401(k) plan, for example, but being able to offer employees direct deposit could be a nice perk.
You may also find some payroll companies are flexible when it comes to how they deliver their services. Some companies have a system that allows clients to enter payroll numbers online; others may require clients to call or fax them in. Most companies offer clients the option of either picking up paychecks or having them delivered for a small fee. To decide which is better, weigh the cost against time saved.
By turning payroll processing over to knowledgeable, experienced, stable payroll professionals, small-business owners can benefit in a number of ways, says Turek. They gain access to financial expertise, can increase their focus on their business, and ensure that they’re complying with tax laws and reporting requirements, all without a significant outlay of capital. As Matulevich puts it, “Having someone else responsible gives peace of mind.” In other words, turning over payroll to a qualified company may let you sleep at night.