The Pros And Cons Of Outsourced Payroll
January 12, 2016
"If you have one employee, get a payroll service" is advice financial expert Rhonda Abrams gave readers of "Inc."
“If you have one employee, get a payroll service” is advice financial expert Rhonda Abrams gave readers of “Inc.” magazine in 2010. As much as outsourcing this necessary aspect of running a business is tempting, it comes with risks. Before handing over the responsibility for the paychecks to a payroll service provider, weigh the pros and cons.
Pro: It’s a Time Saver
Outsourcing payroll saves a business time it would otherwise spend calculating pay and deductions and remitting checks to employees and taxation authorities. The printing costs of pay stubs might also be reduced. Some payroll companies offer a clock in/out function for employees, so you also save time calculating how many hours are owed each pay period. A company also provides services such as direct deposit and online pay stubs to further ease the payroll burden.
Pro: It Calculates Taxes Accurately
Small business owners know the deductions involved with employee payroll can be complicated, state and federal taxes among them. A payroll service provider often is better equipped to calculate these deductions accurately and consistently. The company also ensures taxes are paid on time. The IRS frequently penalizes business owners for errors in payroll-related taxes; one out of three is affected, according to “Inc.” magazine. The fines levied can cost more than the amount of the error.
Con: The Wrong Company Can Produce Errors
A payroll service provider that has never dealt with unique aspects of a company’s payroll, such as unionization and restaurant employee tips, can introduce errors into the payroll unknowingly, and undoing the mistakes can be costly and an administrative headache. A payroll company that does not have an interface that allows businesses to enter their employees’ hours directly — and therefore requires the payroll company to input the information — can introduce mistakes in pay through simple human error.
Con: Business Owners Ultimately are Responsible
If a company fails to pay the taxes the business owes on time and accurately, the business still is responsible for those taxes. Even if the IRS prosecutes the payroll service provider for not properly handing over the tax money, the business might be left owing taxes to the IRS after having paid money to the payroll company. This might be the case if the payroll company has an unscrupulous employee with the ability to embezzle funds. The IRS recommends all companies use the Electronic Federal Tax Payment System so tax payments are properly made on their behalf, according to “Forbes” magazine.
Con: Paying for Services Businesses Don’t Need
Many payroll companies offer other services and entice businesses to subscribe to them by offering all-inclusive packages. This increases the cost of outsourcing payroll, and it’s possible the additional services offered are not of true benefit to the business. Outlining what a business is looking for in a payroll company before seeking a service provider makes the business better armed against such a sales pitch.
If you have any questions, do not hesitate to contact our Payroll service.