Easy Cost Savings for Small Business: Payroll Outsourcing

Effective July 24th, 2008, the federal minimum wage increases to $7.25. A few small businesses may have needed that reminder- those that process their own employee paychecks will need to make adjustments not just to wages, but to tax withholding amounts, employee savings plans, and other accounts. Businesses that already outsource payroll services don’t need the reminder- their payroll service takes care of these changes for them.

When most people think payroll outsourcing, they think about writing checks and managing direct deposit. Payroll companies do provide these services, but they also do much more. Here are a few of the most commonly used payroll company services:

  • provide W-2 and other tax reporting forms
  • automatically update wage amounts and tax deductions to comply with regulatory changes
  • provide online payroll account access
  • allow employees to keep track of sick and vacation days
  • calculate employee tax withholding amounts
  • compute deposits to employee savings accounts
  • project and job cost reporting

Benefits of Outsourcing

Outsourcing payroll is advantageous to small business owners for a few reasons. First, there’s cost savings: payroll companies are able to perform computations faster and more accurately than the average small business owner. Payroll companies also provide experience and expertise. The experts- attorneys, CPAs, and researchers- that work for payroll firms ensure that calculations will be accurate. This helps you avoid fees and penalties that can accompany late filings or errors in tax documentation. Payroll companies also perform time-consuming tasks, like managing employee savings accounts and deferred compensation or employer contribution accounts (cafeteria plans, group term life insurance, and health savings accounts) that most business owners find confusing and tedious. You’ll also avoid worrying about processing payroll when you’re traveling, out of the office, or to busy to crunch the numbers. Outsourcing ensures that payroll processing is done accurately and on time, no matter your workload.

How Outsourcing Works

Payroll processing companies can draw employee paychecks either from your existing bank account, or require that you to set up a “designated account” with their company that they control. You’ll need to provide employee information, such as social security numbers and employment forms (W-4s and I-9s), as well as bank information for direct deposit. You will also need to “call in” or otherwise provide (either online or automatically) employee hours a few days before each payday. The payroll company will need to be notified if employee pay information changes.

Outsourcing Costs

Most payroll companies calculate costs on a per-check or a per-employee basis. Actual costs can vary- they will depend on the length of time between pay periods, the complexity of calculations, the number of employees you have, and the features you choose to offer, such as online access. Make sure you ask vendors for an itemized quote breakdown, and compare several different service offerings before you make your final decision.

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