If you find that processing payroll is becoming an increasingly burdensome task, it may be time to turn to one of the many payroll firms eager to do it for you

By Christopher Freeburn

One of the greatest burdens faced by small business owners is dealing with the voluminous amount of paperwork generated by their businesses. Even small businesses with just a handful of employees create enough paperwork to inspire dread in the most ambitious entrepreneurs. One of the most vexing sources of this endless cavalcade of forms, worksheets, timetables, reports, and compliance documents is payroll. The simple act of paying your employees requires completing a complicated thicket of bank, legal, and tax forms, and that's before the checks even get written.

Trying to go it alone
Even though filling out all the payroll paperwork takes many more hours than most small business owners would like, the overwhelming majority continue to handle payroll themselves. The National Federation of Independent Business (NFIB) recently surveyed hundreds of small businesses and discovered that roughly 64 percent performed all payroll functions in house. "The smallest enterprises are the ones most likely to prepare payroll in-house, while the largest small businesses more often send it out," says William Dennis, a senior researcher with NFIB. "Even then, half of the largest small businesses-those employing 20 or more workers-handle payroll themselves." According to the NFIB, in more than half of these small businesses-and in particular, those with fewer than 20 employees-the small business owner completed all payroll paperwork, personally.

Outsourcing the paperwork
If you dread the thought of having to tabulate tax withholdings, filling out tax forms, and writing checks, there is a solution to your conundrum: payroll outsourcing. The payroll preparation industry has expanded dramatically over the past two decades, with dozens of companies offering a myriad of payroll preparation options. The rise of electronic communications-especially the Internet-has greatly increased the ease and economy of such services.

The NFIB survey mentioned above found that most small business owners who did their own payrolls cited cost as a reason for keeping payroll in-house. However, the profusion of payroll preparation firms and the efficiency of Internet-based communication have lowered the cost of such services to the point that almost any sized business can afford them. Using any of the major payroll preparation firms, a small business with between five and ten employees, can expect to pay $100 or less, per pay period, for payroll services, including paychecks, direct deposit payments, employee tax and benefit calculations, and record keeping.

Reaping the benefits
In addition to reducing frustration, outsourcing payroll lets your business take advantage of the payroll firm's expertise in preparing tax documents like 1099 and W2 forms, which can be difficult for small business owners trying to do them on their own. Professional payroll preparation firms hire CPAs and tax experts who keep track of both minute and major changes to local, state, and federal tax and employment laws. Their knowledge of the laws and their experience in preparing and filing the paperwork associated with compliance with the applicable statutes greatly reduce the risk of errors or late filings, both of which can result in significant penalties. Payroll service providers will also complete and submit end-of-year tax documents like W2 and 1099 forms, correctly and on time.

Today's payroll services are also a lot easier to use. Almost all payroll providers allow small business owners to manage their payroll accounts online. This means you can sign up for additional services, add employees, change information, and adjust salaries, benefits, or pay periods, just by logging into your account.


Outsourcing your company's payroll options permits you as a business owner to focus your thinking on running your business and removes one more distraction. "Small business owners have enough to think about without having to ponder the intricacies of the tax code every time they pay their employees," says Dave Bowman of TTG Associates, a Los Angeles-based business-consulting firm.

Choosing an outside payroll firm
When looking for an outside payroll provider, there are a few things you need to keep in mind:


  • Choose an established firm with a good track record. Contact your local better business bureau to see if there have been any complaints made against the company.
  • Make sure the payroll company can handle your company's specific needs. Some payroll companies only handle federal and state taxes, but not city taxes. Other payroll companies will not handle companies with locations in multiple tax jurisdictions or states.
  • Ask how the company receives payroll information. Many large payroll firms now strongly prefer to receive payroll data over the Internet, or by email. But most will accept data via phone call. Make sure the payroll provider uses a means you are comfortable with.
  • What liability will the payroll provider accept? Will the payroll provider accept any tax penalties that arise from its own errors? Not all payroll companies do, and the government will hold your business, not the payroll provider, ultimately responsible for any mistakes, so make sure you know where the payroll firm stands on this.

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