Business consultants have long advocated outsourcing non-core functions.
A non-core function is one that is not a profit center (meaning, you don’t charge customers for it). A non-core function may be essential, but doesn’t differentiate your business strategically from competitors.
In most businesses, administrative and back-office activities such as payroll are non-core functions.
As such, they are potential candidates for outsourcing.
But the question business owners and managers want answered is: what do you actually gain from outsourcing payroll? Is it worth all the time and effort just to investigate and identify appropriate outsourced service providers? Then there’s the work involved to transition the function outside to the third party service. Do the benefits of outsourcing outweigh that effort?
CPA firm Clayton & McKervey noted several long-term advantages to be gained from outsourcing payroll:
“… a company had one person performing all of the payroll processing functions. The company is now outsourcing the functions as a result of thinking ahead. They chose to outsource the functions to reduce the risk of the payroll not being processed, to manage growth by anticipating the increased payroll responsibilities that will be required as the firm grows and hires more employees, and to keep up with technology, such as pay cards and direct deposit.”
Ideally, outsourcing achieves three main goals:
- It frees up time and resources to focus more on your core business.
- It gives you access to more technology and expertise to perform payroll well.
- It reduces costs and risks.
Let’s examine each of these benefits in more detail, and what they mean.
1. Focus Better on Your Core Business
Payroll is one of those critical functions that may not directly increase sales. But carried out poorly, it can put your business in a world of hurt.
And most of all, it can sap internal time and attention away from core activities.
Businesses have to comply with a wide range of laws when it comes to employees — from federal, to state and local. It takes considerable time and attention to detail to deal with them.
There are the obvious legal requirements, such as tax reporting and remittance. There are requirements around withholding taxes from the employee’s pay, and also calculating the employer’s portion of taxes. In some cases there are electronic filing requirements. You need to also know when to file — at the federal, state and local levels.
Taxes, though, are just the start.
“As an employer, you also need to understand wage and hour laws. For example, you need to know when you are required to pay overtime,” said Andy Childs, a vice president of Paychex, in a recent interview with Small Business Trends. Paychex is one of the nation’s largest payroll services, serving nearly 600,000 small and midsize businesses. The wage and hour rules, said Childs, can be highly technical.
Then there may be new-hire reporting requirements, and state requirements around unemployment compensation and workers compensation insurance.
Childs emphasized that an even bigger issue is the unexpected time obligations.
“You may have set aside a certain amount of time each week to run payroll. Then you get an unexpected surprise in the form of a notice from the IRS. But it’s not just that the IRS is notifying you that you owe a fine. Now you have to go through your records and investigate to determine if you actually committed the infraction. All of a sudden you are involved in a dispute resolution,” Childs said.
And it never happens at a convenient time for a small business owner, he added.
2. Get Access to Expertise and Technology
Another reason to outsource is to get access to expertise and technology.
Employers have to deal with almost 10,000 federal, state and local taxing jurisdictions across the United States. While most small businesses won’t have to comply with each of those jurisdictions, still it points to the complexity of the laws. And every year hundreds of new laws and regulations are enacted.
For small businesses on the larger side (50 full-time employees and up), the Affordable Care Act alone imposes considerable reporting and compliance requirements. When asked for an example, Childs pointed to IRS Forms 1094-C and 1095-C. These forms will require employers to certify whether they offered full-time employees the opportunity to enroll in insurance that provides minimum essential coverage.
“These will not be simple forms to complete,”
Childs added. (Paychex has set up an online resource center for healthcare reform obligations due to the complexity of the law.)
Just as important as expertise is new technology. Employers today rely on technology to operate more efficiently. As a business grows, employers have more employee records to keep and also need more reporting. Lack of technology becomes a hindrance to scaling for growth of the business.
Employees also expect technology. Employees today want options like direct deposit and self-service access to their payroll information online. Employers that aren’t able to provide such options may be at a competitive disadvantage.
On top of that, the explosion of mobile device usage is ushering in a new level of technology expectation. Mobile use is still nascent when it comes to payroll, but it’s “growing at a rapid rate at Paychex,” said Childs.
Employers are using mobile devices to look at certain reports and look up information, such as how much money they need to have in the bank on payroll dates, he noted. Employees also are beginning to use mobile apps to check their own records.
Childs expects payroll mobile usage to continue to grow, because it frees up business owners and managers to leave the office.
“With Paychex’s mobile payroll apps, you could do almost anything from the beach — if you wanted to,” added Childs.
3. Reduce Costs and Risks
Outsourcing payroll can also assist with cutting costs and limiting risks. On average, said Childs, businesses are overpaying employees by about 4 percent because of differences between the employee’s time and an accurate time record.
“Just having a more accurate time and attendance recordkeeping solution can save money,” he added. (Paychex has a cost savings calculator here .)
Then you have the potential penalties for violating reporting and other requirements. According to IRS figures, 40 percent of small businesses pay an average penalty of $845 per year for late or incorrect filings.
Today there are outsourced solutions for businesses as small as one employee, points out Childs. Solutions are affordable, starting at less than $50 a month for small businesses, depending on needs.
A good payroll provider offers capabilities that go beyond what you can do on your own. If you haven’t considered an outsourced solution before, make this year the year you switch. It will deliver peace of mind for you as the owner, and free up time in your company.
Tips for Choosing an Outsourced Payroll Provider
If you’re considering outsourcing payroll, it’s a given that you should look at the typical three points you’d look at when choosing any kind of provider:
But when it comes to payroll, there are other points to consider, too:
Security and Reliability of the Provider
You’re giving your payroll provider the names, addresses, social security numbers, and bank account numbers of your employees. You’re giving a power of attorney to make filings on your behalf.
Go with a provider that is financially strong with good controls in place.
Otherwise, you could find your company in a bind. like some South Carolina firms after a small family-run payroll provider was charged with stealing $11 million from clients.
In 2014, clients of Employee Services Net were shocked to discover that the payroll provider had used their money to fund lavish personal lifestyles, instead of remitting it to taxing authorities. Those clients — all small businesses — found themselves facing IRS action. Why? Because ultimately the employer is responsible even if the payroll provider steals from them. (The IRS has tips to protect your company if you outsource payroll.)
Track Record Serving Businesses Like Yours
Does the payroll provider have a strong track record of serving businesses your size? Is the provider experienced in your industry?
Complementary Service Offerings
Consider the broader services you may need as your business grows, such as benefits and HR services. Will the payroll company be able to provide those?
Does the payroll provider have the resources to keep up with the burgeoning laws and regulations around employment, healthcare and taxes?
Evaluate the payroll company’s technology, including its mobile readiness. Is the payroll company investing in new technology? Can they keep up with technology as demand for it on the employer and employee side grows?
Can your accountant get easy access to your payroll and related records for purposes of reconciliations and tax filings?