The vast majority of business people, particularly those with small businesses, aren’t accounting experts. They simply do not know how to properly run a payroll system. Indeed, processing payroll can be both confusing and challenging for such businesses and there is always the fear that they could get things wrong, which would lead to significant penalties from the IRS. Because of this, they are often intimidated by payroll as well. Unsurprisingly, therefore, there is a huge market for payroll outsourcing services, which offer a number of key advantages.
1. Outsourcing Is Cost Effective
If you want to complete your payroll processing properly, you will need to hire a CPA (Certified Public Accountant). Hiring a CPA is quite expensive. You can expect to pay between $260 and $480 for each payroll run, which has to be done twice each month. A CPA does have all the proper training that ensures your payroll will be done properly. Hence, having one in house means that you don’t have to worry about getting things wrong. However, you can expect them to charge between $65 and $120 for an hour’s work, and you will need them for around four hours for each payroll run, and if you pay your staff every week, or every other week, this will soon become very expensive.
If you outsource it, however, you will have the accuracy and benefits offered by a CPA, but without the huge expenses. Instead, you can benefit from affordability, accuracy, and ease. You can save thousands of dollars each year by opting to outsource.
The Cost Example:
Let’s take a look at the calculations to give you an idea of just how much you would save if you were to outsource. Let’s assume the business has four employees, with a monthly payroll. And let’s say you found an affordable CPA, charging $65 per hour. In this example:
1. Outsourced payroll costs on average $44.95 per payroll run, and an added $1.85 for each employee. That is a total of $52.35.
2. In house payroll takes, on average, four hours to complete, costing, therefore, $260.
This means that you could save as much as $207.65 per month by outsourcing.
2. Outsourcing Avoids IRS Penalties
If you cannot pay for a CPA and you decide to do things yourself, you will quickly find this to be a whole lot more complex than you may have anticipated. Payroll laws also change all the time. This makes it very easy to make a mistake. Did you know that the IRS penalizes around 40% of small businesses each year for mistakes in payroll taxes? That is a lot of businesses, and the average penalty is $850 per year. This means that, if you do decide to complete your payroll yourself, there is a big chance that you will end up paying more than you would have if you had hired a professional instead. When you outsource your payroll, all your small business taxes will be calculated, paid, and filed properly, with no mistakes made. The process is fully automated, which means you will also never be late with your payments. And if something does go wrong, the responsibility will contractually lie with them, not with you.
3. It Is Easy to Outsource
You are likely to find it surprisingly easy to outsource your payroll services if you are a small business. It will only take a couple of minutes to set you and your employees on the system, and you will then be good to go. All you have to do is log into your portal and provide the necessary details. The vast majority of outsourcing services now offer completely online systems, which make this even easier. All you need to do is enter the number of hours that were worked by each employee (and the number of sickness hours if you pay those as well), and the system will take care of everything else. It really couldn’t be easier to do.
4. Outsourced Services Can Complete 1099 Forms and W-2 as Well
When you get to the end of the year, you have to make sure your employees receive their 1099 Form or W-2 before January 31st of the next year. The W-2 is a form that tells employees what their earnings were and how much local, state, and federal taxes they paid in that year. Form 1099, meanwhile, is provided to independent contractors who received $600 or more during a certain year. You must provide these forms to independent contractors and to employees, and they have to be filed properly with the IRS as well. Again, therefore, if you don’t know how things work, you could end up having to pay hefty penalties.
When you outsource your payroll, all the necessary information will be kept and filed. Many of these companies are now fully paperless, but you can still login to the system and print the 1099 Form and W-2 through there, handing them to your employees and independent contractors. Doing so means that you can get the necessary documentation with your employees more quickly as well, rather than for them to wait for their forms to arrive in the post.
5. You Remain in Control
Generally speaking, when you outsource your payroll, you will remain in control of the entire system. It is simply a case of having calculations and filings done for you in the background. It is simply designed to make sure your staff gets paid what they are owed and that you are fully compliant with all relevant taxation laws. Basically, it means that you can focus on running your business, without having to study accounting yourself.
When you enter the relevant information on the system, you will also make sure that there are no double entries. There is also no risk of typing mistakes or other forms of human error, which is particularly common in businesses that still fax or call through their payroll information. All you need to do is enter the details once, review and check them, and approve them. This means you are in full control of who gets paid what, when, where, and how.