Payroll Processing Services - When To Use Them

Why Use a Payroll Processing Service
Why Use a Payroll Processing Service. Comstock Images/Getty Images

What are the Reasons to Outsource Payroll Processing? 

 

Even if you have only a few employees, you may decide to outsource your payroll; that is, turn over payroll processing and other payroll responsibilities to someone else. Here are some considerations to help you decide whether to outsource. 

We'll first look at situations in which you might want to consider outsourcing your payroll, then some outsourcing options.

Outsourcing Payroll Lowers Job Costs

If you are simply paying office workers, you can calculate pay by multiplying hours by rate, and determining if any overtime is owed.  

But if you are producing a product, you need to know the cost of labor on each product, so you can determine cost of goods sold. This is a complicated process, more than a clerical person could probably handle. So, if you want to be able to determine manufacturing costs, outsourcing payroll may be the only way to do that.

Let the Service Deal with Multiple States, Localities

If you have employees in more than one state, you must comply with requirements for paying and reporting state income taxes. If your business operates in different cities, you may also have local income taxes to withhold, pay, and report.

Withholding Calculations are Tricky

Calculating the amounts of withholding for employees is complicated. Briefly, you must:

  • Determine federal income tax withholding based on the employee's W-4(which can be changed as often as the employee wants)
  • Determine state withholding for states with income taxes, based on the state W-4
  • Determine FICA taxes on wages at 7.65 percent (and you must watch highly-paid employees to be sure their Social Security withholding is capped at the maximum for the year)

      And that is just for starters. Even for one employee, the process of determining withholding amounts can be time-consuming.

      Avoid Trying to Keep Track of Deadlines

      Payment and reporting of payroll taxes (federal and state, withholding, FICA taxes, unemployment and workers compensation, and individual state payroll options) can be intimidating.

      And a missed deadline for either payment or reporting can cost you money in fines and penalties.

      Outsourcing payroll, even with just a few employees, is an option many employers consider early in their businesses. It might be the right option for your business, depending on your circumstances.

      How do Payroll Processing Services Charge?

      Many payroll processing services charge a basic fee, so that even if you have just one employee you are paying more, because the service has to all the same filings for one employee as it would do for 10. For example, they would still have to file a Form 941 each quarter, even if you have just one employee. The incremental cost for each additional employee is quite small.

      With that in mind, here is some information on payroll processing services, with their costs and what they provide:

      Assisted Payroll Services 

      Some services do all your filing for you. For example companies like Paychex and ADP charge per check per pay period, including filing, direct deposit, and checks cut. You can input information online and they assign a payroll specialist to help you. As an example, you can see ADP's full range of services on their website.

      Self-service Payroll Online

      Other services help you do your own filing. For example, Intuit's online payroll service allows you to fill out payroll forms online. Before you select these services, check to make sure they are compatible with your operating system and hardware (some don't work on Macintosh systems. 

      Companies like Paycycle allow you to do your own payroll online. They charge by number of employees and number of states. 

      I have done just a very brief review of these services. Some may have additional features that you might need for a specific situation (timecard input, for example). Read the information on the websites and contact the representatives of the companies. This is always a good way to tell how friendly they will be. I have presented only a few of the many services you can find online. The IRS has information about payroll services and providers you might want to look at.

      Is Outsourcing Payroll Worth the Cost?


      Even if you have only one employee, you might want to seriously consider a payroll service to help you with preparing paychecks, and paying and reporting payroll taxes. Remember, one fine or penalty for a missed payment or report might be more than a whole year's worth of service. Setting up a payroll system for your business is not your first priority. And if you have a service, it is one less thing you have to think about.

      Read more about the 6 Steps to Selecting a Payroll Processing Service

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