Here’s When to Outsource Payroll

For some business owners, running payroll is not worth the stress and time. Here’s what to look for when outsourcing payroll services for your small business.

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You often hear people say, "It doesn’t feel like work when you’re doing what you love." And while that’s a lovely sentiment, there are unsavory aspects to nearly every job.

If you find running payroll onerous, consider hiring a company to do payroll for your employees. Several national providers and even more local accounting firms can run payroll, from cutting paychecks to preparing and filing payroll tax forms.

3 benefits of outsourcing your payroll services

While payroll outsourcing costs vary by business size and geographic area, it’s almost certainly more expensive than paying for simple payroll software. However, passing on your payroll duties to another company can lead to peace of mind and fewer payroll errors.

1. Professional payroll management

Let’s face it: Payroll can be complicated. When you’re juggling dozens of independent contractors and a handful of employees, running payroll can be an overwhelming chore. Leaving payroll in a professional’s hands gives you the confidence that employees are getting paid accurately and on time.

When payroll tax rates and laws change — and they do, especially at the onset of new presidential administrations — a professional can guide you through their effect on your business. You get customized support when you outsource payroll.

Payroll specialists can also teach you how payroll works, making it a great temporary solution while you pick up the skills you need to run payroll yourself.

2. Error reduction

Payroll professionals are less likely to make serious payroll errors, such as missing a quarterly payroll tax filing. Payroll service businesses hire and train payroll specialists to ensure compliance with payroll tax laws.

3. Time savings

It’s unlikely you enjoy running payroll every few weeks. You might outsource payroll so you can spend more time doing the things you love, whether it’s meeting new clients or refining your product.

Small businesses with just a few salaried employees don’t require much fuss to run payroll. However, if you have hourly employees or work with many independent contractors who are paid by project, you might spend hours on each payroll run.

What to look for in a payroll outsourcing service

Before hiring an outsourced payroll service, you’ll probably shop a little. Here’s what to look for.

1. Annual and quarterly payroll tax preparation and filing

The most nerve-wracking part of the payroll process is filing and remitting your payroll taxes. Your payroll service should remove payroll taxes from your bank account to pay federal, state, and local governments after each payroll run.

Ask your payroll service to prepare and file these forms on your behalf:

  • Form 941, a quarterly return to report employee federal payroll taxes (applicable to all businesses with annual federal payroll tax liabilities above $1,000)
  • Form 944, an annual return to report employee federal payroll taxes (applicable to businesses with annual federal payroll tax liabilities of $1,000 or less)
  • Form W-2, an annual return to report each employee’s compensation
  • Form W-3, an annual summary return to report all employee compensation
  • Form 1099-NEC, an annual return to report each independent contractor’s compensation
  • Form 1096, an annual summary to report all independent contractors’ compensation

2. Retirement plan management

An important part of the payroll process is your 401(k) plans because employees can contribute their pre-tax dollars.

Many payroll software solutions integrate with 401(k) providers or offer an in-house retirement plan maintenance service. Look for an outsourced payroll service that manages your employees’ retirement plans.

Employee contributions to traditional 401(k) plans are pre-tax, meaning they reduce federal income tax withholdings. Employer contributions to retirement plans reduce some employer-paid payroll taxes, such as federal and state unemployment.

3. Data security

You have a responsibility to your employees to keep their information safe. Look for a payroll service that makes data security a priority.

Payroll records contain social security numbers (SSNs), addresses, and other sensitive information. Ask your payroll service what security measures it takes when storing your employees’ data. If you’re working with a national payroll outsourcing provider, look for news of data breaches.

4. Accounting and tax software integration

Most payroll software on the market integrates with accounting software, sending journal entries so you don’t have to prepare them yourself. Ask your prospective payroll provider how it can speak to your accounting and tax software.

Most national outsource payroll services have relationships with popular accounting software programs. Local CPA firms might not have the technology, so make sure you have a workaround figured out.

5. Payroll professional training

If you’re paying an outside company to run payroll, you want to be sure they know the latest on payroll tax compliance. Ask the provider what it does to train its employees.

6. Stellar customer service

You’ll have a lot of contact with your payroll service. You might need to call them with last-minute changes to payroll.

Ideally, you’d be assigned a customer service representative who understands your business and doesn’t need a long explainer every time you need to get in touch.

Should you outsource your payroll?

Not every business should outsource its payroll function.

When outsourcing payroll makes sense:

  • You have several employees who regularly earn tips, overtime, or shift differentials
  • You’ve received IRS inquiry letters or penalties for past payroll tax mistakes
  • You sometimes pay employees late
  • You don’t have time to run payroll yourself

When you should keep payroll in-house:

  • You have 10 or fewer employees who are paid a salary
  • You don’t offer subsidized health insurance or retirement plans
  • You have a CPA firm that regularly checks your payroll records for compliance

Best practices when working with payroll outsourcing services

Keep these tips in mind when dealing with payroll outsourcing companies.

Ask for help early

It’s unlikely you’ll find a payroll service with customer service hours on nights and weekends. You can’t expect immediate responses to every question you ask of your payroll provider, so expect to play phone tag now and then.

Working with an outside company means things will move slower than if you had a payroll specialist in-house. When you have questions about payroll tax filings, get in touch early to avoid missing deadlines.

Check their work

"Trust, but verify" is a popular phrase in accounting. It would be unwise to trust a new payroll service without checking their work. After the first few payroll runs, go over their work closely and make sure:

  • They’re not missing any payroll tax deductions
  • Employees are receiving pay stubs, a legal requirement
  • You have access to all payroll records

Let’s take this outside

Hiring an outside company can alleviate the stress brought on by payroll.

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