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Business Solutions Center
Grow Your Business
Employee Payroll: Don't Outsource - Best-Source!
Small businesses aren't static. They grow, add new hires, develop more services, sell more products. They evolve—sometimes quickly, sometimes slowly and steadily.
As your small business becomes a mid-sized business, you have to make important decisions. How can the company's cash flow be put to best use? What's the optimum way to allocate its resources? Where can you cut costs to add value and make the company more productive and more profitable?
One place many owners look to trim costs is payroll. Most start-ups and small businesses use in-house personnel to handle the books. But the process of calculating, writing, and distributing checks every Friday is a business expense that often can be better managed, and at lower cost.
At some stage in the growth of a company, its principals will need to consider the question of whether to outsource the payroll system. There are pros and cons to every solution, and many decisions to be made. How much will it cost? How long will the learning curve be? How do you find a reliable company? How do you choose from among QuickBooks, Sage, Paychex, or your local commercial bank to handle your payroll each week?
Let's take a closer look at why and when to consider outsourcing payroll management.
Why Use a Payroll Processing Service?
Payroll processing services handle the entire payroll process, including:
- filing tax forms and other paperwork
- writing and delivering payroll checks or electronic funds transfers
- depositing payroll taxes in a timely manner
- preparing tax documents quarterly and annually, and filing them with the IRS by March 15
- providing reports on spending, revenues, and other company financials
- customizing services to suit the size and nature of your business
- keeping payroll records up to date, including adding new hires, changing deductions, and updating withholdings
In short, it's an ongoing process that is time-consuming and expensive, especially for a growing company that needs to focus on growing its business.
Payroll services provide one-stop shopping: they take care of all payroll functions, from hiring to firing and everything in between. However, there is a cost involved. Services charge by the employee or by the total amount of payroll processed each week, month, and year.
Transactions are usually billed on an a la carte basis. If you add a new employee, you'll pay a fee for the service; complex or unusual situations, from early retirement to workman's comp to performance bonuses, also may involve extra time and fees.
But in the long run, it's often cost-effective. There's a lot of number-crunching involved in payroll management, and outsourcing it all frees up your time to do what you alone can do best: grow your business.
Payroll is a business function that can be outsourced whether you have 10 or 10,000 employees. In many cases it's a time and money saver over the long term.
The advantages to outsourcing payroll include:
- Reduced need for specialized skills. Accurately processing payroll requires skills and experience that small businesses usually do not have. And if one key employee does, what will happen if he or she leaves the company?
- Expanded payment options. Payroll-processing services typically offer direct deposit to your commercial bank, making cash available sooner and cash flow faster.
- Avoiding errors and penalties. Payroll-processing services have the expertise to avoid omissions and late filings, and to strictly adhere to IRS and state requirements, so you don't have to worry about late fees or penalties.
- Reduced administrative demands. Outsourcing payroll streamlines and minimizes payroll-related duties and tasks and frees up your staff for other responsibilities.
- Cost savings. Using a payroll service saves your company from hiring internal employees and paying costly benefits like health insurance, vacation, and sick days.
How do you decide when the time is right?
You can perform a simple cost-benefit analysis to determine the dollars and cents of outsourcing payroll versus keeping the function in-house.
- Determine current payroll management costs: the cost (salary plus all benefits) of internal CPAs, accountants, and bookkeepers who work on your payroll, plus your own time for whatever hours you get involved in the process. Determine how much the salaries come down to per hour times the number of hours everyone spends doing payroll weekly, monthly and yearly.
- Determine potential payroll management costs. Get a couple of proposals to figure the cost of having a CPA or payroll service handle the process for you.
- Do the math. Consider not just the dollars, but the time and stress involved.
When calculating internal costs, include the time spent gathering and updating payroll-related information; calculating wages; determining local, state, and federal tax filings, and the accuracy of the filings; depositing taxes with the appropriate authority; staying on top of tax regulation changes; and the cost of any software or training required.
Consider your comfort level too. Some business owners prefer to pay an outside service so they can focus on running the business. Others are just more comfortable keeping confidential payroll information and management of the process within their four walls.
Can you handle payroll in-house? Absolutely – millions of companies do.
But millions of small and large companies best-source this business activity based on cost, oversight, comfort, and numerous other considerations that only you and your partners can weigh. It's your business. It's your decision.
Where to Go for Advice
A good place to start is with your commercial banker. Your bank rep knows you, and already knows your business, your industry, your growth history, your expenses, and your long-term plans.
Many banks offer payroll systems that integrate all company financials, including checking, money-market, and savings accounts; and print employee checks. The can make sure your tax filings are accurate and on time; and they can deliver all the other services of an outsourced payroll company.
Many companies find it easier to use a single vendor for all their financial activities, and choose their bank as their partner. Online banking makes it simple to track account balances, oversee payroll outflows, and quickly identify any suspicious activity that might be taking place. Commercial banks also offer credit lines to help you cover shortfalls.
In any case, your bank can help you decide whether to keep payroll services in-house or best-source the process to a third party.