Why Small Businesses Should Outsource Payroll

Tuesday, September 01, 2015

Most small business owners find payroll complicated and time-consuming to manage, especially for smaller businesses where resources are often stretched. Errors in calculating withholdings can prove costly, making payroll outsourcing to professionals specializing in the complexities of tax and benefits withholdings an intelligent move.

Payroll is certainly not a job to take lightly. Outsourcing payroll can save a business time and money — more importantly, it can help the business avoid costly mistakes.

The following are four ways payroll outsourcing can save time, money and a lot of hassle by:

Reducing payroll complexity

Unfortunately, payroll isn’t as simple as writing checks for hours worked. Along with correctly calculating employee withholdings for a la carte benefits like health insurance, an employer is responsible for Medicare, state and federal income tax withholdings, and payments.

The Internal Revenue Service (IRS) can penalize late employment tax payments as much as 15% of the amount owed. Mistakes can wreak havoc on the bottom line.

In a Congressional Hearing on small business and taxes in 2015, it was reported that small businesses with annual earnings between one and five million dollars are spending between 104 and 156 hours per year to process their taxes. Also observed was that the IRS often doesn’t address errors for as much as two years. By the time they do, the business, which often continues making the same mistake, is so much in arrears that it’s hard to recover.

To make things worse, states often have their own tax complexities.

Ensuring businesses avoid payroll mistakes


Small business owners have a lot to track and stay on top of, and payroll comes with a bevy of potential pitfalls that can harm their business. The following are some of the most frequent payroll mistakes small businesses make:


  • Missing payroll dates 
  • Not planning for bank holidays that impact payroll
  • Paying employees incorrect amounts
  • Miscalculating tax rates
  • Not making employment tax payments on time — or at all
    Not making correct withholdingsNot complying with state requirements on payroll frequency
  • Reporting employees as contractors and not recognizing the ‘legal’ differenceMisclassifying non-exempt employees and not paying overtime 
  • Not maintaining proper payroll records
  • Not paying for training time, on the job injury recovery time
  • Not paying for required-attendance meetings and parties

All of these mistakes are harmful to the business. Some will cost money, others like late payroll or having to correct employee pay due to miscalculation will cost a business reputation and the loyalty of good employees.


Helping to support employees


Providing your employees with convenient services allows them to focus on helping your business succeed. Employees benefit from payroll features like scheduled direct deposits, plus online check stubs and W-2 forms when you outsource payroll.


According to the American Payroll Association, nearly 93% of Americans get paid via direct deposit. More than 82% say their employers provide self-service portals, where they can access pay and benefits information online. A little over 74% admitted that they would have difficulty meeting their financial obligations if their paycheck were delayed for a week — more than half of them said it would be ‘very difficult.’


Employees like and are comforted by the knowledge their pay is not dependent on the boss finding time to do it. Payroll is a critical part of running a healthy business. It deserves professional attention.


Time is Money

Unfortunately, processing payroll does not produce revenue. Nor does all the research into labor laws and payroll rules and regulations. The hours spent calculating withholdings and verifying current tax codes can otherwise be spent growing a business.


There is also a lot of time behind keeping required records, including payment amounts and withholdings, timesheets, W-2 forms, tax records, and tax payments. And then, there is the time lost to potential audits and pulling together all the documents to support your case.


Professional payroll outsourcing can save a small business owner countless hours per month and allow them to focus on what they do best, bringing in revenue.


 4 Reasons to Outsource Your Payroll Infographic

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