Five Tips for Outsourcing Your Small Business Payroll Operations

Are you considering outsourcing your payroll function?

If you find you don’t have enough hours in the day to take care of your business operations, your clients and your employees, outsourcing key business functions such as payroll can be a cost-effective business strategy. In fact, payroll is the first function many small business owners look to outsourcing.

Why Outsource Payroll?

Managing payroll is an especially time consuming and detail-oriented task that can quickly consume even the savviest business owner.  Some of the operational and fiscal benefits of outsourcing payroll to a third party service provider include:

• Reducing IRS penalties –Small businesses are particularly vulnerable to financial penalties that can be assessed by the IRS when payroll taxes are filed incorrectly. By outsourcing to an expert, you can gain reassurance that filing deadlines and deposit requirements are met.    
• Reducing costs –Depending on your needs, outsourcing can be more cost-effective than hiring a temp, doing it yourself or adding to your staffing overhead.
• Paying your employees by direct deposit – You may be able to save your employees a trip to the bank and reduce time-consuming paperwork reconciliation at the end of each month with this common provider-based service.
• Benefiting from the knowledge of an expert – It can be hard to stay on top of changing regulations, forms and withholding rates. A payroll expert comes with institutional knowledge that you can rely on.

When is the Right Time to Outsource Payroll?

It could become obvious one day that the time is right. But if you’re not sure, ask yourself these questions:

• Are you missing payroll deposit deadlines? If your payroll tax deposits aren’t timely, late deposit penalties can be as high as 10 percent.
• Are you unsure about your payroll tax calculations? Your errors can be held against you, and penalties can be assessed. 
• Too many employees? If you have fewer than 20 employees it’s likely that you can save money by outsourcing payroll. Do the math by comparing the hours/cost of your current system and comparing it to the plans offered by a shortlist of service providers.

What do Payroll Service Providers Do?

Basic services offered include calculating payroll and tax obligations, printing and distributing checks and producing reports. Additional services can include direct deposit, payroll tax filing, issuance of W-2 forms, 401(k) deductions, and tracking of employee benefits.

Tips for Choosing a Payroll Service Provider

The best way to find a payroll provider is undoubtedly through referrals. Talk to other business owners, to your local Small Business Development Center, or your accountant.  To help you build your short list, consider whether vendors address the reporting needs of small businesses in your industry and state.  Take the time to screen your candidates to ensure they meet your specific needs and requirements. Areas you should cover in your interviewing process include:

• Professional qualifications – Such as licenses, bonds and experience.
• Customer service – Who will be doing the work? What are their response times? Can you communicate with them regularly?
• Payroll tax processing – Will they file your payroll taxes for you? Will they assume penalties for incorrect filing? Do they handle EFTPS payments on your behalf? Can they help with local tax filing?
• Fees and charges –You can expect to pay up to $2.00 per payroll check, plus a base account fee. Add-on charges can also apply and include features such as direct deposit, support for employees in multiple states, etc. It’s worth having a good idea upfront of the services you need so that you can negotiate a flat fee and avoid expensive add-ons.
• Payroll communication – Find out how payroll data is given to the provider each pay period. Is it secure?
• Ask for references and for permission to contact them. 

Know Your Payroll Tax Responsibilities as an Employer

Even if you do outsource your payroll it’s important to understand your tax responsibilities as an employer. For example, you are ultimately responsible for the deposit and payment of federal tax liabilities, not the payroll service provider, even though you may forward the tax amounts to them to make tax deposits on your behalf. If they fail to make the tax payments, the IRS will hold you liable for taxes, penalties and interest due. IRS guidance on this can be found here: Outsourcing Payroll Duties Can Be a Sound Business Practice, but... Know Your Tax Responsibilities as an Employer.

Related Articles and Resources

• IRS Payroll Professionals Tax Center - Information for Payroll Professionals and Their Clients

• IRS Tax Calendar for Small Businesses and Self-Employed

• Setting up a Payroll System: A 10 Step Guide for Small Business

• Building your Finance Team - Do You Need an Accountant? Could You Benefit from a CFO?

• Selecting a Small Business Accountant

Caron Beesley has over 15 years of experience working in marketing, with a particular focus on the government sector. Caron is also a small business owner and works with the SBA.gov team to promote essential government resources for entrepreneurs and small businesses.

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed.