To manage payroll, business owners either handle it in-house or hire an outside service provider. Jiri Stejskal does both.
After Stejskal founded CETRA Language Solutions in 1997, he calculated payroll for his two employees on his own. But that didn’t last long.
“I didn’t want to deal with it anymore so I started using Paychex,” says Stejskal, chief executive of the Elkins Park, Pa.-based company. “I used them for about two years but it was overkill,” given CETRA’s relatively small size and modest payroll needs at the time.
Finally, Stejskal hit on a solution that was just right. He uses an online service package offered by QuickBooks in which he pays a monthly fee for payroll support.
“I enter the payroll data and QuickBooks takes care of the taxes and other stuff,” he says. “I distribute the paystubs through [QuickBooks] portals. Employees can access their paystubs online and print them out if they want.”
Over the last eight years, Stejskal has found this system works better than either doing it all himself or outsourcing to a huge payroll provider such as Paychex. Because he travels frequently for work, he likes that he can run payroll for his 17 employees from abroad. All he needs is an Internet connection.
“I recommend getting a payroll company rather than doing it entirely on your own,” he says. “There are lots of hassles with taxes, the penalty for making a mistake is pretty high and payroll services usually don’t cost very much.”
As Stejskal discovered when he initially tried to do it himself, payroll administration is a complex process replete with risk. Making sense of all the forms, timesheets and tax compliance reports can prove a dizzying challenge.
Even scrupulously careful employers can face IRS payroll penalties for late or inaccurate tax filings. The penalties can amount to thousands of dollars depending on, say, the size of a calculation error or the timing of the payment.
Should You Do It Yourself?
Despite the difficulties posed by ever-changing tax rules, employee turnover and workers’ expectations to get paid in a timely, well-orchestrated manner, many business owners opt to do their own payroll. Entrepreneurs’ self-reliant streak or their preference for hands-on business management can carry over to administrative tasks such as payroll.
According to a National Federation of Independent Business (NFIB) survey, 64 percent of small employers prepare payroll in-house, 19 percent use a payroll services company and 14 percent hire an outside accountant or bookkeeper. For those that do payroll in-house, the owner personally does it 55 percent of the time, while 29 percent use an employee and 14 percent rely on an unpaid spouse or family member.
“When they go outside and hire payroll providers, they say they do it because that takes care of everything so they have less to worry about,” says William Dennis, senior research fellow at the NFIB in Washington, D.C. “When they do it inside, they give many reasons including cost savings and the desire for more oversight control.”
Many entrepreneurs run their own payroll in the early years. As head count grows, however, the burdens can multiply. By using an electronic spreadsheet to calculate payroll and tying your system electronically to your accounting software, you’re in a better position to make the transition to outsource payroll.
“To the extent that you have all your personnel and financial records in an integrated electronic system, that makes it easier to use an outside payroll provider,” Dennis says. “If you have a lot of it still on paper, it’s tough to go outside because you’ve got massive bookkeeping challenges.”
A Payroll Success Story
“It’s unreal how much incompetence is out there,” Kevin Carney declares. He’s referring to payroll providers.
In his previous job running a handyman franchise in California, Carney went through three payroll services that did sloppy, inaccurate work before finally finding a winner. Now that he’s president of Solera Home Improvement in Sunnyvale, Calif., he uses the same payroll firm that served him well before.
“One of the ironies is the fantastic payroll service I eventually found is also the cheapest I’ve ever dealt with,” he says with a laugh. “At one point, I used a very large company which was the most expensive. It made a $2,000 mistake. I’d go through its payroll reports each time because I knew there would be big and small errors.”
When shopping for payroll providers, Carney recommends asking, “How do you ensure accuracy?” Check references—and ask them about the payroll firm’s error rate.
* Heartland Payment Systems, a national payroll processor, created a “Merchant Bill of Rights” in 2006 that lists six criteria that business owners can expect from its payroll firm (www.merchantbillofrights.org/PayrollAct).
* Biz2Credit (www.biz2credit.com/biz-analyzer.html) offers another way to benchmark your business against competitors to gain awareness of how you stack up against similar firms when you seek a bank loan.
* At PayrollServiceProvider.com, you can obtain price quotes from competing firms, browse providers by state and get shopping tips and supplier contact information. Resource Nation provides a similar portal to compare payroll providers’ rates (www.resourcenation.com/business/payroll-services?version=C).
* HRWorld (www.hrworld.com/features/10-small-business-payroll-solutions-010308/) provides a series of informative articles on payroll companies, including the top 10 payroll solutions and how to avoid payroll mistakes.
The IRS lists payroll companies that have systems that meet certain testing requirements (www.irs.gov/efile/lists/0,,id=101120,00.html).
1) Payroll Best Practices by Steven Bragg (Wiley, 2005) is a 224-page primer on payroll policies, procedures and reporting requirements.
2) The Employer’s Payroll Question and Answer Book by Paul Love (CreateSpace, 2011) is a 66-page book that provides basic information on payroll administration.