Benefits of Outsourcing Payroll Against Payroll Software

The essentials element of payroll administration in the UK is to accurately calculate the income tax and national insurance contributions deducted from the employee each pay period, produce payslips for each employee and account to the tax office for the payroll deductions.

Running a payroll system is natural for medium and large companies who may employ specialist payroll staff to perform these functions. Many medium companies may still choose to outsource the payroll function leaving many of the technical issues that might be encountered to a specialist payroll service.

Small businesses may choose to outsource the payroll function because they are not familiar with the paye system although HMRC do run seminars to assist employers. The payroll system not only calculates the tax and national insurance deductions but also has to deal with tax code changes, new employees and changes to existing employees plus taxable benefits and allowances such as statutory payments for sickness and maternity leave, contracting out of the state pension scheme and student loans.

The main benefit of manually producing the employee payroll is the reduced cost although the time spent on the payroll function by the proprietor may be better spent running the business. The cost may not be the cheapest option if an employee is required to produce the payroll. Purchasing payroll software can save significant time and costs for the small business that chooses to prepare and control its own payroll function. Although time is more important as the payroll production cost is not usually a big issue.

Outsourcing payroll adds a small additional cost to running the business but would normally carry worthwhile benefits in reducing the time spent on the function and reduces the paye administrative burden.

Main benefits outsourcing the payroll function.

1. Frees up time in calculating the payroll deductions and dealing with different and sometimes complex employee circumstances.

2. Using a professional outsourcing service to advise on potential payroll problems and difficulties.

3. The cost of outsourcing payroll should be compared against the cost of employing specialist in house payroll staff.

4. Payroll services use payroll software and are more likely to produce accurate tax and national insurance deductions and pay records reducing the prospect of problems with the tax authorities.

5. Payroll administration such as preparing the tax deductions schedules, dealing with starters and leavers, year end certificates for employees and the employer annual returns are normally all automated as part of the payroll service

6. The outsourced service company should also be responsible for producing employee payslips, advising tax and deductions liability and in larger businesses also provide a payroll analysis for accounting purposes.

Alternatives to outsourcing payroll functions.

Finding a suitable outsourced payroll service is not difficult. Local telephone directories or searching the internet would produce many potential payroll service providers.

Many accountancy firms offer payroll services to their clients and although the prices may struggle to be competitive price is always negotiable. Using the business accountant for the payroll has advantages since a substantial cost area for most businesses is already known to the accountant since they prepare the numbers.

Choosing payroll software.

The major alternative to outsourcing the payroll is for the business to acquire and use payroll software.

Larger companies require payroll software that has incorporated within it all the potential pay scenarios and also be capable of dealing with high numbers of employees. Large comprehensive packages can be complex to operate and require specialist wages staff.

Small business may choose simpler less complex payroll software packages that meet the basic needs of the business. It is important the person running the payroll within the wages function understands the payroll essentials and legal payroll administration requirements.

The advantages of choosing payroll software is basically the cost should save the business money against outsourcing the payroll, should retain control over the function and liabilities and ideally should take no more time that supplying employee details and gross wages to the payroll service.

If the business chooses to adopt a payroll software package then the complexity of the package should be considered and also the attributes and capabilities of the chosen software to produce all the payroll requirements in relation to pay and wage deductions, paye administration and employee payslips.

Employee or Independent Contractor

Generally, business growth is accompanied by a higher head count, which in turn is accompanied by growing tax and employee benefit challenges. Many business owners may be tempted to minimize the impact of these challenges by classifying workers as independent contractors rather than employees. However, it is critical that business owners correctly determine the individuals providing services are employees or independent contractors.

Business owners have various statutory obligations arising from wages, including the responsibility for withholding income taxes, withhold and pay Social Security and Medicare taxes, pay unemployment taxes on wages paid to employees along with various payroll reporting and filing requirements. In contrast, the statutory obligation relevant to independent contractors is very limited and includes the annual preparation and filing of form 1099.

