What to expect when outsourcing small business payroll

I often mention to small business owners that one of the easy and surefire ways a small business can get improved level of service, save time and save money is to set up an outsourced payroll service. These are remote services; there is no need to be close to your business. Small businesses can easily save more than an hour per week and more than a thousand dollars in fees each year with almost no risk of mess-ups1 with payroll services.

What do you need to outsource payroll to achieve maximum benefits?

  1. Employees must be willing to accept direct deposit paychecks
  2. Employees must be willing to accept online pay stubs
  3. The employer must be able to communicate employees’ work hours by email.

How does it work?

  1. I do the setup and typically charge $75 per month for smallest firms for this service though automatic monthly debt.
  2. At the end of the pay period (unless pay is the same amount and automated) you send me the hours worked for each employee and any expense reimbursement. For example “Jim 25 hours, Jane 27 hours plus $132,50 expense reimbursement“.
  3.  I manually confirm by email that the payroll is processed.
  4. The payroll processing service sends you an email listing the day, time and amount that your bank account will be debited.
  5. The payroll processing service pays the employees and submits all the wage taxes.
  6. You then see two deductions from the payroll processing service on your bank records: one for wages, one for wage taxes. Typically your accounting software imports this bank record into your business accounting records.
  7. Whenever you want, you can log on to see detailed reports for all types of payroll-related data.
  8. At year end the payroll processing service files the appropriate tax forms.
  9. If a question or discrepancy comes up from a tax authority, the payroll processor handles the response.

What are the advantages?

  1.  Employer and employees have full-time access to payroll information through their smart phone or computer.
  2. Payroll processing is faster and employees have their pay faster.
  3. Pay periods can be flexible; processing whenever you want it.
  4. No ‘tax payable’ accounts to worry about.
  5. The processing cost is lower.
  6. This works with any bank and any accounting system; it is completely independent.
  7. Decreased risk of human error.
  8. Ongoing professional accountant oversight.
  9. Human interaction ‘friction’ is minimized through the use of technology.

What are the limitations?

  1. This low-cost service is not designed to produce paper records. You must print your own paper check or pay stubs if this is necessary.
  2. The breakdown of taxes is not transmitted to your business accounting records. You refer to the processor’s reports for these details if needed. (They are usually not necessary for any other purpose. Except in rare circumstances, it is perfectly acceptable to use a combined account “payroll taxes” in your business financial statements).

See a sample payroll processing agreement here. To learn more, contact me online or by telephone.

1 In more than three years of offering these services, I haven’t received any reports of errors or complaints.


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