Payroll Services Buyer's Guide

Payroll services are an affordable solution to administrative burdens - find out how to choose the right service.

Payroll services introduction

Even the most meticulous and experienced human resources professionals find that handling payroll can be a headache. Slap on potential stiff penalties for tax filing omissions, and now we are suddenly talking about a full-blown, financially-induced migraine. For many businesses, payroll services offer an attractive and valuable alternative to in-house processing. They can provide a less expensive, simpler means of paying employees, filing taxes, and performing other essential but mundane tasks

Very small firms with a stable, salaried staff and minimal changes in tax obligations may well be better off processing internally; it can be more convenient and cost-effective if your needs are straightforward. But many ultimately discover it is not all that cheap when they factor in the time spent managing the process.

Plus, without the proper knowledge of payroll procedure and access to a sound payroll program, it is easy to make mistakes. Employees as well as federal, state, and local tax collection agencies need to be paid in full, on time, and in the proper manner. Usually, late payments are cause for monetary penalties. And given the ever-changing nature of tax regulations, it is easy to make an error that can significantly affect your bottom line.

BuyerZone.com can help you select the right payroll service - this Buyer's Guide will give you the solid working knowledge you need in your search.

When to choose payroll outsourcing

Although most small businesses in the U.S. still process paychecks internally, this is not always as cost-effective as it appears. At minimum, processing payroll internally can cost valuable hours of employee time every pay period plus expensive accounting software and training. In addition, the person who handles your payroll needs to keep up to date on changes in personnel, deadlines, and tax requirements on an ongoing basis.

Payroll outsourcing can be an affordable way to remove this burden. If your employees work varying amounts of hours each week or if you have significant turnover, a payroll service can be a time-saving and cost-effective alternative to internal processing. Using a payroll service can also be helpful if you have to pay payroll taxes for multiple states.

Even if your payroll expenses are quite stable, companies with more than 10 employees may find that the time saved by outsourcing payroll easily makes up for the low costs.

Payroll provider services

Payroll providers' basic services include calculating paycheck and tax obligations for each employee, printing and delivering checks, and providing management reports. Paychecks can be issued on a weekly, bi-weekly, monthly, semi-monthly or yearly basis.

Additional payroll-related services that may carry separate fees include automatic check signatures, direct deposit, and handling of W-2s. Many services now offer tie-ins with 401(k) and Section 125 mutual fund plans, allowing employees to set up automatic deductions from their paychecks.

For larger companies with more complex processing needs, some payroll providers offer HR software systems that track employee benefits information in addition to regular payroll data.

Filing taxes
Many payroll services offer the option of filing state and federal payroll taxes for your business. This can be a great feature given the fact that the Internal Revenue Service has reported that one out of every three employers has been charged for a payroll mistake, with total penalties reaching into the billions of dollars.

Typically, this payroll tax filing service is offered at little or no cost. This is because the provider will impound the tax due at the time paychecks are issued, earning interest on the funds until the money needs to be handed over to the government.

Just because another company handles the payroll tax filing does not mean you can stop worrying about making sure the filings are timely and correct. While most services assume responsibility for penalties resulting from incorrect filing, your company may be liable for any interest charges.

Keep in mind that many companies will not calculate local or city payroll taxes. Make sure to inquire about this if it is a significant issue for you.

Choosing a payroll provider

There are several key points to consider when choosing a payroll provider. Talk to several payroll service providers and evaluate them on these criteria:

• Speed. What turnaround time do they offer? If there are mistakes in your payroll, how quickly can they be corrected and re-issued?
• Accuracy. You are still liable for paying your employees correctly, even if you outsource the processing.
• Ease of use. Tracking and updating employee information should be easy and quick for maximum efficiency.

Also important is customer service. Unlike some other business services, you will need to communicate regularly with your payroll provider, so make sure they have qualified personnel available to work with you. Speak with customer service reps to verify that you will be able to get the help you need. Consider requesting references from current clients to gain a better sense of the provider's level of customer service.

Finally, check that the company is bonded to ensure your company will not suffer from any potential financial mishandling.

Relaying information to a payroll service

Each pay period, payroll data has to be "called in" to the payroll service provider. While this used to be done via a phone call or fax, almost all data is now transferred electronically.

The standard method is by modem. The provider will supply you with software for tracking each employee's pay rate, deductions, and vacation time. Once you enter the information for the pay period, the software dials in to the provider's server and transmits the information. Many companies use a dedicated computer that is not connected to the company network for payroll, which substantially increases the security of your sensitive data. Because the computer is not on a network, the direct connection to the provider is not susceptible to hackers, Internet bugs, or internal snoops.

Some providers also offer Web-based payroll data entry. You enter employee information on a secure Web page, which feeds directly to the provider. This method is gaining acceptance, but is still less popular than modem-based communication.

Your tax filing can be handled electronically as well. With the Electronic Federal Tax Payment System (EFTPS), your company transfers funds electronically to pay taxes due, rather than relying on checks. You are required to pay taxes via EFTPS within two years after your company has paid more than $200,000 in federal taxes. If for example, your company paid over $200,000 in taxes in 2003, then by January 2005, you must pay taxes electronically.

EFTPS is free to use and available to any business. Many payroll services offer electronic tax payments as part of their standard package as well. For more information, call EFTPS Customer Service Unit at (800) 945-8400 or (800) 555-4477.

Payroll service pricing

The market for payroll services is competitive and reflects local market conditions. The basic payroll processing service typically costs between $2 and $3 per check, plus a base account fee. Services such as tax filing and delivery can cost between $4 and $9 per payroll period. Add-ons like direct deposit often carry a nominal per-check charge. For a full-service solution, a small to medium-sized business can expect to pay a total of $3 to $5 per paycheck issued.

Furthermore, there can be fees for adding or dropping employees, adjusting employee information, or setting up your account. Fees for various services can differ dramatically across payroll services, so it is important to understand which ones you want before signing up for a service. That way, you can ensure you are comparing the relevant pricing when evaluating different providers.

As with many other business services, the more you buy, the cheaper it gets. If your company has significant plans for expansion, find out when you will be eligible for volume discounts.

Questions to ask

Features

• What does your basic service include?
• What are your most popular add-on features? How much do they cost?
• How quickly can you re-run a payroll if there is a mistake?
• How long does the average client stay with you?

Tax filing

• If I use your tax filing service, do you cover the penalties and/or interest charges?
• Do you provide filing assistance for local taxes?
• What is the cost to file taxes for multiple states?

Charges

• What is the cost for your service for one year, including year-end W-2 forms?
• How long are these rates in effect? What rate increase should I expect after that?
• How much will it cost to set up our payroll account?
• If there are payroll data mistakes, how long will it take to reconcile the errors and what will it cost?

Questions for references

• How responsive is the provider to your questions?
• Have you had any problems with accuracy? How did they help resolve the Have you used another payroll service? If so, why did you switch?

Buying tips

Look for a stable provider
If a firm's only business is payroll, make sure to check the number of clients it supports. To ensure stability, a payroll service should ideally maintain at least several hundred clients.

Double-check the math when switching
Transitioning to a new payroll firm rarely occurs without glitches. Be especially thorough in reviewing the first paychecks issued through the service as well as the money paid to cover tax obligations.

Watch prices over time
Do not be swayed by services that waive charges upon sign-up. Often rates go up or charges start accruing after six months to a year of service.

Be wary of low fees
Watch out for providers that offer low base processing rates with expensive add-on features. Your total fees paid may wind up being more costly than those of a provider with slightly higher fees.

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