Outsourcing payroll presents a few advantages for small business owners:
- Cost Savings: Payroll companies can usually perform computations faster and more efficiently than the average time-strapped small business owner- ultimately saving you both time and money
- Expertise: Payroll firms employ experts- attorneys, CPAs, and researchers that can help you avoid the costly penalties or fees that can accompany late filings or errors in tax documentation. Payroll companies can also manage employee savings accounts and deferred compensation or employer contribution accounts, such as cafeteria plans, group term life insurance, and health savings accounts- tasks that any business owner knows can be difficult to perform if you choose to go at it alone.
- Automatic Service: If you outsource, there's no need to worry about processing payroll when you're traveling, out of the office, or to busy to crunch the numbers. Hiring an online payroll firm makes paycheck processing automatic.
- Information Management: Most payroll firms offer reporting functions to help you manage payroll data more efficiently, such as employee/labor cost per job, per project, or per client.
- Tax Credit Processing: There are a myriad of tax credits available to employers based on an employee's residential address, criminal background, military service, receipt of TANF (Temporary Assistance for Needy Families) fund and many other factors which can drastically reduce payroll tax burden. These credits are difficult and time consuming to process and approve, but with a well-managed on-boarding procedure and the help of a professional payroll services firm, the process is made easy. This service often costs nothing to the employer, who pays the processor based on a percentage of the tax credits generated by the relationship.
- Relationship Automation: Using a payroll company with an efficient online employee portal can save your organization much time that would otherwise be spent servicing employee requests for past pay stubs, W-2s, or income verification.
How Outsourcing Works
Payroll processing companies will draw employee paychecks either an existing bank account, or ask you to set up a designated account that they control. Setting up a payroll account requires employee information, such as social security numbers, employment forms (W-4s and I-9s). You'll also need to provide bank information for direct deposit features. Prior to payday, you'll provide information about employee hours worked, commissions, bonuses, or sick days taken. Some payroll firms require you to "call in" employee hours a few days before each payday. Some allow you to enter information online or to set up automatic verification procedures (if you have salaried employees). You will always need to notify the company if pay information changes- for example, when an employee gets a raise.
While payroll costs vary based on the business functions of the employer, nearly all are calculated on a per-employee, per-pay period basis. Employers who pay employees across many states and at lower volumes will pay more per transaction due to cost of filing multiple quarterly tax returns. On the other hand, employers who have a high weekly payroll volume, or only have employees within a tight geographic area, can take advantage of low transactional rates.