Payroll Outsourcing

What is it?
A payroll outsourcer is an accounting firm or service bureau that processes payroll for other businesses. The typical client is a small business - one large enough for payroll to become a hassle, but small enough to not merit its own full-time payroll department.

The following services are typically included in a payroll outsourcing agreement:

• Printing of employee pay checks on time for payday


• Direct deposit of pay into employee bank accounts, when desired


• Appropriate calculation and withholding of federal, state, and local taxes


• Calculation of payroll taxes (Social Security and Medicare) to be paid by employer


• Filing of quarterly and annual payroll reports


• Depositing of withheld amounts with tax authorities


• Printing and filing of year-end employee tax documents, including W-2s.

Additional services may include:

• Management of retirement and savings plans


• Health benefits or "cafeteria" plans


• Timekeeping

In the United States, it is customary for the payroll provider to absorb the cost of penalties or liabilities incurred as the result of a mistake made by the payroll provider.

Do I need it?
Every company needs to pay its employees. The question is whether you should process payroll yourself, or outsource it to a payroll provider.

Here are the key considerations when evaluating 'doing it yourself' vs. outsourcing:

• Your expertise. Do you have sufficient payroll expertise to insure that you are in compliance with the applicable state, federal and local regulations?



• Nature of your work force. Do your employees work varying hours per pay period? Do you have high turnover or utilize seasonal workers? if so, doing it yourself becomes increasing more difficult.



• Multiple States. Do you have employees in multiple states? If so, your payroll becomes more complex.



• Simplification. What is it worth to not be saddled with the hassles and complexity of processing payroll? Are you prepared to pay a vendor to take over this job?

What does it cost?
Your actual cost for outsourced payroll services will, of course, vary by the vendor you select and the specific services included in your agreement.

As a rule of thumb, however, most small to medium businesses end up paying their provider roughly $3 to $5 per each paycheck processed.

When evaluating a vendor, be sure to undetstand the services that are included in your per transaction fee -- as opposed to the services that may require additional payment.

How do I buy it?
Once you've decided to outsource your payroll, you need to select a vendor.

Here's a checklist to guide you through the selection process:

• Services. Can you customize your program so that you receive the services you want, without paying for services you do not need? Ideally, you can select and pay for services from a menu that contains the following options:



• Basic payroll processing
  (calculations, withholding, check distribution and reporting)


• Direct deposit


• Payroll deduction for employee benefit plans


• W-2 processing
• Duration of the Agreement. How long are you obligated to stay with this vendor?



• Service Quality. How flexible and responsive is the vendor when you need assistance? What are the hours of operation of their call center? Is their user documentation understandable?



• References. Can you check references - and preferably ones that are within your geographic area and of a comparable size as your own business?



• Relaying Payroll Information. You need to "call in" your payroll data for each pay period. What options does the vendor provide for relaying this infomation? Typical options include telephone, fax, modem, courier or web.



• Tax Filing Services. Will the vendor file your company's state and federal payroll taxes on your behalf? Does the vendor support the Electronic Federal Tax Payment System (EFTPS), which is required when your company exceeds $200,000 in federal taxes.



• Payment of Penalties or Interest. Will the provider pay interest or penalties that may be imposed because because of a mistkake they make?



• Price. What is the total cost for their service? How long is the fee guaranteed, and what services are subject to additional fees? How will the price change if you increase staff or downsize?