A key factor in the determination of whether an individual providing services is an employee or independent contractor, is the issue of control; accordingly all information that provides evidence of the degree of control and independence must be considered. According to the Internal Revenue Service (“IRS”), the facts that provide evidence of the degree of control and independence fall into three categories: (1) behavioral – the company control or have the right to control what the worker does and how the worker does his or her job; (2) financial – the business aspects of the worker’s job, including how the worker is paid, whether expenses are reimbursed, and ownership of the supplies, tools and equipment, are controlled by the payer and (3) the type of relationship – when the type of work performed by the worker represents a key aspect of the payers’ business; and the worker provides services exclusively to the payer; it is more likely than not the worker is an employee.

It is critical that business owners look at the entire relationship, consider the degree or extent of the right to direct and control the relationship. Additionally, business owners should document the factors used in coming up with the determination.

Inaccurately classifying employees as independent contractors may result in significant costs, as the employer may be held liable for the employment taxes for those employees. However, if there is reasonable basis for inaccurate classification, the employer may obtain partial relief from the associated financial liability, subject to compliance with certain IRS corrective actions, such as participation in the Voluntary Classification Settlement Program, (“VCSP”). Under the VCSP taxpayers are allowed the opportunity to properly reclassify their workers for future tax periods, with partial relief from the federal employment tax liabilities.

Hiring a Payroll Services Vendor – Does it Make Sense For Your Business?

Outsourcing particular business tasks can enable you to free up resources and energy to focus on your core competencies. Payroll is an important function and in all likelihood it makes sense to outsource payroll administration rather than hire resources in-house and dedicate them solely to the function. Payroll companies help you organize your payroll, adhere to policies and procedures, and get employees paid on time.

To stay on top of your tax obligations is reason enough for your company to consider using a payroll provider. Payroll administration warrants attention to detail and even the smallest indiscretion can attract heavy penalties from the tax authority of your country. In the US, the IRS has a history of levying heavy fines on small businesses for even the smallest transgression. Recently released statistics show that one out of every three small businesses is penalized in some way for not complying with tax laws.

Why should you outsource payroll processing? If you company is large enough, you may choose to conduct payroll functions in-house but be prepared to hire at least a couple of employees dedicated to this function. You will also have to allocate resources to continuously train your payroll staff in use of accounting software and to keep up with the frequently shifting state and federal tax laws. Also if you are a growing company that is continuously adding new employees, teams and locations, managing payroll is going to be quite a challenge. Do you really want to get distracted from the core-functions of your business by administering payroll yourself?

Payroll service providers are experts in what they do and have economies of scale since they administer payroll for many other companies. More than likely, they will deliver payroll services to your company cheaper and more efficiently that what you can do yourself.

What Services Do Payroll Companies Provide? Payroll companies provide various services. The following are the most common:

o Calculating pay checks for each employee

o Addressing tax obligations on a local, state, and federal level

o Printing and delivering checks

o Providing management reports

o Tracking employee benefits information

o Automatic check signatures

o Providing direct deposit

o Processing W-2 forms

o Processing 401k and mutual fund plans

o Addressing tax needs for your company and providing tax preparation

How to choose a Payroll Service? Ask for quotes from several payroll companies before making a final decision. An easy way to request quotes from multiple providers is to go to a B2B networking portal like Trade Seam. Keep the following in mind as you decide on the provider.

o Can they provide accurate payroll service without any mistakes in employee pay or providing tax information to the government? Ask for history of efficiency.

o An occasional mistake is acceptable but how quickly can they correct it. If the payroll service provider is overstretched, they may not have the resources to quickly provide the remedy.

o Is the payroll providers system and software compatible with your own operating systems? Would it be possible to transfer data to and from your business easily?

o Are the references flawless? Excellent customer service to business owners and its employees is important.

o How many clients is the payroll provider serving? Large number of clients may indicate a successful service but attrition in the past few months may indicate deteriorating quality. Does the provider have adequate resources to serve your business?

o Is the pricing competitive? Some companies may bait you with low basic fees and charge heavily for extras. Ask for an all inclusive package to compare prices.

Once you decide on a payroll provider, scrutinize the contract very carefully for any hidden fees or charges that may kick in after a few months of service. Check the first few pay checks very carefully for any mistakes. It is better to uncover the issues early enough before they get compounded and more difficult to fix.

Hiring a payroll provider is an important decision for your business. It is tough to easily switch a payroll provider if you make the wrong decision. Make sure you adequately research all possibilities before making a final decision.