Small Business Smart Tips for Outsourcing Payroll in 2014

Given the recent news that gross domestic product (GDP) grew at a 4.1 percent annualized rate in the third quarter, its fastest pace in almost two years, and that the jobless rate fell to 7 percent in November, which is its lowest level in five years, there are finally some good signs the economy is turning a corner.
Add to that the fact that Standard & Poor’s 500 stock index has soared more than 27 percent this year, setting the stage for its best annual performance since 1997, and there’s reason to hope that many small businesses will soon be on track to grow in 2014, if they aren’t already.

Oftentimes, part of growth is recognizing that some of the tasks and responsibilities that you as a small business owner were once able to handle all on your own have simply become too cumbersome. Moreover, the DIY approach may no longer be profitable, all of which means that the whole idea of outsourcing certain administrative tasks could very well be something you want to consider.

Building a Reliable Partnership

As is true of any decision in business, hiring an outside partner to do your payroll is not something you should take lightly. In fact, given the extreme sensitive and proprietary nature of the information that will exchange hands as a result, it’s critical that you take the job of creating an outsourcing partnership on this front very seriously.

Hire the right payroll outsourcing partner and you likely will be able to streamline your business operations and even reduce your cost of doing business such that you experience an increase in profitability. Hire the wrong one, and you risk paying a pretty steep price, both literally and figuratively.

Therefore, making sure you get solid references from other small business owners or companies that outsource their payroll before you jump in and hire just any firm to do the work is most important. After all, you’re developing what will ideally be a long-term working relationship. Plus, keep in mind that some firms will allow you to try their services risk-free for a certain amount of time so that you can get a sense of whether or not it’s a good fit for your specific needs and style of doing business.

Additionally, there’s one other very important point to keep in mind, and that is that any firm or individual that you choose to process your company’s payroll may very well be servicing your competitors. So watch out for conflicts of interest when you’re shopping for the best option to service your small business’ payroll needs, and make sure you have the assurance of the firm or person in question that there will be no problems if that is the case.

Cost-Benefit Analysis

Outsourcing your payroll function will require you to relinquish a fair amount of control, perhaps for the first time if you’re not one to delegate such important tasks to others. And while the whole idea of delegating can be a challenge, especially for small business owners who are so accustomed to doing everything themselves and wearing so many hats, it can also be incredibly liberating.

At the same time, hiring out for these kinds of services means having a full understanding of what you do and do not need. Many payroll services providers offer all-inclusive packages, and for smaller companies, all those bells and whistles may not be necessary. Make sure you’re getting only what you need most and that you pay accordingly. Don’t be lured in by a slick sales pitch such that you end up paying for a level of service you won’t ever use or don’t even want.

What is most important is to go in with your eyes wide open, to know what the pros and cons of outsourcing really are where payroll duties are concerned and to be prepared to either enjoy or deal with them accordingly.

So here they are…

Outsourcing Your Payroll Function: The Upside

There are a good number of pluses to outsourcing payroll duties, but we’ll try to cover it all in just three to keep things really simple:

Cost Savings — On average, outsourcing payroll beats handling it all in-house by as much as half, especially for small businesses. It enables you to save money on everything from in-house staff and their associated benefits, as well as business payroll software, computers/printers and overall IT costs. Of course, the scenario is different in each case, so you need to take a hard look at all of the costs associated with hiring an in-house bookkeeper or other accounting professional before you make the final decision to hire out-of-house.

More Free Time — Okay, maybe free time is a misnomer. Let’s just say you’ll have more time to focus on other things, like servicing clients or marketing. You know, things that might actually enhance your overall profitability. And let’s not forget the time you will save in NOT having to manage the myriad of problems associated with in-house payroll processing and mastering all the latest changes in the tax code. Let’s just say, outsourcing your payroll function means greater convenience, efficiency and flexibility on a number of levels.

