Business owners often handle payroll on their own before realizing that outsourcing makes an attractive and cost-efficient solution in the face of tax complexities, growth, and changing priorities. In addition to streamlining the routine payroll process, an outsourced provider helps a business stay on top of benefits, IRS changes, data security and other aspects of managing payroll effectively and accurately. Ultimately, payroll services make the process more affordable and provide peace of mind.
Larger businesses learn quickly that the company’s payroll is better handled by utilizing the expertise of a professional payroll service company rather than trying to stay compliant by processing their payroll with an “In house” system. Sure, management wants easy access and ultimate control of the data, but confidentiality, information protection and financial savings usually wins out. The vast majority of businesses, both small and large employers, quickly find the decision to manage their own payroll system and tax compliance to be all consuming and costly in more ways than they imagined.
- Payroll requires a depth of knowledge few business owners have time to acquire
The true investment to learn and understand the ever-changing intricacies of tax and wage laws can be daunting. Federal, state or local agency reporting requirements that must be followed increases the number of items which a business owner must handle. The slightest error will trigger penalties and interest that compound and quickly burn through any cost savings that you may realize by bringing the payroll in house.
- Signs that Payroll Outsourcing Is Right for Your Business
Many businesses realize they need to outsource payroll when staying after hours to pore over accounting reports and time sheets. In other cases, a business may have a strong handle on payroll but see outsourcing as an opportunity to streamline and reduce risk. Here are some of the signs that a business would benefit from outsourcing payroll:
You need to devote time to other projects.
Businesses succeed and grow when focused on strategy and mission-critical tasks more than day-to-day procedures like payroll, which can be outsourced to an expert. Accounting departments and small business owners that waste time on payroll are missing out on growth opportunities.
You have incurred IRS penalties in the past.
Laws and procedures change constantly — even if you have a background in accounting or finance, most people cannot be expected to keep up with tax and benefits laws. Fines from the IRS or other penalties are red flags that you need to leverage outsourcing.
Reporting causes stress and inconvenience.
Paydays, quarterly reports, annual filings and other deadlines create headaches when you would rather spend your time conducting business.
Turnover is high in your industry.
Payroll providers can handle employee turnover at scale. If employees frequently leave — or if you promote rapidly and payroll must process changes frequently — a provider may be even more cost-effective.
You deal with a lot of compliance and security issues.
Businesses in regulated industries and those that employ a variety of contractors are examples of organizations that face significant concerns for payroll compliance. With greater complexity, outsourced payroll makes more sense.
Recently, the California Supreme Court issued a decision in an employee lawsuit. The complaint centered on the proper method for calculating overtime rate of pay for nonexempt employees who receive “flat sum” bonuses, or bonuses that do not vary in amount and not based on employee variables such as productivity or efficiency. these flat sum bonuses include attendance bonuses, safety bonuses, and certification bonuses.
Employees were paid an hourly wage but also received an “attendance bonus” as an incentive to work weekend shifts. As required by both California labor law and federal law, the employer included the bonus into employees’ overtime rates for each pay period.
The employer added the total base hourly wages to bonus wages and divided the sum by total hours actually worked, including overtime hours, to reach employee's regular hourly rate of pay. This regular hourly rate of pay was multiplied by 0.5 to calculate the overtime premium to be paid for each overtime hour worked. Notably, this is the formula prescribed by the FLSA and is used by many California employers.
The court determined, however, that when employers give a flat-rate bonus to nonexempt employee, the bonus must be factored into the employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the pay period. In addition, the court held that employers use 1.5, not 0.5, as the multiplier for determining their employee’s overtime rate of pay.
Court cases such as this, along with changing minimum wage requirements, stricter enforcement of employee classification, and issues such as exempt employee status create a challenging environment for payroll staff.
- Up to date knowledge and the required continuing education
Training staff who can be trusted to confidentially handle payroll and the associated duties is a costly endeavor, and more so if that staff tasked with managing the payroll duties leaves your organization. Eliminate the risk of an information gap. Payroll providers are professionals that can handle all your payroll related activities, so you can focus on your business. Expertise you can count on and continuity will provide the peace of mind, so you can do what your business does best.
- Time commitment
Processing payroll internally requires both man hours and information resources that can better serve you in other functions within your business. Time is valuable, use it effectively.
- Guarantee that comes with an outside payroll service
A competent payroll company provides a guarantee that things will be handled correctly. The guarantee protects you from paying costly penalties from the IRS and the numerous other state and local agencies involved with your payroll and associated tax liabilities.
The single largest expense category for most small business owners is labor. Typically accounting for between 30-50 percent of the total cost of operation, control of your payroll costs is a significant determining factor for whether your business will succeed.
Proper handling of time and attendance records is necessary to give an accurate picture of your labor costs and the overall health of your company.
Overpaying and Underpaying
In the early days of a business it's often easier to manage and account for labor hours. However, as the business grows, less-than-diligent time and attendance tracking leads to serious issues of over and under payment of your employees.
An employee is scheduled to work 40 hours a week but arrives 5 to 10 minutes late each day and the half hour lunch break typically runs 35 to 40 minutes. If the employee is still paid for a full 40-hour work week, the employer is overpaying for more than 2 hours of labor that was not provided each week.
While this may not seem like much, those numbers begin to add up quickly, especially if there are three or four employees doing the same thing.
The opposite also holds true. Instead of arriving late each day, an employee comes in early or stays late. Without proper time and attendance accounting that employee could be underpaid for several hours of labor each week. Regardless of the reasons, the employee will be underpaid on overtime hours and, should that worker make a complaint to the Department of Labor, the company will be in serious trouble.
Employee Morale
Most employees will abide by their work schedule and show up when they are supposed to.Problems arise when proper time and attendance accounting is not in place to monitor employee hours. The employees who arrive on time will resent those who arrive late, and eventually they may become disgruntled and quit.
In addition, the employees who properly clock in and out are the ones that must pick up the slack for workers who are late or absent. But a proper time and attendance monitoring system can minimize these issues and allow employers to address the situation before employee morale falls too far.
Time and attendance accounting are vital to giving you an accurate picture of your labor costs. The use of a third-party human resources services company can give you all the time and attendance support that you need to ensure you pay for all the hours worked, and help you identify potential problem employees.
Each business is different and will need to consider their specific needs to determine if outsourcing their payroll will benefit their organization. In-house payroll processing may fit for two types of organizations. Firstly, large companies with a department staffed to handle thousands of employees, and secondly, companies with predictable straightforward salaries paid with few variations. However, even for these types of companies, outsourcing may still prove to be the best option.
- When making the outsourcing decision you’ll need to consider items like:
- How and Why Payroll Outsourcing Helps
Payroll service providers offer different levels of service, with various packages and service levels to suit the needs of small and large organizations. The common theme: saving your business time and money by taking care of paperwork, processing, and tax payments that could otherwise consume your time, put your business at risk of accounting errors, and let you incur IRS penalties and payments.
GET THE COMPLETE GUIDEHave more questions or need additional information about payroll outsourcing? Download the complete 2018 Payroll Outsourcing Guide for the answers to your questions. In this guide we cover, everything we talked about on this page in addition to common issues with in-house payroll management, what kind of return on investment you can expect from outsourcing your payroll processing, what to look for in a payroll service provider and more.
