What Kind of Payroll Service do I need?

If you are a small business owner with employees, it’s not a question of whether you need payroll services.  That is, unless you like paying lots of extra money to the IRS.  Payroll penalties and interest can quickly exceed any money you are saving by processing payroll on your own.  Also, certain penalties can be assessed individually against anyone responsible for the company payroll, so you could be putting yourself or an employee at risk. 

This article will discuss various types of payroll services and the potential advantages or disadvantages of each. 

1. Full Service Payroll with Tax Impound

You supply the employee hours etc before every payday, the service provider prepares the checks and/or direct deposits, charges your checking account for the net pay plus all tax withholdings and employer taxes.  The service makes all your payroll deposits for you.  You will probably sign a POA that allows the service provider to sign and file your payroll returns for you as well.

Fees are charged to your bank account each payday.  Since these types of service providers specialize in payroll processing, they can operate efficiently and the fees are usually pretty reasonable.

Pros:  High level of accuracy for tax computations with little risk of penalties from calculation errors or missing a payroll deposit.  This is a good choice if you are likely to forget to make your payroll deposits or if you find it difficult to set aside the necessary funds. 

Cons:  Service may not be as customized as you would like.  If there are any errors on the paychecks, you may need to wait until the next payday to make the adjustment.  Also, payroll information usually must be submitted several days in advance, so there may be more of a delay than your employees are accustomed to.

Note:  It can be difficult to change services mid-year if you are already using this kind of service. If they are filing your payroll tax forms for you, it’s best to wait for year-end to avoid confusion with the filings. 

2. Full Service Payroll (employer responsible for payroll tax deposits)

If you feel you can handle making your payroll tax deposits in a timely manner, you will have more options for choosing a payroll service provider.  Most accounting offices offer payroll services, and there are some on-line options as well.

 Types of service will vary.  The service provider may run the checks and/or direct deposits for you, or simply give you pay stubs and you take care of printing the checks. 

The service provider should remind you of due dates for your payroll tax deposits, and prepare your quarterly payroll tax returns and W-2’s at year end.  Every quarter, you may be asked to provide verification of your payroll tax deposits (so the forms can be completed correctly), and you may need to sign the quarterly and annual tax reports.

Fees may be based on hourly rates or according to the level of service and number of employees.   

Pros:  High level of accuracy for tax computations (and less risk of penalties); more options in choosing a service provider; personalized service.  Some employers like the convenience of working directly with their regular accountant.

Cons:  Penalties can occur if you are late with payroll deposits. 

3. Limited services: employer processes payroll checks, service provider prepares quarterly reports and W-2s.

Many small employers use their own bookkeeping and payroll software, such as QuickBooks, to run their payroll checks.  If this is your situation, we recommend that your accountant or a payroll professional prepare your quarterly reports and W-2’s for you. This will assure that all taxes have been computed correctly.   Also, payroll tax deposits can be computed for you if needed, along with due date reminders.  Your service provider should also be available to answer questions you have about running your payroll.

Fees based on hourly rates will vary , depending on number of employees, and how many processing errors are encountered.

Pros:  You have direct control over payroll processing. You may experience faster turn-around time.  With more employees, you can save on processing fees, but savings will be lost if penalties occur due to errors with the payroll processing. 

Cons: There is additional cost for the payroll software, and more of your time or an employee’s time is required.  There are also many opportunities for errors, from setting up employee information, processing checks, and making corrections.  All things considered, it may be less costly in the long run to use full payroll service, especially when you factor in the cost of your own time.

 4.  In-House Payroll Processing

Larger employers may be able to justify assigning payroll processing and reporting to skilled staff members (emphasis on skilled).  Payroll software is a must, but there are many options for purchased or on-line software.  We caution that it’s important to make sure to hire someone with the right training and skills, because of the risks involved.

Pros:  Simpler in terms of operations, since there is no need to communicate with an outside service provider.  This option may be more economical for very large employers.

Cons:  It is essential to find the right person (with experience and training) for the job.  Most business owners to NOT qualify to do this job themselves!  If tempted, please review the first paragraph above for warnings about payroll penalties.