Top Reasons You Should Outsource Payroll
While some businesses opt to handle payroll functions in-house through manual bookkeeping or do-it-yourself payroll apps, other business owners have come to prefer the expertise of a professional payroll provider. When considering whether to outsource this function, the time and resources required to complete essential payroll tasks often weigh heavily in the decision-making process. A recent Paychex poll* found that one-quarter of payroll users said they are concerned about keeping current on tax laws and regulations, 21% noted the amount of time processing payroll manually takes, while 16% are concerned about tasks around managing taxes, withholdings, etc. for employees in different locations.
Despite identifying these tasks, Paychex found that 39% of businesses do payroll manually — 23% of which use a desktop solution and 22% use an online solution — yet only 17% would consider changing from a manual to an outsourced solution.
Wondering whether outsourcing payroll could help your company? Since payroll and tax responsibilities can be time-consuming and complicated — yet essential — busy owners are increasingly looking to outsource these functions.
Learn more about some common benefits of payroll outsourcing, areas of your business where a provider may be able to help, and how this approach could make sense for your business.
Potential time saved
No matter how many employees a business has, processing payroll demands time and attention to detail. This often comes at the cost of valuable time that could otherwise be spent on more pressing business priorities, such as building revenue or serving customers.
By outsourcing payroll to a reputable provider, owners have more time to focus on what matters most to them. In many cases, they'll also have a variety of options available to maximize time saved throughout the pay period. Additional tasks, such as new hire reporting or benefits administration, can be easily added into the outsourcing mix, and business owners can specify how often they'd like to be contacted regarding payroll-related tasks. If there aren't any discrepancies or problems, payroll providers will likely only need to reach out once per pay period to notify owners that payroll has been processed successfully.
Common time-consuming payroll responsibilities
Once a business has hired its first employee, payroll responsibilities will continue every pay period. As noted above, the complexities of payroll processing require a significant time commitment on a daily and weekly basis — time you can't make up elsewhere. Whether it's calculating payroll amounts, generating in-house reports, preparing and remitting state and federal payroll taxes and returns, or simply printing, signing, and distributing paychecks, the demands on your time can be costly.
Think of the time required for each of the following:
Calculating payroll each time period
Each pay period, every employee must have their hours totaled, verified for accuracy, and multiplied by their designated pay rate. Then the appropriate amount of taxes must be calculated and subtracted from the gross pay to determine a net amount.
If the employee also receives any benefits or has other deductions, such as child support or retirement plan contributions, additional calculations must be made. Multiply each of these calculations by the number of employees in your business and it's easy to see why calculations alone can take a significant chunk of time out of your week.
Printing, signing, and distributing paychecks or pay stubs
Once the pay amounts for each employee are calculated, the physical checks must be printed, signed and distributed. Some employees are likely to have direct deposit, so those amounts must be verified and processed electronically, but pay stubs still must be made available to the employees. In addition, these records must be securely maintained for tax and reporting purposes.
Generating reports for in-house and accountant use
At the end of each payroll period, the amount of pay earned by all employees, any benefits or miscellaneous deductions withheld, and all payroll tax amounts must be carefully recorded for future accounting purposes.
Depending on the size and structure of the business, payroll reporting may be included in any fiscal year-end reports, especially if the business is publicly traded or currently looking for investors. Even if those reports are not required, many business owners evaluate previous payroll reports to make hiring and staffing projections.
Payroll figures are also necessary for tax purposes, both for business year-end income tax filing and for quarterly and annual payroll tax reporting. Keeping this information organized and easily accessible for future reporting or delivery to an accounting professional can take additional time each period.
Preparing and remitting payroll taxes and returns to government agencies
Even after the payroll figures are organized and recorded, there are still additional payroll tax responsibilities each quarter and at the end of each fiscal year. Business owners or designated administrators must carefully calculate and complete a quarterly payroll tax form to prove that the proper amount of payroll tax has been withheld. This form must then be submitted, along with the proper amount of withheld taxes, to the IRS each quarter.
At the end of the year, businesses must submit a year-end payroll tax statement that verifies each of the quarterly figures and calculates any remaining taxes due. Like individuals, businesses must also complete a yearly income tax return, and payroll figures are included as a deduction on these forms.
Respondents from the Paychex poll* echo these sentiments: 54% of manual payroll users rate easy and accurate tax filing and payment as a very important benefit of an outsourced solution. When evaluated on a per-payroll-period or a monthly basis, a time/cost analysis may well indicate the benefits of working with a payroll service provider.
Mitigate payroll mistakes
Payroll errors can be frustrating and costly to both employers and employees. For employees, a mistake in state tax deductions can require an unexpectedly sizable tax deduction from an employee's final paycheck of the year, at a time that coincides with the holidays. Missed hours or improper pay rates can also inadvertently decrease an employee's pay, which may cause frustration and lasting resentment. These mistakes can negatively affect your employees and ultimately result in employer/employee strain.
For the employer, payroll errors can cause fines and penalties for improperly calculated tax obligations. Generally speaking, business owners aren't experts in the complicated world of government tax regulations. At the same time, they're legally responsible for any cases of misrepresentation or a failure to accurately report employment taxes to federal and state government agencies.
These mistakes can lead to audits and penalties — situations no business wants or needs. According to the IRS, more than 1.8 million tax returns were audited in 2016 for businesses with income between $200,000 and $1 million, and 978,564 businesses were assessed civil penalties. Even if these errors are caught before they are submitted, they can still cause countless hours of reprocessing employee paychecks and tax returns.
