Businesswoman calculating finances at office desk.
Small businesses face several barriers when calculating and processing payroll, so you may benefit from working with a payroll services provider. — Getty Images/ guvendemir

Paying employees and complying with tax laws are essential yet time-consuming responsibilities for small business owners. Consequently, the process becomes more complex as your company grows.

Payroll companies can run payroll, pay employees and contractors and handle benefits administration. They work as an extension of your human resources (HR) department and offer a range of payroll services, from basic to advanced.

Below we’ll discuss:

  • Challenges of in-house payroll processing management.
  • Types of payroll tasks you handle now that can be outsourced.
  • Benefits of using a payroll service.
  • Questions to consider before outsourcing payroll.
  • Payroll service alternatives.

Explore your payroll processing challenges

Small businesses face several barriers when calculating and processing payroll. This is especially true if your staff live in different states or countries than your company’s headquarters.

The challenges of in-house payroll processing management include:

  • Tax compliance: The IRS reported that it “assessed nearly $31.4 billion in civil penalties in the fiscal year 2020.” Of this amount, more than $6 billion in penalties were imposed on companies for employment tax problems. Common issues involve accuracy, delinquency, failure to pay and bad checks.
  • Time and resources: According to a National Small Business Association (NSBA) survey, “one in five small business owners report spending more than six hours each month handling payroll taxes internally. Among small firms with five or more employees, that figure jumps to one in three.”
  • Cost: Handling payroll services in-house can be expensive. The U.S. Bureau of Labor Statistics lists the median pay for an accountant as $73,560 per year, not including benefits. Plus, you may still use HR software to process payroll.

Decide what tasks to outsource to a payroll provider

There are several steps to the small business payroll process, and a payroll service can take over some or all of these tasks. Employers calculate the employee’s gross pay, withhold or garnish wages as necessary, and send paychecks.

You may also need to comply with federal and state regulations, such as the Family and Medical Leave Act (FMLA), depending on the size of your business.

Other payroll processing tasks include tracking and accounting for:

  • Employee time and attendance.
  • Paid time off (PTO) and sick leave.
  • Salary and hourly payroll records.
  • New hire reporting.
  • Payroll tax statements.
  • Worker’s compensation.
  • Tax forms and payroll tax filings.
  • Federal, state, and local year-end taxes as well as W2s.
  • Tax payments, including social security and state unemployment insurance.
  • Employee benefits and deductions.

In addition, your staff may want direct deposit and an online self-service portal for accessing electronic payroll records and pay stubs. Payroll services for small businesses can handle basic payroll processing and offer advanced features, such as new hire reporting.

One in five small business owners report spending more than six hours each month handling payroll taxes internally. Among small firms with five or more employees, that figure jumps to one in three.

National Small Business Association survey

Consider the potential benefits of payroll services

Outsourcing human resources tasks, like payroll, can help small business owners comply with federal and state tax requirements, save time and reduce costs.

The best payroll services for small companies provide the following benefits:

  • Improve employee experience: Payroll providers offer employee self-service portals, direct deposit, electronic payroll records, digital W2s and convenient ways to update personal information.
  • Save money: Full-service payroll services may be less expensive than hiring a professional employment organization (PEO) or hiring an accountant. Many payroll providers give a guarantee and will pay fees you incur due to an error.
  • Scalability: Flexible payroll options let employers add or remove various features, making it easy to ensure compliance and track payroll tax payments, whether you have five or 100 employees.
  • Data collection: Integrations with accounting software and time tracking apps provide insights into benefits administration, payroll taxes and employee use of payroll and HR features.

Assess your small business payroll needs

Once you understand your challenges, tasks and potential benefits, it’s a good time to review your budget and needs. Many payroll services charge a fee per employee per month, so you’ll want an accurate staffing count, as well.

Questions to think about include:

  • How often will you process payroll?
  • Do your employees work in other states or countries?
  • Will you increase the number of employees next year?
  • Do you have any special circumstances, such as tipped employees?
  • Will your health insurance requirements change?
  • Do you need to track 401(k) deductions?
  • What type of integrations do you want?
  • Will you pay contractors using a payroll solution?
  • Do you want a personal payroll specialist or round-the-clock customer service?

Compare payroll software and services

Before deciding if payroll services are a good fit, consider your alternatives. Small business owners have several options for handling payroll responsibilities, including payroll software, PEOs and accountants or bookkeepers.

Paid or free payroll software works well for those with HR and payroll knowledge. Payroll apps include do-it-yourself (DIY) and full-service solutions for running payroll and tax filing.

A full-time accountant or bookkeeper can help with payroll as well. They calculate employee pay and payroll taxes and maintain records. Likewise, PEOs manage payroll processing. But they assume the role of employer of record and cost more than payroll software and services.

According to the NSBA, 45% of business owners “use a payroll service,” making it a popular solution; however, you may prefer automating payroll using online software or outsourcing it to a local accountant. Consider your options and pick the one that fits your needs.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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CO— is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce.

Published September 29, 2021