What Payroll Could be Costing You



December 2011

Payroll is a critical procedure that is constantly changing. As government policies create new requirements, new risks of fines and penalties can result from error or noncompliance. Payroll preparation is not an easy job and mistakes can be costly.

You have to have the right tools, procedures, and processes set in place in order for smooth transactions. Each pay period employers must report, collect, and deposit all state, federal, and local taxes to the right authorities for both the employee and employer portions.

According to IRS statistics, approximately 33% of all employers make payroll errors. Roughly 40% of small businesses incur an average of $845 per year in IRS penalties. With more tax law changes expected, there is even greater risk for payroll errors. Other costs incurred by erroneous payroll preparation include reduced employee morale and employee retention. Issuing inaccurate or late paychecks can even lead to a potential lawsuit.

When prepared manually, payroll can become tedious and time-consuming and mistakes are almost inevitable. For this reason, trends towards automation have caused more and more companies to outsource their payroll. A study by PriceWaterhouseCoopers states that “organizations that retain payroll, workforce administration, time and attendance and benefits administration in-house, spend on average 18% more than those that are outsourcing. Larger organizations spend 27% more than smaller sized organizations and organizations using software vendors spend 32% more”.

According to recent research, human resources outsourcing will reach $162 billion worldwide by the year 2015, with payroll playing a key role in the industry. Listed below are nine reasons to outsource your payroll:

1. Accountability
Any delayed or mishandled paperwork falls under the payroll service provider’s responsibility. Most national payroll service providers also take responsibility for any penalties that may result from error or noncompliance. This cost-savings, in many cases, immediately justifies outsourcing payroll.

2. Reduced Costs
On average, small businesses will typically spend $2,600 per year in direct labor costs associated with payroll. The direct costs of processing payroll can be greatly reduced by working with a payroll provider.

3. Direct Deposit
For companies who don’t use an outside payroll service, providing direct deposit can prove to be quite difficult. Employers are becoming increasingly aware that not waiting in line at a bank is an important convenience for employees. Direct deposit eliminates time-consuming and error-prone paper handling and the need to reconcile individual payroll checks every month.

4. Accuracy. Keeping up with the latest versions of payroll software tax tables can be difficult for employers. Using the wrong tax tables can result in stiff penalties. A good payroll-services provider is far less likely to make a serious error than your in-house staff. Furthermore, if a big mistake is made, you can seek financial restitution from the provider – something you can’t do with your own employees.

5. Reliability. In-house payroll activities function as reliably as the people doing the work. With a payroll service, output speed and quality won’t vary in accordance with vacations and illnesses. You also won’t have to spend time helping new hires understand your business’s payroll system.

6. Speed. Since payroll-services providers are specialists with vast technical resources at their disposal, they can process even the most complex payrolls at lightning-fast speed. Unlike most employers, they can also accommodate a temporary influx of seasonal workers without acquiring new systems that will remain dormant the rest of the year.

7. Insight. Most business owners and controllers don’t have time to keep up with constantly changing laws and policies. A good payroll-services provider will know all the ins and outs of payroll-related tax laws and regulatory mandates on the federal, state and local levels. Your employees could try to achieve the same level of understanding, but it would take a considerable investment in time and effort.

8. Flexibility. Boring, repetitive payroll work can act like an anchor on your business. Outsourcing payroll can free up staff time to pursue more important value-added and revenue-generating activities.

9. Worry.
Manual payroll is a headache, even at its best. Business owners who outsource payroll eliminate a tiresome source of personal pain.