It’s no secret payroll can be a major headache for employers, no matter what size business you have. The good news is payroll service providers can alleviate many of the hassles associated with payroll, help you maintain compliance with the tax code and ultimately save your business money. The following details what payroll is, lists common payroll challenges and explores ten ways a payroll provider can help your business.
What is payroll?
Payroll refers to the processes you use to pay employees; however, it’s not as simple as tallying hours and paying wages. Payroll encompasses many different aspects of payment and reporting, including:
- Salary and hourly wages
- Payment processing and distribution
- Paid leave
- Employee tax withholding and deductions
- Employee information and time tracking
- HR compliance
- Tax reporting, deposits and filing (federal, state, county and city)
With so many moving parts, payroll presents multiple challenges to businesses both large and small. That’s why many employers outsource to payroll service providers.
Common payroll challenges
You have a business to run, but payroll alone can seem like a full-time job that distracts you from daily operations, management and business growth. Here are some of the payroll challenges employers face.
This is a big one, and one of the most difficult to keep up with. The payroll tax code is complex and it’s constantly changing – sometimes more than once per year. Keeping up with changes in federal, state and local taxes is a chore, and complicated regulations for overtime, unemployment (FUTA), healthcare (ACA), employee withholdings and benefits reporting requires expertise that is often outside an employer’s scope of business. The payroll tax code calls for accurate reporting, quarterly deposit payments and on-time filing. Make a mistake or miss a deadline, and you could incur costly penalties plus jeopardize your eligibility for important tax credits that significantly reduce your payroll tax liability.
Payroll processing and distribution
Weekly payroll processing can take a lot of time, especially if you’re still manually processing payroll. You must spend time adding up employee hours, making deductions, transferring funds and creating paychecks; and, if you don’t have direct deposit, you need to distribute paychecks to each employee. That alone can make payroll a full-time job for even small employers with just a few employees.
Employee time keeping
Keeping track of employee hours can be difficult, especially if you don’t use time keeping software. You might rely on employees to manually track their own hours or to clock in with an archaic time system. As much as many of us hate to admit it, the honor system isn’t always accurate (even if good employees are well-intentioned) and could cost your business money in wages paid for unworked hours.
It’s critical to accurately report employee wages, benefits, deductions/withholdings and other information for tax purposes, in-house accounting and budget projections. However, it can be easy to make mistakes if you don’t have a good system to track employees or if you don’t have a good grasp of the tax code. For example, do you know which employees should be classified as exempt and non-exempt for overtime? How about which employees qualify as part-time, full-time and full-time equivalents for ACA reporting? Do you offer fringe benefits such as a retirement plan, meals or company vehicles? If so, do you know which types of benefits qualify as taxable compensation for payroll purposes and which are exempt? Misclassifying employees and miscategorizing compensation can cost you money and land your business in legal hot water with the IRS. It’s best to check with your legal counsel to understand how to classify employees and categorize compensation to help you comply with various tax regulations.
Security and data management
Collecting, storing and managing employee information can be time-consuming, even if you store records electronically. Not only that, but you should be up to speed with the latest data privacy laws, including HIPAA laws that protect employee medical information. Whether stored physically or electronically, it’s important to keep employee data secure to avoid potential lawsuits and other legal liabilities. That can prove an enormous task for employers who might not have the resources to secure servers, computers, cloud-based software and other data storage mechanisms.
Unique payment terms
Weekly, biweekly and monthly paychecks and direct deposit remain the norm. However, flexible payment options, daily payouts and payments due at the time of service – especially for contractors and remote workers – are becoming more common and might not fit into your current payroll processing system. Do you hire overseas workers or digital nomads? They might demand payment in foreign currencies. Transferring funds might require familiarity with international banking laws and policies.
Verifying employee information
Tax regulations require accurate employee information, so it’s important for employers to verify things like legal names, addresses, phone numbers, social security numbers and eligibility to work in the United States. The verification process can be time-consuming; even if you use a background check service, you still must manually review the results to determine whether employee information is valid.
Identifying tax credits and deductions
The better you understand the tax code on all levels – federal, state and local – the easier it is to identify and apply tax credits and deductions that can have a significant impact on your bottom line. You can also avoid misapplying tax credits that could result in costly penalties. However, many employers simply don’t have the time (or desire) to become an expert in payroll taxes. Sound familiar? If so, you risk missing out on key tax savings.
