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.

This checklist walks you through the basics of forming a new business, and helps you avoid some common pitfalls.

Entity Formation.  Your attorney can help you determine the best choice for your circumstances and type of business.

Please note that if you wish to incorporate, you must stay current with annual registration and tax filings.  If you typically have trouble meeting filing deadlines, forming a corporation is not a good choice for you.

Tax Election. If forming an LLC, you must decide how the LLC will be taxed.  To be taxed as S-Corp or C-Corp, you must file IRS form 8832 Entity Classification Election.  Otherwise, your choices are Sole Proprietor (Schedule C) or Partnership.  Don’t forget to prepare for required tax reporting for your business by keeping good records and budgeting for accounting fees.

City business license (if inside the city limits).

EIN. This number identifies your business for payroll taxes and income taxes.  To apply for an EIN, use IRS form SS4. 

State tax registration.  You can register your business on-line at the Missouri Department of Revenue web site.

Paying wages.  It is very important to get professional advice before paying employees or contract laborers.  You can easily end up owing massive payroll penalties and back taxes to the IRS or state.  Civil Penalties can also be assessed for failure to make proper payroll deposits.  These civil penalties can be assessed individually against anyone responsible for the company payroll.

We recommend that all employers get some level of professional assistance with payroll.

We also strongly recommend that you review the IRS rules for determining whether a worker should be classified as an employee or contractor.

Insurance.  Talk to your insurance agent about:

BOP

Professional Liability

Workers Compensation

Business Interruption (partnerships/multiple owners)

Estimated Taxes — avoid tears at tax time!  Income taxes and Self-Employment tax catch many new business owners unaware their first year.  Planning ahead can help you avoid unpleasant news when your tax return is prepared.

For a sole proprietorship or partnership, we recommend setting aside 30% of your profit for taxes.

You may be required to make quarterly estimated tax payments.  Check with your accountant if you are not sure.   If quarterly payments are not required, it is still advisable to set aside a portion of profits for any taxes that will come due when your return is filed.

Record Keeping. If you only use bookkeeping records for tax return preparation, you are missing out on a vital tool for business success.  You wouldn’t drive your car with your eyes closed.  Don’t try to run your business without timely and accurate financial information.

You should be able to review your business profit/loss statements and balance sheets at least quarterly.   Bookkeeping software, such as QuickBooks, will provide these and other useful reports, but ONLY with accurate data entry. Your accountant should be able to help you interpret the reports if needed.

We find that business owners typically under-estimate the importance of keeping good financial records, and the skill it takes to do so.  Having your bookkeeping done or reviewed by a skilled professional will assure you have access to relevant and useful information.

Financing A start-up business can be a ravenous, cash-eating beast.  It may take several years before the business generates a steady profit.   Plan ahead by estimating your cash flow needs. Do you need a line of credit for seasonal declines in sales? Do you need a business loan or investors? Can you live on savings until the business starts to make a profit?

Written Business Plan. Identifying your purpose, your mission, and your target market can provide clarity that guides your every day management decisions.  Most of us can’t be all things to all people.  A business plan helps you focus on your particular strengths and goals, and will help you serve your target market more effectively.

HR Considerations:

Employment contracts

Bonding

Non-compete or non-disclosure agreements

Job Descriptions

Employee Handbook

Benefits

Employee leasing or temp services

Disaster Preparedness

Data back-up

Power back-up

Security, passwords etc.

Off-site storage / safe-deposit

Alternate location with access to computers/data