Outsourcing Payroll – The Good, the Bad and the Ugly

Outsourcing Payroll – Payroll is an essential business practice – like sales or customer service. It can be difficult, detailed and complicated with its ever changing rules and regulations and the consequences of some mistakes can be much more serious than an employee’s checks simply being wrong. Many mistakes can result in getting a very hard time, no, not from the employees. But from people you already don’t want to know – the federal and state government enforcement types.

While pay services offer an attractive and valuable alternative to in-house processing. This is true only when chosen correctly and monitored by someone (like a professional freelance accountant or bookkeeper). Who knows the basic compliance rules.

When a payroll company is chosen correctly, they provide a less expensive, simpler means of paying employees and filing the compliance tax returns each quarter, not to mention protecting you from the liability associated with preparing payments, it is important to remember:

THEY, the payroll provider, are responsible for calculating pay from the information provided to them and remitting your tax payments and filing your returns on a timely basis.

YOU, the user of the payroll service (freelance accountants, bookkeepers or business owner) are responsible for:

Knowing the basic rules of payroll and asking the provider the “right” questions about their services as it relates to your company. Bear in mind even if you ask the “right” questions the sales representative. Who sets up your account and the customer service representative whom you deal with after your account has been set up. May not have the correct answers no matter how large or small the company! Here’s an example of an incorrect set-up that ended up costing a client of mine almost one-hundred thousand dollars.

When we began working with a new client last year who has a unique, complicated payroll we uncovered that they were not making Medicare contributions. This company had been in business for several years and was using a rather well-known company to process their payroll. Not once during the set-up of this company or processing was the question ever raised by the payroll provider “that you are not contributing to Medicare”. The payroll was just processed!

This oversight resulted in our client being out of compliance with the Federal government and when you are out of compliance for taxes you will go to jail. We helped our client to take immediate steps to rectify this issue and while everything has been resolved amicably with the government. It should be known that the company who set-up and processed the payroll has taken no responsibility for this oversight. Needless to say, we have changed providers on behalf of our client.

Understanding exactly what services the payroll provider performs for you and how those services affect your cash flow. For example, does the service you select debit the entire net pay and taxes amount from your checking account or do these amounts clear individually on your bank account? Another client of mine thought. That the payroll company was making the tax payments and filing the tax returns directly with the government. This was not the case and my client ended up paying penalties and interest.

Gathering and communicating the information needed to accurately calculate your payroll. This includes hours, new hire information, employee change information, properly classifying your employees as exempt, non-exempt, properly applying overtime rules, etc.

With payroll companies now providing an internet option for the convenience of processing. The burden of entering information accurately and correctly belongs with the business owner. Or the bookkeeper performing this task on their behalf. Mistakes can result in additional processing fees being charge.

Reviewing the processed payroll and reports for accuracy and completeness. Even though you have hired the company to process the payroll and they are the “experts”. It is still your responsibility to have a basic knowledge of rules and regulations. I cannot tell you how many times our clients have communicate their new state unemployment contribution rate to their pay company and that information was not update. Or federal unemployment taxes being take out beyond the maximum limit of $7,000 or $56 per employee. Being knowledgeable always saves you money in the end.

Here are a few tips I have developed over the years that have helped me successfully manage payroll.

Obtain written authorization from your client to speak on their behalf to the provider directly. To make it simple, we write the letter for our clients and have them print it on their letterhead. All they have to do is print it on their letterhead. Sign it and fax a copy to the provider and me. I keep a copy on file just in case the next time I speak with the payroll company they cannot locate my client’s authorization. You’d be surprise how many times the provider loses the authorization letter!

Quarterly refresh you working knowledge of the basic compliance rules.

Develop a relationship with ONE payroll provider that you like working with and TRUST. My success has come in getting to know one sales person and asking to have one customer service representative. Who I can go to no matter which company my client works with to get good answers to my questions. I never force my clients to move to the payroll company I prefer. But once I gain their trust I do suggest that we move to my favorite. Because of my working relationship with them and usually can obtain better if not competitive pricing for my client.

If you process payroll on behalf of your client. Standardize the format in which your client provides you the payroll information. This will eliminate the guess work.

Don’t forget, even though your client is outsourcing their pay. The burden of the responsibility for accurate payroll compliance relies with the business not the payroll provider which is why they need you!