Should you outsource your payroll?
Payroll is the Pandora’s Box of small business ownership. Open one tiny corner and a world of questions and potential liabilities await. Tax law, labor rules, local, state and federal requirements all come rushing out the tiny tear of the box threatening to bring your growing business to its knees.
Why did you start processing payroll in the first place? Mostly because you had one or two employees and while it was a hassle to do, it wasn’t big enough to outsource and pay someone else to do it, right? The business grew and now you were processing payroll every two weeks for 20 employees. Again, the work to manage payroll was growing but still not worth paying someone else to assume it, you thought. Then the nondescript black and white envelope came in the mail. The dreaded letter from the IRS that you didn’t pay the proper amount of payroll taxes. Dread strikes and your stomach roils. Now you are very much wishing you had outsourced your payroll.
When is the right time to switch to a payroll service?
1. If your small business has payroll changes every pay period. This can be as simple as variable hour employees, part time workers or if your business is in a growth period where new employees are frequently being added to the payroll.
2. Out of state employees. Once your business crosses state lines, it is definitely a good time to start investigating the feasibility of a payroll service. Tax and labor laws vary from state to state and even within the state from county to county. Knowing all of those nuances and how to process them can be a full time job you just don’t have time to do yourself.
3. If your once small business has crossed over the magic line of 50 full-time employees, there is another whole set of reporting called the Affordable Care Act (ACA) may spur your decision to use a payroll service. The basic premise for ACA is that Applicable Large Employers (ALE) are required to demonstrate that they have offered affordable health coverage to their employees. While this may not seem like a big ask, calculating each employee’s hours worked, eligibility for health coverage, the offer of coverage and applicable covered months, can be daunting, especially if there is no record keeping software in place. For this new headache alone, a payroll vendor may be your best friend.
4. In theory, the best time to switch to a payroll vendor is at the beginning of your business’ fiscal year. The previous year’s financial statements have been closed out and everything is fresh for the new year. Of course, there is no fixed season for switching to a payroll company. All providers have an onboarding process that allows you to provide base information about your company and demographic information about your employees. Once this is loaded, the payroll vendor will perform a test run where you can validate payroll data. If everything checks out, the next pay date will be your first official payroll with the new vendor. No matter how thorough you are with the transition, they are never without a few bumps along the way. Validate the data, the check run, employee’s withholdings and your estimated tax payments. They will now be responsible for tracking tax payments and withholdings along with processing year end documentation such as W-2s for wage reporting to the IRS.
5. In addition to payroll processing, some payroll vendors offer additional services such as online benefit enrollment modules that allow employees to self-service changes to the company benefits for qualifying life events and annual open enrollment elections.
Think you’re ready to outsource your payroll? Talk with a Small Business Advisor at PASBA. Find an Accountant in your area here.
PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.
To find a trusted accountant in your area, visit www.SmallBizAccountants.com.
Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230