Should I Outsource My Payroll?

Should I Outsource My Payroll?

You’ve set up shop and hired your first employee — even if it’s yourself. Now it’s time to think about how your business will handle payroll.

Most experts agree that unless you’re in the accounting business, outsourcing payroll is a smart move. Maintaining the duties yourself is not only time-consuming and keeps you away from your core business — but it’s also a landscape of compliance issues and tax levels that’s constantly changing.

“If you’re making more than $100,000 a year as a one person, you can probably save more in taxes if you become your own employee rather than just getting the money and using it, things like that, as a business,” says Raj Tumber, a Las Vegas-based U.S. Small Business Association SCORE mentor and business consultant. Of course, you should always check with your tax preparer to make sure this makes sense in your situation.

What’s more, some payroll companies also offer HR services, which is a valuable added benefit to a small business. If there’s an HR-related lawsuit, for example, a large company probably has the legal and financial resources to fight it, says Tumber. “But with small business, you don’t have enough reserve if some employee comes back and tries to sue you.”

Even larger, emerging businesses with on-staff accountants outsource payroll. “In some instances, the client’s in-house accountant was overworked and needed more help because the company was growing,” says Jean Kruse, a retired Iowa CPA and mentor for the SCORE program.

Kruse says that even if you decide you want to take over the payroll in the future, make sure you’re clear on how to make the necessary deductions, what taxes to pay and when they’re due. “While each step is not that difficult, it is very time consuming and if the taxes are not paid on time, the penalties can break a company,” she warns. Kruse suggests following an outline to make sure you’re fulfilling all requirements so your employees have a payroll structure they can count on.

Here are several steps to preparing your payroll:

Determine Your Pay Period

Time the paycheck to employees for at least a week after the end of the payroll period so you have plenty of time to complete all of the requirements. This also gives you time to fund the full payroll. But whatever you do, don’t postpone a payday: Many employees live from paycheck to paycheck, and it’s a bad idea to change a payment date when your employees are relying on a set pay cycle.

Decide How Often Your Employees Get Paid

Do not choose a weekly pay period. Arrange for at least a bi-weekly or semi-monthly pay period. “One reason for this is that the payroll outsourcing service will charge you for each payroll they prepare,” says Kruse. “The fewer pay periods, the less cost it will be to you.”

Gather All Necessary Payroll Forms

Get each new employee to complete and sign a state and federal withholding allowance form W-4, as well as an I-9 for employment eligibility. There’s also the W-9 form, the request for taxpayer information that you’d provide to contract employees.

Keep a separate personnel file for each employee where you keep everything pertaining to that employee. You should also keep all payroll records for at least four years, and make sure the payroll processor gives you a copy of all payroll tax forms filed on your behalf.

Don’t forget about the privileged information your employees know. Are there trade secrets that go along with your business? You may need an attorney to draw up confidentiality agreements, as well as non-compete agreements.

Have a Plan for Payroll Errors

Finally, understand that everyone makes the occasional mistake, and it’s more important to understand that even if a payroll company makes an error, you as the business owner will be held responsible. Established payroll companies such as ADP offer an online portal where you can monitor what’s happening—and communicate immediately if you see a problem. The U.S. Small Business Administration offers more tips for setting up your payroll system:

Vanessa McGrady

About the Author


Vanessa McGrady is an award-winning communications expert skilled in creating content for national publications, Fortune 200 corporations and small businesses.

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