Payroll is one of the “simple” business tasks that we often think that anyone can handle. After all it is just math, right? For those of us who aren’t either experienced in payroll issues or payroll professionals trained in the complexity of complying with local, state, and federal agencies and tax jurisdictions, we often don’t even know where the pitfalls are – until we find ourselves trying to claw our way out of the pit!
We all know that when it comes to dealing with OUR money we want people to get it right, get it to us on time, and do it consistently. When it comes to generating payroll for your small business, it means satisfying state and federal tax reporting, getting the pay correct for each employee, accurately generating the payments, managing the process effectively and minimizing the risks inherent in dealing with payroll. Too few business owners and payroll preparers realize that errors in generating payroll can create PERSONAL liability for the person or persons preparing the checks. For most small business owners, you are the person calculating and writing the checks.
Depending upon scope of your business and where it operates, different payroll issues come into play. Local, state, and federal tax and other agencies require reports, filings, and payments. You may operate in only one state. However, if your employees have financial obligations from child support or other judgments against their wages in other states do you know about them and how to follow the rules for those states? If multiple states are involved and there are multiple garnishments (see sidebar for definition) and types of garnishments, do you know how to calculate the amount to withhold? If they have multiple garnishments, do you know what order to calculate them in? How much time do you have to spend on payroll? As your business grows, so will the complexity of your payroll needs.
Do you have sales or other employees located in other states? This is a significant issue for small business owners. If you have sales reps working in other states, and they meet certain check points, some states say they are employed in their state. Do you know which states you are operating in, based upon the rules of the states you do business in?
State tax rates for workers compensation, state unemployment insurance and other state payroll deductions vary state by state. Keeping up-to-date with those changing rates and with filing requirements is the responsibility of the business and its payroll department.
Getting payroll right requires a robust system and is critical to your business. As a small business owner or manager, it is also personally vital. What alternatives do small business owners have for generating payroll?
- Manual Tracking, Calculations and Check-writing
- Bookkeeper, Accountant or CPA
- Accounting Packages and Stand-alone Payroll Software
- ASP Provider Software and Services
- Assisted Payroll Preparation Services
- Outsourcing to Payroll Companies
- Utilizing Professional Employer Organization
This is how most businesses begin – calculator, paper, time card, pen and checkbook. If you are computer oriented, then you may also utilize spreadsheets.
Accounting Packages – Built-in and Add-on Functionality
Everyone wants a simple to use payroll system; many, if not all, of today’s accounting packages have payroll modules available. Each system has a range of functionality, and assessing your needs now and for the future should be the first step in selecting your payroll system. (See sidebar for information on operational and functional needs of your payroll system.)
Examples of software packages available:
- Simply Accounting
- QuickBooks – Do It Yourself
- QuickBooks – Intuit Add-on
- Sage HRMS
Outsourcing Services – Payroll and Tax Reporting
Alternatives to handling your own payroll include payroll service companies like: ADP, Paychex, and other similar businesses. Regardless of size, you can usually find a payroll service willing to handle your payroll. In addition to payroll processing you can also opt for tax payment, human resources, 401(k), workers’ compensation and Section 125 plan services.
Let’s talk about some of the aspects of the payroll services that you can obtain from these companies:
Timekeeping and Attendance Records
- Time and Attendance Systems – these systems utilize software and electronic clocks to gather data and compile the time sheets for employees, enabling your business to apply your payroll policies consistently.
- Enhanced Time and Attendance Systems – include an aspect of “security” in that they are badge/bar code driven systems that clock employees in through electronic signals from badge to readers for example.
Payroll Tax Administration
- Calculating and depositing federal, state and local, Social Security , FUTA, and other taxes
- Filing tax returns and report reconciliations
- Responding to agency questions
Wage Garnishments Processing
- Deduction Calculations
- Payments to appropriate agencies
- Monitor law changes for compliance
Other Employee Related Issues
- New Hire Notification
- Unemployment tax rate
- Unemployment claims
- Termination processes to minimize unemployment claims
Employee Leasing – Professional Employer Organizations (PEO)
PEO’s may be a new concept for you. It was to me until the past few years. Essentially what a PEO does is put your employees on their books and handle ALL human resource, employee benefits and payroll related activities – including hiring, firing, and performance reviews. They work with you to recruit, evaluate, and dismiss employees.
How does this work? Well, the PEO provides a service to your business in return for a percentage fee over and above your payroll costs (salaries, wages, taxes, etc.). In return for that fee, they lease the employees you need, select and “hire” back to you. A reputable PEO can minimize the day to day operations related to human resource and payroll compliance issues. By utilizing their expertise, you have the ability to have a comprehensive, standard employment manual, expert screening, evaluation, and termination processes. Beyond the operational aspects, a PEO can provide the ability to provide competitive benefits for you and your employees through their ability to have a large group plan.
I’ll leave the specifics of the PEO operations and advantages to another time, but it is a “payroll” alternative that for many small businesses makes sense. The ability to delegate the complexity of human resource issues and payroll can relieve many of the pressures that small businesses have on them. Especially the not-enough-hours-in-the-day and the personal and business liability associated with payroll errors.
Things to Consider and Remember
Payroll is more than math. It is complying with local, state, and federal tax and employment regulations. There are many different software packages and add-ons that can facilitate the mechanics of generating the checks. Each one has its own strengths, weaknesses and advantages. Small businesses need to be concerned with more than the mathematical and technological aspects of their payroll systems. You need to be able to comply with multiple jurisdictions and have the ability to collect and accurately reflect information about your employees.
Payroll is about accurate documentation from the hire to the departure. It is more than the hours and pay rates; getting it right is critical to your business. As you grow, so will your payroll and related issues. Outsourcing the payroll preparation does not relieve the entire burden or risk related to human resource compliance. The ability to keep private information (like garnishments) confidential requires robust recordkeeping processes and knowledge of regulations. Further, misclassification of employees between exempt and non-exempt status under the Fair Labor Standards Act is an additional analytical and compliance process that has to be addressed regardless of the payroll system.
What actions should you take to make sure you are properly addressing payroll and human resource compliance issues?
- Take the time to do some research, check out the websites of payroll service and software providers, talk to other small businesses in your area, and talk with your accountant.
- Obtain information specific to your business
- Quotes from several providers
- Details of services – what they do and don’t do – For example: Will they make the tax payments and other remittance to other states or local jurisdictions? Does the PEO accept all cost for defending legal actions related to human resources and payroll issues?
- Get references and check with the Better Business Bureau, the Secretary of State and other regulatory bodies to determine the standing of any vendor
- Evaluate the various options and your business needs, choose the method that best suits you and your business – based on:
- Complexity of needs
- Degree of business risk
- Long term objectives and growth plan
- Consider hiring an independent expert to assess and consult on your human resource and payroll needs.
The choice you make today may not be the same once you reach 10, 50 or 100 employees. As you grow, reassess your options and make changes that make sense. It does pay to get it right!
Copyright © 2004 Lea A. Strickland, F.O.C.U.S. Resource, Inc.