When to Use Payroll Processing Services

Direct deposit sign and phone
Comstock Images/Getty Images

What are the Reasons to Outsource Payroll Processing? 

Even if you have only a few employees, you may decide to outsource your payroll—that is, turn over payroll processing and other payroll responsibilities to someone else. Below are some considerations to help you decide whether to outsource.

We'll first look at situations in which you might want to consider outsourcing your payroll, then some outsourcing options.

Outsourcing Payroll Lowers Job Costs

If you are simply paying office workers, you can calculate pay by multiplying hours by rate, and determine if any overtime is owed.

But if you are producing a product, you need to know the cost of labor on each product, so you can determine the cost of goods sold.

Let the Service Deal with the Multiple States, Localities

If you have employees in more than one state, you must comply with requirements for paying and reporting state income taxes. If your business operates in different cities, you may also have local income taxes to withhold, pay, and report.

Withholding Calculations Are Tricky

Calculating the amounts of withholding for employees is complicated. Briefly, you must:

  • Determine federal income tax withholding based on the employee's W-4 form(which can be changed as often as the employee wants).
  • Determine state withholding for states with income taxes, based on the state W-4.
  • Determine FICA taxes on wages at 7.65% (and you must watch highly-paid employees to be sure their Social Security withholding is capped at the maximum for the year and to begin withholding the additional Medicare tax.

Even doing payroll for just one employee can be time-consuming, because you must make payments and file required reports just the same way as if you had many employees.

Avoid Trying to Keep Track of Deadlines

Payment and reporting of payroll taxes (federal and state, withholding, FICA taxes, unemployment and workers compensation, and individual state payroll options) can be intimidating.

Remember, however, that a missed deadline for either payment or reporting can cost you money in fines and penalties. Outsourcing payroll, even with just a few employees, is an option many employers consider early in their businesses. It might be the right option for your business, depending on your circumstances.

How Do Payroll Processing Services Charge?

Many payroll processing services charge a basic fee so that even if you have just one employee you are paying more because the service has to all the same filings for one employee as it would do for 10. For example, they would still have to file a Form 941 each quarter, even if you have just one employee.

The incremental cost for each additional employee is quite small. With that in mind, below are some information on payroll processing services, with their costs and what they provide.

Assisted Payroll Services 

Some services do all your filing for you. For example companies like Paychex and ADP charge per check per pay period, including filing, direct deposit, and checks cut. You can input information online and they assign a payroll specialist to help you. As an example, you can see ADP's full range of services on their website.

Self-Service Payroll Online

Other services help you do your own filing. For example, Intuit's online payroll service allows you to fill out payroll forms online. Before you select these services, check to make sure they are compatible with your operating system and hardware. (Some don't work on Macintosh systems.)

Some companies allow you to do your own payroll online. They charge by the number of employees and the number of states.

Some may have additional features that you might need for a specific situation (timecard input, for example). Read the information on the websites and contact the representatives of the companies. This is always a good way to tell how friendly they will be. I have presented only a few of the many services you can find online, but the IRS has more information about payroll services and providers you might want to look at.

Is Outsourcing Payroll Worth the Cost?

Even if you have only one employee, you might want to seriously consider a payroll service to help you with preparing paychecks and paying and reporting payroll taxes. Remember, one fine or penalty for a missed payment or report might be more than a whole year's worth of service. Setting up a payroll system for your business is not your first priority, but if you have a service, it is one less thing you have to think about.

For more information about payroll services, see this article from the IRS with a list of payroll and practitioner partners. For example, check the website for the National Association of Enrolled Agents for an enrolled agent to help with payroll tasks.

Warning! Payroll is Still Your Responsibility

Even if you hire a payroll service, you as the employer are still ultimately responsible for payroll tax deposits and federal tax liabilities. If the payroll service doesn't make federal tax payments, for example, the IRS may assess you - not the payroll service - for penalties and interest due.

In addition, the responsible party (maybe you, as the owner) at your company can also be held personally liable for certain unpaid federal taxes.