The Ultimate Guide to Proper Outsourcing of Payroll

The Ultimate Guide to Proper Outsourcing of Payroll

Payroll is one of the most despised tasks that business owners have. About 86% of small business owners handle at least one financial task in their business, including payroll processing and taxes.

A majority of those find payroll confusing and frustrating because of the different tax laws in each state and city.

Business owners have enough to think about. The time and attention spent on payroll mean that they can’t focus on things that grow the business.

The outsourcing of payroll is a potential solution if you find yourself in a similar situation. You can ultimately focus on the activities that matter, rather than the ones that aren’t generating revenue for your business.

The big question is whether or not outsourcing payroll makes sense for your business. If it does, then how do you make it happen?

You’re in luck, because this guide helps you answer those questions and so much more. Are you ready to learn more about outsourcing payroll for small businesses?

Let’s get to it!

Is the Outsourcing of Payroll Right for Your Business?

Take a look at the amount of time you spend running payroll each week. This includes payroll taxes and every financial task related to payroll.

Count the number of employees that you process payroll for. You can divide the number of hours by the number of employees to figure out how much time you spend on payroll tasks per employee.

Consider your areas of expertise, too. How much do you really know about labor and tax laws? If you’re not that experienced in these areas, it makes sense to outsource payroll to a company that is competent in these areas.

Opportunity Costs vs. Actual Costs

The biggest issue that prevents small businesses from outsourcing payroll is the cost. You have to look at the cost of outsourcing payroll from a different perspective than other business expenses.

With something like marketing, you invest money expecting a return on that investment. The investment comes in increased revenue.

It’s not that simple with outsourcing payroll. You need to keep in mind how much your time is worth and what you lose by doing payroll yourself.

Ways to Outsource Payroll

There are two primary ways to outsource payroll. You can hire a payroll services company or use an online payroll service.

Hiring a service is more expensive, but you have a personal connection with the business. This is usually a bookkeeper or CPA that is local to your area.

The advantage here is they understand the laws in your city and state to make sure you comply.

Online payroll services range from software packages to an online bookkeeping service. These options give you flexibility and let you pick and choose which tasks you keep in-house and which ones you outsource.

You can check out the online payroll service prices and decide which one fits into your budget.

Some payroll providers have a flat monthly fee, while others have a flat fee and additional charges for each employee. The cost of payroll also depends on how often you process payroll.

How to Find a Payroll Provider

Start your search by looking for a provider that has experience in your industry. That’s important because your industry may have additional issues when it comes to payroll.

You also want to know what kind of services they offer. Some companies just do payroll and that’s it.

That’s fine for now, but what if your business grows and you need to outsource other HR tasks. It’s preferable to have HR and payroll with one company. Keep in mind that these companies tend to be more expensive.

You might end up hiring a payroll service just for payroll and then transfer the services to a full-service company.

Security and Privacy

Outsourcing payroll has a lot of advantages, but if there’s a risk, it’s security. One large payroll processing company was hacked. That compromised the data of 27,000 customers and their employees.

You want to know how the payroll company protects your company’s sensitive data. You want to know who has access to those records and where the records are stored.

Ask how the data is kept secure when it’s accessed and transmitted. Does that data go to another party? Are those records kept internally?

Be sure to ask about their security protocols. Ask how they prevent and detect data breaches.

This information is important to you and your employees. You don’t want your employees to worry about data breaches and ID theft.

Interview Providers

It’s critical to find a provider that is a good fit for your company. Take the time to know what your needs are and think about how you want to work with a provider.

Interview providers and ask them questions about their services. You want to learn about their processes and their support.

Ask them about their onboarding process and how they work with new clients. You also want to know how long it takes to transition data to the new company.

Finally, you want to know about their communication methods. Do they reach out if they have questions? How often should you expect to hear from them?

This helps you better understand how they work with clients.

Referrals and Testimonials

Ask prospective payroll companies for reviews and testimonials. They may have case studies that show how other companies like yours are happy with their services.

Look online for reviews of online service providers. These reviews show if there are any weaknesses in the services.

Small Business Payroll Responsibilities

About 40% of small businesses face fines of more than $800 because of payroll mistakes.

You are still responsible for legal and tax compliance when you outsource payroll. It doesn’t matter if you outsource payroll or do it yourself.

You can’t claim ignorance if there’s an error somewhere. That’s why you need to know what your responsibilities are when you outsource payroll.

You should have a system in place with your new provider to review payroll documentation before you sign off on the checks. This prevents costly mistakes.

How to Transition Payroll to Another Provider            

In a perfect world, you have payroll set up in a software program and you hand that off to the third party for processing.

In a not-so-perfect world, the transition can get very complicated, very quickly. Once you choose a payroll provider, you want to make that transition as smooth as possible.

First of all, transitioning payroll takes time and patience. It’s not as simple as flipping a switch. You and the third-party provider should work together closely during the transition.

Set a date for them to manage payroll on their own. You should also communicate the change to employees and inform them of any policy changes.

They should know if the timing of payroll processing changes or if they need to submit their timesheets earlier than before.

Employees also have to know who to go to in the event of payroll errors. Do those questions go to you or do they have a direct contact at the payroll provider?

The main thing to keep in mind is that you do need to keep old records on file, so you can’t just delete your old systems. In fact, you should have complete documentation for your old system in case things don’t work out with your new provider and you have to revert to your old system.

You and the payroll service should assess the system’s compatibility before you transfer data to them. You might have to make a few tweaks to make the transition as seamless as possible.

Be sure to run a test of the system before you run payroll for your employees. This identifies any bugs in the system, which can get worked out.

The Outsourcing of Payroll Is Simple

Small business owners work around the clock to make their businesses successful. There are burdens on them that add to the stress, like running payroll and paying payroll taxes.

You don’t need to worry about those things when you outsource payroll to a third-party service. This guide showed you how to determine if the outsourcing of payroll is right for you and how to do it.

You have all of the tools you need to make sure you can gain more time to focus on the activities that grow your business.

If you liked this article, you’ll love the other tips to help you grow your business on this site. Be sure to check them out today!

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