Winston Churchill, apparently quoting some unknown earlier writer, once said, “Democracy is the worst form of Government except for all those other forms…”
And I’ve been thinking about this statement and sentiment as I ponder the question, why should a small business outsource payroll processing, because my assessment of outside payroll services, in a way, mirrors Churchill’s assessment of democracy.
Why? Outside payroll services superficially seem too expensive for a small or new business. (Expect to pay between $1,000 and $2,000 a year even if you’ve only got a few employees.)
Furthermore, outside payroll services seem to create inflexibility. When you outsource payroll, you get forced to use the outside vendor’s schedule, system, and procedures.
But here’s the thing: Like democracy, an outside payroll service only seems like the worst option (because of the expense say) until you compare it to the other option you have—going the do-it-yourself route.
Because new business owners often don’t understand why do-it-yourself is worse, I want to briefly identify the three big hidden costs of going commando with your payroll.
Mrs. Peabody’s Midyear Raise
I’ve been talking about the fictitious yet troublesome Mrs. Peabody in various editions of my QuickBooks for Dummies book for years. So I’m not going to repeat that entire story here.
But in a nutshell, one of the problems with doing payroll in house is that your staff will learn more about what their co-workers earn. And that learning will mean that you have more people disgruntled because they make less than someone else. Or that you have more people disgruntled because some joker or slacker in your business makes more than he or she should.
Note: In my extended discussion in QuickBooks for Dummies of Mrs. Peabody’s angst, I explain that both problems cause disgruntlement for Mrs. Peabody. She’s in tears because she learns she makes quite a bit less than the very talented Mrs. Raleigh. She’s outraged that she doesn’t make that much more than Wayne, the idiot who works in the warehouse.
If you want more detail, you can refer to Chapter 1 of QuickBooks for Dummies. But do take away the principal point: A lack of payroll data privacy may cost you real money.
Compliance Failure Penalties
Another issue with do-it-yourself payroll: Penalties.
And here’s what you ought to know about payroll penalties. While processing payroll isn’t that hard to do, if you’re only doing quarterly payroll forms a few times a year, you will make mistakes. Sorry, but that’s the reality.
And here’s the problem with these mistakes. Usually these mistakes will cause the government to assess penalties that easily add up to hundreds of dollars (and occasionally add up to thousands of dollars).
A good payroll service, in comparison, will almost never make mistakes that trigger penalties. And when they do make that once-in-a-blue-moon mistake—remember they are doing payroll for hordes of small businesses—they will know how to fix the mistake quickly and economically.
Probably, as a public relations and product warranty thing, they’ll also often pay the penalties, though you want to check with the vendor you choose.
In any case, you will basically eliminate the penalty problem if you outsource payroll. And that represents another savings—and a hassle-reduction factor too.
Easier In-house Bookkeeping
Let me mention a final economic reason for outsourcing.
In many businesses, payroll becomes the trigger for you outsourcing all your accounting, or the trigger for you needing to hire more expensive (and more competent) bookkeeping or general accounting help.
If you can outsource just the payroll piece, however, you may be able to easily retain the remaining accounting in-house. You may even be able to do pretty much everything else yourself. And these sorts of things should save you money.
Which Service Should You Use?
I would not focus too much on cost here. No, really. I would focus on quality of the service and convenience.
The big players are Paychex and ADP—both good, solid choices.
Gusto Payroll might be another option to consider. So would the payroll offerings from Intuit, the maker of QuickBooks. But I will point out that to me, both the Gusto Payroll and QuickBooks Payroll offerings mean you’re doing more of the work yourself as compared to Paychex and ADP. Or at least that’s my experience.
By the way, you might also be able to work with a local payroll service. Your tax accountant might also provide the service. (We really don’t, by the way, except in unusual circumstances… just so you know.) And a local provider should represent another solid option.
A Final Payroll Option for Specialty Situations
While I’m on the subject of payroll, let me say that in one situation it’s probably okay to do payroll yourself: The situation where you, the owner, are the only employee in the business and can set your salary to some “standard amount.” For example, you’re a shareholder-employee in an S corporation with a single employer.
We’ve got an economical e-book, Five Minute Payroll, that describes how you can do this. Note that we will provide a complimentary copy of the e-book to any clients of our CPA firm. For others, we charge a modest fee for this instantly downloadable resource. (We also offer a money-back guarantee, just so you know…)
Our Five Minute Payroll e-book (2017 version) explains how to do simple cookie-cutter payroll for most one-employee situations using base salary amounts of $10,000 a quarter or $16,000 a quarter. (These amounts should work for just about everyone.) The e-book includes sample and nearly-complete IRS forms which you can copy to get payroll tax returns done in a few minutes. And the e-book provides some common-sense tips you can use to set a reasonable salary for yourself or a family member you employ.
Interested in our $20 e-book? Use this button:
Money Back Guarantee
All our digital products come with a money back guarantee. If you don’t think our e-book is worth it, just let us know (email works best) and we’ll refund your $20 purchase. By the way, we do promise the e-book delivers great value. Once you learn our “Five Minute Payroll” system you can skip paying some outside payroll service hundreds of dollars each year. And you’ll also reduce your payroll return preparation to, oh, about five minutes a year…
Kael Drake says
I really liked your post, Steve. I think that it very clearly outlines the benefits that a small company can enjoy if they outsource their payroll. In your post you mentioned several advantages to hiring a payroll service, but the one that caught my eye the most was how by simply outsourcing your payroll, you a company can avoid paying a number of penalties that could be very expensive. I think that any small business owner will tell you that they want to avoid paying penalties as much as possible! I have a few friends that own businesses, so I’m going to recommend to them that they start to outsource their payroll if they haven’t already. Thank you for the informative post!
Good points. Thank you Kael.
Ian Horn says
I genuinely liked your very much. Ya, it is true that if we process payroll by hand then it will surely consume more time. But if we outsource payroll services for the business then it can free up staff time in order to pursue more important value added and revenue generating activities. Another benefit of outsourcing a payroll service is that it helps to reduce the cost. Again manual payroll service is a headache in best case and a nightmare in worst case. So, if a business owner outsource payroll then it may eliminate a tiresome source of personal pain.