How outsourcing payroll can save your business time and money

By Chris Freeburn

As an employer, you are probably more than happy to pay your employees well for their work, but handling all the paperwork that comes with each paycheck is probably not something any small business owner anticipates with pleasure. Keeping payroll records in order, keeping track of the correct taxes and dispensing checks or managing direct deposits for your employees is a time consuming and sometimes frustrating task.


Despite this, most small business owners choose to do it all themselves. Indeed, a recent survey by the National Federation of Independent Business (NFIB), found that roughly 64 percent of small businesses handle 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." The survey found that in more than half the businesses that prepared payroll in house it fell to the owner to do all payroll preparation. According to the survey, cost was the most frequently cited reason for small business owners to prepare the payroll themselves.

The outsourcing solution

Fortunately for small business owners weary of tabulating tax withholdings and writing checks, payroll outsourcing options have grown rapidly over the past decade and, thanks in large measure to the Internet, the cost of outsourcing your payroll has fallen sharply.

Typically, a small business with between five and ten employees can expect to pay $100 or less, per pay period, for payroll preparation (including pay checks, direct deposit payments, employee tax and benefit calculations and record-keeping). Outsourcing payroll will also allow you to 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 it on their own.

While outsourcing your company's payroll will certainly save you frustration, the benefits go well beyond reducing your stress. According to management consultant Dave Bowman of TTG Consultants, many small business owners don't realize how much time they spend on preparing payroll--time that could be better spent running or growing their businesses. "Letting yourself get distracted every week or two weeks by a huge pile of paperwork keeps your attention off the business, away from looking for new customers or streamlining operations," Bowman says. Moreover, payroll preparation is complicated, requiring small business owners to keep abreast of the latest changes in IRS guidelines. Professional payroll preparers, on the other hand, make it their business to keep track of local, state, and federal employment tax requirements, and their experience and expertise in preparing and filing employment tax reports make it far less likely that costly mistakes will be made. Or that tax reports will be filed late. Better still, most payroll service providers will prepare and file end-of-year tax documents like W2 and 1099 forms, properly and on time.

Choosing an outside payroll firm

When looking for a 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.

  • 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.

Online Management

The Internet has not only reduced the cost of payroll services, but has streamlined the process and made it much easier for small business owners. Almost all payroll service providers offer online management of payroll accounts, permitting small business owners to sign-up for payroll services, change information (adding employees, changing salaries or benefits, adjusting pay periods, etc.) with the click of a mouse. The major payroll services providers also provide telephone customer service support to deal with any questions and issues small business owners may have.