If you’re processing your own payroll, there are 3.8 million small business owners out there just like you. Given the versatility and self-reliance it takes to run a business, this is hardly surprising. It’s even admirable to a degree. The problem is that payroll is one of those administrative hassles that you don’t have to shoulder. In fact, it’s typically the first service that businesses consider outsourcing — often at the advice of their accountants.
Outsourcing payroll reduces costs, saves time, and eliminates the need to keep up with changing tax regulations. These general facts make a good argument for outsourcing, but a closer look at the facts makes an even more compelling case.
An up-close look at the savings
Time and administrative hassle Processing your own payroll requires 54 steps and eats up between 40 to 60 hours each year, even for two-employee companies.1 It’s tedious work that requires constantly updating records, printing checks, and answering employee questions. Employers who farm out their payroll have less paperwork and spend just a few hours on payroll each year.
Money Anyone who runs a business knows that time is money. If the person who handles payroll earns $35,000 per year, works 40 hours per week, and spends 60 hours processing payroll each year, then $1,100 of his or her yearly salary goes toward managing payroll. If the business owner processes payroll, the cost may be two to three times that amount, or perhaps even higher.
Relief from tax penalties and overpayments Each year, 40% of small businesses pay the IRS an average penalty of $845 for improperly filing their payroll taxes.2 Similarly, businesses overpay state and federal unemployment insurance by $1.45 million each year. These kinds of miscalculations would be greatly reduced if more businesses outsourced their payroll, since processing companies keep track of continually changing tax laws and assume full liability for correctly filing payroll taxes. In the process, payroll-processing companies shield businesses from dealing directly with the IRS.
The advantage over software Processing payroll internally requires training, software and software upgrades, and extensive paperwork. Even when businesses use payroll software, they still have to remember deadlines and to process and mail checks. Outsourcing payroll eliminates all of these headaches.
- “How To Make Payday Less Painful”, Business Week, February 9,1998