August 3, 2011

Small businesses historically have been the job generators, creating more than 60 percent of all new jobs. One thing that may be holding some companies back from hiring is the sheer burden of managing a payroll. Earning the money to pay employee wages is easy compared with the federal and state responsibilities connected to payroll. Using an outside payroll service can help.

The good

As an employer, you have to do all of the following, even for one employee:

• Figure employees’ withholding for federal and state income taxes (if applicable). Depending on the benefits offered by your company to staff members, other withholding may be necessary for medical coverage, 401(k) plan contributions, life or disability insurance, etc.

• Deposit employment taxes with the U.S. Treasury and state.

• File quarterly employer returns with the IRS and state. (There’s also an annual federal return for federal unemployment tax (FUTA) purposes.)

• Report withholding annually to the employee and the Social Security Administration.

Failure to comply with any of these requirements can result in penalties. While there are some breaks for very small employers, such as annual filing instead of quarterly filing, most employer responsibility is across the board.

Relying on an outside professional can ease the burden of this responsibility. The party you engage, which can be a payroll service such as ADP or Paychex, an accountant, a bookkeeper, or other payroll professional, knows the ropes and follows through on your behalf. They stay up on the latest changes. For example, new withholding tables take effect in Connecticut on August 1 to reflect a tax hike retroactive to January 1, 2011. A payroll professional can assist a company with a wide array of services, including retirement plans. The time and stress you save by shifting payroll chores to an outsider can be considerable.

The bad

The bad news is that these payroll services aren’t free. Depending on who you use as well as the size of your staff, the cost can be moderate to substantial. From a strict numbers standpoint, it may be less costly to handle payroll internally, by yourself, your company bookkeeper, or someone else able to do the work. QuickBooks’ payroll may be all that’s needed for you to manage payroll chores.

However, if you want to use an outside professional, look for ways to minimize costs:

• Consider using a local payroll company, which generally cost less than national payroll companies. Of course, the national companies are highly reputable and offer a wide array of payroll-related services that may not be available through local companies.

• Consider using an outside bookkeeper rather than an accountant because the hourly rate or fixed cost for payroll services will usually be lower. Again, you get what you pay for—the accountant’s expertise may be worth the extra cost to you.

You can get free price quotes from providers through PayrollServiceProvider.com.

The ugly

Unfortunately, there have been cases where a payroll service absconded with a company’s payroll money rather than depositing it. In all of these cases, the company still owed the taxes (plus interest and penalties) to the government. So even if you use an outside payroll professional, you remain liable for all employer responsibilities.

• If the outside professional fails to deposit the taxes, you are on the hook.

• If the outside professional is late in filing employer tax returns, you owe the penalty (although you probably can recover it from the payroll professional).

Bottom line

There are many good reasons to use outside help to handle payroll responsibilities rather than doing it in-house. Make sure to use only a reputable payroll professional. The IRS maintains a list of payroll service providers that have met certain requirements for transmitting electronic business returns to the government, which may be helpful but is no guaranty of reliability. Whoever you decide to use, follow up to see that deposits have been made and returns have been filed so you can rest easy.

Related Topics

• Managing

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Barbara Weltman, Article, payroll, taxes, managing