As your small business grows, so do its payroll problems. It’s not just a matter of adding employees. Tax filings and reporting requirements are becoming increasingly complex. Many businesses, as they get bigger, add new benefits that require payroll deductions and reporting. The complexities keep growing.
Perhaps you, like many business owners, are ready to switch from an in-house payroll system to an outsourced payroll service. If so, there are a number of considerations to take into account during your search for the right service.
It can be hard to pin down the actual cost of a payroll service. Some companies charge quarterly, others by the payroll run. Still others charge a fixed fee per pay period plus a smaller sum per paycheck. Some services provide free reports and filings, while others charge a fee for such services. One-time payments, such as annual bonuses and checks for terminated employees, usually incur an additional fee.
Many of the larger payroll-service companies raise their fees annually, reasoning that customers will pay a bit more rather than go through the hassle of switching payroll services. Ask potential vendors for a list of recent rate increases to learn about their practices.
Before the Internet came along, communicating with payroll providers was often difficult. Employers had to phone or fax payroll data to the vendor or worse, wait by the phone for a data-entry person to call. Some services still operate this way, but many have turned to the Web to free their customers (and data-entry staff) of this burden.
A good payroll service should have a Web-based user interface that lets you enter payroll data any time you wish (subject to processing deadlines). It should give you an opportunity to check your figures before you commit to running payroll. The latest real-time payroll systems will calculate payroll and let you review each check before they print or deposit checks electronically.
Although your payroll data is hosted on the provider's computers, you should be able to access it and use it the way you want. A good service will let you view a variety of reports online. You should also be able to review historical pay stubs and change information about your employees, such as their addresses or tax exemptions.
You should additionally be able to retrieve your information in forms that are useful to you — Web-based reports, Excel files or proprietary file formats for applications such as Intuit Inc.’s QuickBooks or Microsoft Corp.'s Microsoft Money should be available. Your accountant should also have access to payroll data through an online interface, so that he or she can download data for importation into general-ledger software.
A recent trend in payroll services that you might consider is employee self-service. This allows employees to log on to the service and change some of their own information, such as marital status, number of exemptions and direct-deposit accounts.
Though seemingly obvious, it's important to determine which payroll services make more errors than others. The biggest factor for eliminating errors is minimizing data rekeying. This is another reason payroll vendors are moving to self-service data-entry options. The payroll provider’s software should also check data for valid formats, such as a nine-digit Social Security number. Lastly, the person entering data should be able to review information and correct errors before the vendor transfers funds or writes checks.
Credibility boils down to whether the payroll service can be trusted with your employees’ paychecks and personal data. You should ask for customer references to hear about others' experiences with the vendor. The financial stability of a payroll service is also critical since you will trust it with large sums of your (and your employees’) money. Run Dun & Bradstreet reports, ask for credit references and check with your secretary of state’s office to see if there are any financial problems or lawsuits pending with the service you are considering.
Also, ask the company about its data-security procedures. Is confidential data stored in a secure data center? Are backup copies maintained off-site in case of disaster? Do Web-based interfaces use encrypted connections to keep data private in transit from your office to the host and back? How does the payroll service comply with regulations such as the Sarbanes-Oxley Act and HIPAA (Health Insurance Portability and Accountability Act)?
In addition to the general criteria described above, here are some specific features you should look for in any payroll service:
- Check Printing: You may prefer to print checks in your own office; if so, the payroll service should support this option. Most services will print and deliver checks for an additional fee. Even if all employees elect direct deposit, paper pay stubs will have to be delivered to them. The payroll service should do this.
- Paying and Filing Taxes: The payroll provider should take responsibility for paying tax money withheld from employees’ paychecks to the appropriate taxing authorities. If other funds are withheld for non-taxing entities, such as retirement-plan contributions, the service should also ensure that money gets to where it belongs.
- Accuracy and Timeliness Guarantee: A payroll service should stand by its work, indemnifying your firm against any penalties the IRS (Internal Revenue Service) or other taxing authorities may impose for inaccurate or late filings caused by the service. This is one of the biggest reasons employers outsource payroll. Make sure your contract spells out who is responsible if something goes wrong.
- New-Employee Registrations: Most states require employers to report information about new employees to a state agency. Some, but not all payroll services will perform this service in addition to standard payroll functions.
- Reports: You should receive copies of IRS filings, workers-compensation reports and other data you need to keep a handle on your payroll costs. Some payroll vendors charge fees for such services, while others do not.
Choosing a payroll service is complicated, just like payroll itself. But if you ask the right questions, you should hire a payroll provider that you can stick with for a long time.