Given all of these complicated tasks and the potential for mistakes, processing payroll on your own can cost you more in the long run than what you may save initially.
Enhanced security of payroll data
Payroll processing is a complex and potentially risky business operation. Even with trusted partners , there is always a risk of identity theft, embezzlement, or tampering with company records for personal gain..
Outsourcing payroll to a stable, experienced provider can offer a "safe haven" for your confidential payroll data. In addition to redundant backup and multiple server locations, a quality payroll provider invests in state-of-the-art systems for storing and protecting data, simply because it's part of the service provided to clients.
Compliance with government regulations
Businesses understand how critical compliance is in their operations, and 52% of Paychex poll respondents* agreed, noting that peace of mind with regulations is very important. Whether you have three employees or 30, having to track every employee's pay rate, hours, and employee status can be stressful and can possibly lead to inaccuracies. Additionally, understanding employee deductions for federal, state, and local taxes — as well as programs like Social Security and Medicare — can be challenging. These taxes must be set up correctly before employees are initially paid.
When you outsource payroll, you can simplify these processes and streamline all your employee and payroll information. Although business owners are ultimately responsible for meeting payroll accuracy and tax filing requirements, having a provider on hand often helps them feel more confident about staying up-to-date on regulations. Government rules and regulations often change, and small business owners can't always stay on top of the latest requirements. Professional payroll providers, on the other hand, are obligated to stay current with rules, regulations, and changes in tax rates for all geographic locations.
One notable area where a payroll provider may be able to help you is with the Paycheck Protection Program (PPP), which is designed to help small businesses stay afloat during the COVID-19 pandemic and keep employees on payroll. Whether you have recently received your Small Business Administration (SBA) loan through the PPP, or are hoping to apply by the deadline June 30, 2020 your business's payroll costs are critical when estimating your PPP loan forgiveness amount, along with other information. A payroll processor can help you gather the necessary data, complete the steps of the application, and increase your chances of maximizing your loan forgiveness.
A professional payroll company employs individuals who know payroll processing inside and out. These individuals specialize in the complexities of payroll processing and taxes, as well as compliance with government regulations. It's what they're trained to do and part of the guaranteed service they provide.
Reputable payroll processors bring expertise in the following areas:
- Knowledge of 401(k) regulations and integration with payroll deductions
- Updating W-9 forms and adjusting accurate tax deductions
- Managing voluntary and involuntary employee withholdings and submitting them to the proper government entities or benefits programs
- Calculating and submitting quarterly and year-end payroll taxes
- Maintaining eligibility for tax credits and minimizing amounts owed
- Tracking employee benefits eligibility dates and processing benefits enrollments
- Handling FICA, Social Security, and Medicare deductions and payments
- Updating federal, state, and local tax guidelines and adjusting payroll figures as needed to maintain compliance
Payroll experts are also very good at verifying accurate data, finding mistakes, and correcting them before it becomes an issue.
Integrated payroll and benefits data
Many companies offer benefits to their employees, and employee contributions must be deducted from payroll. If your company offers multiple healthcare plans, each with different contribution amounts, managing these figures can become quite complicated. These contributions are further impacted by an employee's status (single vs. married, dependents vs. none, part-time vs. full-time, etc.) as well as their salary level.
During the benefits enrollment period, employees may have the option to register for multiple types of benefits: health insurance, dental insurance, retirement contributions, life insurance, and more. Each of these requires separate contribution amounts for both the employee and the employer to ensure the benefits programs stay active and properly funded. Most benefits programs also require payment amounts be sent to different companies, all of which is handled by the payroll processor.
Outsourcing payroll helps ensure that your deductions are aligned, that what you're offering complies with regulatory guidelines, and that payments to providers are sent on time to avoid interrupted benefits coverage. Reputable payroll companies can provide an integrated benefits platform that allows a business owner to easily add and remove employees from the benefits programs, properly calculate the amounts deducted from each paycheck, and provide benefits information directly to the employees without requiring the owner to handle individual employee benefits issues directly.
Employee self-service features
A 2019 Paychex Pulse of HR Survey found that 84% of HR leaders identified that providing self-service options to employees is a key to their success. Having an integrated payroll platform with employee self-service options saves time and money by allowing them to handle common tasks on their own, including:
- Submitting time-off requests
- Printing tax documents
- Completing onboarding paperwork
- Updating benefits and tax allowance forms
- Swapping shifts
- Updating personal contact information
- Previewing pay information and accessing pay stubs
When these key business functions are outsourced, many reputable payroll providers will also offer mobile applications and remote access for employee self-service — resources that can help preserve HR teams' time and resources.
Choosing a provider to outsource payroll
If even one of the above payroll benefits could improve profitability and efficiency in your organization, it may be time to consider outsourcing. With so many options available, you may question how to choose the right payroll service. Consider first outlining the key features that would benefit your business in relation to your company size, payroll frequency, and industry type. Once you've pinpointed what you need from a payroll provider, explore payroll options that meet your specific criteria.
*Paychex conducted four separate online surveys of 300 principals of U.S.-based businesses with 2 to 500 employees. Wave 1 was fielded April 17-20, 2020; Wave 2, April 24-27; Wave 3, May 1-4; Wave 4 May 15-17. Each survey has a +/-5.66% margin of error.