Automating certain payroll activities is a fantastic way to streamline your organization; however, many employers don’t have the technology or resources to create an automated in-house system that enables employee self-service, time tracking, reporting and other activities. A cloud-based system can simplify employee onboarding and allow employees to enroll in benefits, track their time and take other actions without the need for HR or other human intervention.
You want your business to grow, but each new hire adds more time to payroll processing. Manual tracking and outdated systems such as Excel spreadsheets aren’t easily scalable and hinder business growth. Savvy businesses invest in systems that can be scaled from simple one-employee operations to corporations that employ hundreds or thousands of people under multiple divisions.
As mentioned, payroll can be highly complex and time consuming. Even if you hire an in-house team or have a full HR department, payroll activities can distract staff from other critical duties needed for daily operations as well as high level projects designed to help maintain compliance and foster business growth. Not only that, but training can become a major expense – every time the tax code changes (which is often), you might need to invest in training so your entire staff is up to speed with the latest laws.
9 reasons you need a payroll service provider
If executed incorrectly, payroll can be a major challenge for businesses, and can potentially put employers at risk for legal issues. That’s why many businesses choose to outsource to a payroll service provider. Here’s what a payroll provider can do for your business.
1. Tax and regulation compliance
Payroll service providers help businesses stay on top of tax law changes and knowing which forms to file, which payments to make and when everything is due to help businesses maintain compliance. They may also be able to assist with classifying employees, categorizing compensation, applying benefits and complying with FUTA, ACA, unemployment and other regulations.
2. Accurate reporting
Outsourced payroll service providers often have cloud-based software that makes it easy to accurately track employee time, wages paid, benefits, deductions and more information. If you need to look up or supply information to satisfy tax agency queries, you can find it at the click of a button (or simply send the query to your payroll service provider).
3. Automated employee onboarding and self-service
Payroll providers offer software that streamlines employee onboarding and enables employees to self-service their accounts without the need for in-house staff. That frees staff to focus on high-level activities and enables employees to enroll in benefits, change information such as addresses or phone numbers, input new employee information and track their time.
4. Employee information verification
Payroll service providers often offer employee information verification services, including background checks and verified eligibility to work in the United States. Whether you need to verify applicant information and check criminal history before you make a new hire or you need to ensure employee information is accurate on I-9 forms, an experienced payroll provider can help.
5. Secure, organized data management
Outsourced payroll providers have secure technology in place to protect employee records and allow account access only to authorized personnel, which can help you comply with important employee confidentiality regulations. They also present employee records and other data in an organized fashion so it’s easy to retrieve when needed.
6. Accurate employee paychecks
Meeting your tax obligations and tracking employee time are only part of the equation; you also need to process and distribute accurate employee paychecks. Payroll service providers can help you make accurate deductions/withholdings on each employee’s paycheck. Overtime payments are calculated accurately (and applied only to non-exempt employees). If an employee’s wages are garnished, payroll providers can help handle that, too.
7. Flexible payment options
From paper checks and direct deposit to employee pay cards, international payments and other alternative payment options, payroll service providers have the capabilities to meet the flexible payment demands of a diversified workforce. They can also be set up to deliver payouts at different intervals: on demand, daily pay, weekly, biweekly, monthly and more.
Growing businesses need payroll systems that can scale with them, and outsourced payroll service providers can help with cloud-based software that works for businesses of any size. Whether you’re a small business with just a few employees or a major corporation with thousands of employees – or any size business in between – expert payroll solutions can help you continue growing without the need to change your payroll system along the way.
9. Save money and resources
Outsourcing your payroll can free human resources to tackle other issues and foster business growth. You also won’t need to invest as much time in training new employees or paying for training programs every time the tax code changes. You also won’t need to panic if a key employee quits right before tax season. Hiring a payroll service provider can amount to significant savings for your business. Ultimately, payroll service providers can help employers save money, comply with tax laws, avoid penalties, efficiently deploy in-house staff and reduce worries and headaches about payroll and compliance. If your business struggles with payroll – or if you feel payroll could be handled more efficiently – it might be time to explore what a payroll service provider can do for you.
Editor's note: This blog post was deemed accurate at the time of publication and may not reflect recent changes related to payroll law. The information provided in this blog does not, and is not intended to, constitute legal or financial advice.