For small business owners, managing payroll can be a costly endeavor. When payroll is handled in-house, you need the appropriate software to support the job, an employee who has hours to dedicate to the process each week, and a keen understanding of tax laws and employer obligations.
It’s likely that this was manageable enough when you were just starting out, but as your business grows and you add new employees, more benefits, and open up shop in other locations, managing payroll can become unwieldy.
If you’re beginning to feel out of your depth with internal payroll management, it may be time to consider outsourcing the process. And while the idea of handing over such an important task (not to mention all that sensitive information!) to a third party may be nerve-wracking, there are some tips to help ease the transition.
Is Outsourcing Right For You?
Before diving in, run a cost/benefit analysis. According to a 2017 survey from Paychex, payroll is the most time-consuming activity each week for HR professionals, taking up an average of 11 hours. Multiply that out over 52 weeks, and—assuming a 40 hour work week—that comes out to just over 14 weeks per year spent on payroll alone!
Aside from the pure amount of time and money put into payroll each week, there are less tangible costs as well. The employee handling payroll must stay up-to-date on the ever-changing tax codes, and any errors in remittance of tax payments can result in costly fines and fees.
You’ll want to consider this against the costs of an external provider. Typically, payroll companies will charge a monthly base fee, plus an additional fee per employee or per check run. If you’re looking for extra services like direct deposit, state and federal tax filings, and W2 and 1099 processing, these will incur additional costs.
I Want to Outsource! What Next?
If you’ve decided that outsourcing makes sense for you, it’s time to start looking for providers. After you’ve identified some prospects, set up calls or meetings to discuss what services they offer. Here are some questions to consider that can help guide your discussion with a payroll company:
Question: How many clients do you have?
Why to ask it: You want someone reliable and experienced handling your payroll. Most reputable companies will have several hundred clients. Not only that, but you want someone who’s going to be your partner in the long run. If this payroll company is brand new, how do you know they’ll be around in 5 years? And if they shutter, will you be left holding the bag?
Question: What services do you provide?
Why to ask it: Not all payroll is the same. Some companies are looking for just the basics: issuing checks and W2 forms, plus managing tax obligations. Other companies, however, have more complex needs, and require additional support for benefits they offer (401(k) contributions, healthcare costs, deductions for pre-tax transit programs, etc.). Does this payroll provider cover all the services you need? And if they provide a broader scope of service than you need, will you be able to negotiate pricing so you’re only paying for what you use?
Question: What is your error rate?
Why to ask it: Payroll errors can be costly. Not only do they cause major headaches when they happen on employee’s checks, but errors in calculating taxes can get you into hot water with the IRS (every business owner’s nightmare). Does this payroll provider have a strong track record of dotting all their is and crossing all their Ts?
Question: How can I get in touch with you?
Why to ask it: You need to have a payroll company that you can easily reach when you need them. Changes in staffing, rolling out new employee benefits, opening offices in new locations with different tax codes—these are all things you’ll need to discuss with your payroll provider, and you want to be sure you’ll have a direct and easy line of communication to the person or team managing your account.
Question: What software do you use?
Why to ask it: As the business owner, you’ll need to be providing your payroll provider with a lot of sensitive information on a regular basis. Does their software platform make it safe and easy for you to pass that information along? Additionally, is there a way for your employees to access their pay stubs, tax documents, and benefits information online? A comprehensive software platform makes it easier for your employees to remain in control of their personal finances and benefits.
Signing on the Dotted Line
Once you’ve identified a company you like, it’s time for you to sign a contract and begin outsourcing payroll. When considering the contract, be sure to take into account the long-term cost of the services. Some payroll providers will offer an initial discount as a sort of signing bonus, but make sure that you’ll still be comfortable with what the costs will be once you’re responsible for the full rate. Plus, if you plan to add staff and expand benefits as time goes on, that will mean a greater monthly cost—are you prepared for that?
After you’ve switched to your external provider, you’ll want to keep an eye on things for the first few weeks to make sure any errors are caught and remedied quickly. It’s likely that there will be a bump or two in the road as you hand off all payroll responsibilities, and you want to ensure that your employees are receiving their proper pay and benefits, and that all of your tax obligations are being met.
Getting payroll right is a critical part of running your business. There’s no shame in turning this sizeable task over to the professionals. Just be sure to do your research and find a provider that best fits your needs and budget.
If you liked this post, check out our Guide to Managing Your Small Business Finances.