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Questions to ask a payroll service provider |
Does your company run its payroll, or find itself running around doing payroll? If you're in the latter group, you're not alone. Thousands of business owners have come to the conclusion that it's easier, more accurate, less stressful and often less expensive to outsource the work to payroll provider services.
· Is payroll their primary business?
· Have they had an SAS 70 audit performed by a reputable CPA firm?
· What is their disaster recovery plan?
· Do they have a strong management team?
It might surprise many business owners to find out what types of companies turn to payroll services. The industry was founded about 50 years ago primarily to service medium-sized businesses that couldn't afford the expensive equipment that was necessary to quickly print and distribute paychecks. Large companies typically had their own automated payroll departments and small companies did it manually because they couldn't afford to outsource the work. That's all changed with the advent of overnight mail and inexpensive software packages that make it affordable for even the smallest businesses to do payroll.
Even though it's become affordable for most companies to do their own payroll duties, it's anything but easy. The IRS has taken a big-stick approach in forcing employer compliance in paying taxes correctly and on time. More than one in four business tax returns contain errors in employer tax reporting, resulting in about $3 billion annually in penalties.
The other issue is employee satisfaction. Surveys by the American Payroll Association (APA) show that only about 70 percent of the workforce is very confident that their paycheck is accurate.
Payroll services have lowered their prices and expanded the range of services they offer to capture more of both the small and large business markets. Payroll providers are now often the first outside contractor hired by emerging small businesses.
"Payroll is a complex, technical function," says Robert Wagner of the APA, which is based in San Antonio, Texas, but has offices in New York, Las Vegas and Washington, D.C. "Outsourcing the work allows a company to concentrate on its critical core function, be it manufacturing a product or delivering a service." Businesses with from five to 5,000 employees can benefit from the services of a payroll provider, he says. But the procedure for deciding whether to outsource payroll is the same for small or large companies.
First, do the math. Figure out how much it costs to do payroll on a per-check or per-employee basis, says Wagner.
"It's important to really examine your payroll operation closely," he says.
Ask yourself whether your existing IT department can handle the company's current and anticipated payroll needs. If additional software, hardware or personnel is needed, would the money be better spent on IT projects that are more critical to the success of the company?
Take a look at how the prospective payroll provider meets your needs. If you're a small, growing company, you might prefer to go with a smaller payroll service that offers other accounting services that will be helpful as you grow. A smaller payroll provider might be more willing to spend time teaching you the ropes.
Larger businesses, especially ones that operate in many states or countries, should seek a payroll company with experience handling complex accounts, Wagner says.
You can still find payroll services that perform only the most basic functions, such as merely "cutting the check." But they are increasingly offering a wide range of other services, including state and federal quarterly and annual employer tax filings and payments, W-2 filings, registering new employees with state agencies, overseeing pension and health plans, tracking vacation and sick leave, providing direct deposit, debit cards, online access and other technologically driven services, and miscellaneous accounting functions.
Develop a flow chart of who currently does what payroll and human services functions in your company. Even if you decide to hire a payroll service, you might be able to save money by doing some of the work in-house, such as keeping track of time cards.
Insist on a written agreement that outlines each party's responsibilities. Ask the payroll provider to clarify what services are included in the cost. Who pays postage for the checks, for example? What happens when you need to make changes to the program? How often do you pay the provider? Who is responsible for sending in tax payments? Will tax payments be automatically deducted from the employer's business account? | 
