Are you still doing your payroll in-house?

We work with a lot of small businesses and often they are challenged covering all the office functions most businesses have to deal with on a daily basis. One of the most critical office function of any business is processing payroll. It’s a necessary function that on the surface seems straight forward but when you take a closer look and examine all the related factors, you may be exposing yourself to unnecessary risks if you handle your payroll in-house.

One role of a CFO is to manage risk. These include financial risk (having appropriate cash-flow and capital), insurance risk (proper coverage and limits) and compliance risk (complying with federal, state and local laws).

The laws governing wage and hours, tax withholding, reporting and submitting to federal and state agencies is constantly changing and becoming more complicated. The Affordability Care Act (ACA) and overtime for salaried employees are just a few recent examples of increased compliance requirements. These constant changes are enough to keep you awake at night.

The purpose of this post is not an argument for outsourcing payroll but to raise a business owner’s awareness on risks associated with processing your payroll in-house:

Single Point of Failure:

If you have an accounting or support staff of several people this may not be an issue, but if you’re like many small businesses, you generally have one person processing payroll. Due to the sensitive nature of payroll it’s not a position easily open to cross training and the backup is often the owner, or none at all.

I’m not a fan of the overused question, “What happens if so and so gets hit by a bus?” but the reality is that there is often no backup person in the company that is trained to calculate time, enter information into the software, print or process payments and run a payroll cycle.

While having an outside payroll company does not eliminate the “calculate and enter into a system problem,” and owner can pick up the phone and say “run the same pay they got last pay period” and have time to figure out a solution. There is also comfort knowing the outside payroll company will have someone who can train a new person on using the payroll software. If you use your own proprietary in-house software this may not be an option.

Repercussions if you Mess Up Reporting or Paying:

If you’re handling payroll in-house, chances are you’re also reporting and paying federal state and local taxes and various withholdings. There is FICA, FUTA, SUI and State withholdings reporting and paying that requires discipline and vigilance. It you miss reporting and/or paying, there may be stiff penalties imposed. Recently one of our client’s incurred over $4,000 in penalties and interest paying late on a State estimated quarterly payment of $11,000.

Out-sourced payroll companies provide automatic tax reporting and paying services. This takes the discipline and vigilance off your worry plate and puts it in the hands of people who have the knowledge and expertise. They even have performance guarantees where they pay the penalties and interest if something goes wrong.

Guidance and Expertise:

In the ever changing world we live in, when was the last time you heard running a business is becoming more simple or easier? As mentioned in the beginning of this post, laws surrounding payroll, labor, HIPPA, ACA, HSA, HRA and discrimination are changing every day and how can any small business stay on-top of these every shifting sands?

A good outsourced payroll company can provide the knowledge, guidance, systems and support to keep you out of trouble. These additional services may cost a few bucks more than just processing payroll but we all know attorneys cost far more than a few dollars spent on doing things the right way.

Operationally there may be good reasons for using in-house payroll that is integrated into your ERP or accounting package. However, outsourcing companies have come a long way in providing integrating solutions, so overcoming this obstacle may be easier than you think.

The world keeps getting more complicated, and with complication comes the increased risk that something can and will go wrong. Consider these risks with handling your payroll in-house. If it’s going to cost more using an outside payroll service consider the incremental cost as insurance that you stay out of trouble and have a good night’s sleep.

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Todd Rammler

Todd Rammler is the President and founder of Michigan CFO Associates.  Todd is a Certified Management Accountant (CMA), and holds an MS in Accounting from Walsh College (cum laude), and a BBA in Finance from Western Michigan University.

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