Expertise to Manage Complexity — If you’re like the vast majority of SMB (small and medium-sized business) owners, you’re not a payroll expert by trade. Hiring out for these kinds of services means you have access to the best practices in the industry, as well as the latest technology and experienced professionals to manage it all for you. Payroll firms are typically able to handle benefits, pension and retirement savings programs and taxes, all under one roof. They can also be relied on to be on top of frequent payroll tax changes, filing your W-2 forms, making direct deposits in a timely fashion and even keeping track of contract-labor filing forms. Moreover, a payroll company is oftentimes better equipped to manage the overall complexities of employee payroll to avoid costly mistakes and ensure payments are made on time. Given the IRS (Internal Revenue Service) levies fines so readily on business owners who make errors on their payroll-related taxes and that those fines can easily cost more than the amount of the error itself, getting it right the first time is a big deal.

Outsourcing Your Payroll Function: The Downside

Of course, where there is good news, there can also be bad, and outsourcing is no exception. Here are just some of the potential pitfalls of hiring out your payroll duties:

Data Access and Security Threat — Farming out your payroll means you may very well be giving up the ability to have instant access to a lot of employee data, which can slow up your decision-making. Additionally, the data you are releasing to your payroll service provider is about as confidential as it can get, so you have to know without a shadow of a doubt that whatever firm or individual you hire is capable of protecting the information. Otherwise, you will be extremely vulnerable to theft and/or employee lawsuits, none of which is inviting.

Slower Response Times — Turning over the reins for any of your core business functions means you may have to get used to waiting in line for a change. There’s no question that having an in-house payroll person or even doing it yourself can mean you get all the answers you need when you need them, especially if there’s a problem that needs to be addressed quickly. However, given that the benefits of outsourcing your payroll function are likely to be pretty indisputable, it might very well be worth the trade-off of your having to have a little bit more patience on occasion.

Giving up Control — Whenever you as a small business owner give up control of anything, there is a risk that mistakes will be made, and while that can also be said of doing things in-house, it can be more exasperating to deal with them outside-in versus inside-out. Put most simply, it can be harder to both catch and correct mistakes when things are not being done in-house. Moreover, anytime you use an outsourcing partner, you run the risk of having to cope should that company or firm go out of business, so it’s critical to choose a well-established operation with a solid track record. Lastly, and this is a timely concern, the IRS warned as recently as this past July that individuals and companies around the country who and that provide businesses of various types and sizes with payroll processing services were being prosecuted for stealing funds intended for the payment of payroll taxes.

THREAT ALERT: A Recent IRS Warning

What many business owners may not realize is that, should they be the victim of the kind of scam the IRS warned about this summer, they are still very much legally responsible for any and all payroll taxes that are due. This includes any federal income taxes withheld, as well as both the employer and employees’ shares of Social Security and Medicare taxes, and is even true if the employer forwards tax amounts to a PSP (payroll service provider) or RA (reporting agent) to make the required deposits or payments.


To protect you and your business from these kinds of unscrupulous third-party payers, the IRS recommends taking the following steps:

Make sure the PSP or RA uses EFTPS (Electronic Federal Tax Payment System) to make tax deposits. Free from the U.S. Department of the Treasury, EFTPS ensures employers have safe and easy online access to their payment history when deposits are made under their EIN (Employee Identification Number). It also gives them the option to step in and handle things on their own should that become necessary. To enroll or for more information, you are encouraged to call toll-free 1-800-555-4477 or go to

Don’t substitute the third-party payer’s address for that of your business. The IRS recommends that all employers use their own address as the official address of record so that they will continue to receive bills, notices and other account-related correspondence directly. This approach gives employers yet one more way to monitor any third-party involvement and spot inaccuracies, inconsistencies or other red flags.

Contact the IRS asap if you see a problem. Should anything look out of place or like there is a problem with a payment or if you as a SMB owner and employer receive a notice by mail from the IRS, you are urged to contact the agency as quickly as possible.

Be aware of special rules that apply to RAs. Reporting agents are required to use EFTPS and file payroll tax returns electronically, and they also are required to provide employers with certain information on a regular and routine basis. To learn more, see Reporting Agents File on the IRS website.

Know your tax due dates. As a small business owner, it is imperative that you know the tax due dates that apply to you as an employer just so you can keep tabs on whether or not your payroll outsourcing partner is doing his, her or their job. The IRS provides a Small Business Tax Calendar to help you keep track.

For further clarity on what the differences are between a PSP, an RA and an Agent, the IRS has a chart you can review here at Third Party Arrangement Chart. And for more information on outsourcing payroll and third-party payers, go to Outsourcing Payroll to Third-Party Payers now!