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Determining the Best Payroll Processing Method for Your Business

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Now is the time of year when businesses should be thinking about their payroll processing methods. A great deal of tax data, and therefore payroll data, starts over at year's end. That means we're fast approaching the simplest and most convenient time that you can switch processing methods. The next few months present the best window in which you can review your current processes and make sure they are right for you. Businesses considering a change have many options they might wish to consider.

Employers can choose between two basic payroll processing options: use an in-house method, or outsource the work to an independent payroll service. Each basic category has its share of pros and cons.

In-House Pros and Cons

The in-house method can provide greater customization because in-house processing utilizes existing staff whose costs are often hidden in the general payroll and it can also appear to be more cost effective. In fact, cost analysis typically finds that doing it in-house actually ends up costing more.

"Many businesses believe that just because they do payroll using existing resources, it means they are doing it for free," says Jeff Ireland, AppleOne Payroll and Tax Filing Services’ Director of Sales. "It’s actually to the contrary — as well-incorporated as payroll may be in their functions, there are always day-to-day operating costs to think about."

If economy is a concern, you’ll want to be sure you understand the hidden costs before electing one method over the other. Additionally, companies attempting to process their own payroll have greater exposure to tax liabilities and government imposed fines.

Outsourcing Pros and Cons

On the pro side, outsourcing your payroll can be more cost-effective. It is also easier and can help shield you from certain tax penalties.

On the con side, you won’t have the same level of customization if you outsource. While that customization can come at a steep price, very large companies with dedicated resources often find it is a cost they must accept due to the complexity of their payroll systems. Additionally, depending on the vendor you choose, you may run into problems with responsiveness and access to your data for reporting and decision making. This can be mitigated by selecting a smaller, more responsive provider that emphasizes customer service and data access.

Keeping it Internal

Businesses who process their payroll in-house do so using either a manual process or through a payroll software program. Those who find the in-house option feasible are often larger organizations who have the infrastructure, system and personnel to focus on this function, or operations that wish to keep their finances as flexible and discretionary as possible. As with any critical organizational function, payroll processing is far from simple. If you are currently assessing the feasibility of integrating manual in-house payroll processing, here are some aspects of the process that you might want to consider:

  • Hiring or training personnel to perform payroll-related responsibilities
  • Use of personnel for payroll versus other business tasks
  • Gathering payroll-related information
  • Calculating employees’ work hours, wages and the corresponding taxes and other deductions
  • Recording payroll data into general ledger
  • Staying up-to-date with federal and state payroll tax laws
  • Computing the company’s tax liabilities and filing payroll tax returns
  • Integration of Human Resources information

Using software to streamline your in-house payroll processes can help minimize the time, effort and even risks involved with in-house payroll processing. Purchasing software addresses the challenges of numerous calculations, payment schedules and information management. However, there is still the outlay of implementation and maintenance to consider. There are software, hardware and maintenance costs to factor in. And, like manual payroll processing, unless you hire an accountant or any dedicated personnel, personnel would need to be diverted to learn and perform software-driven payroll functions.

Leaving it to the Experts

Payroll vendors offer functions that range from basic calculating of employee payroll and tax obligations, producing checks, and preparing management reports to optional services such as filing payroll taxes, preparing W-2s, 401(K) processing and even union reporting. Due to the convenience and affordability of outsourcing, it has become increasingly feasible for companies to transition their payroll to individual payroll service providers. Ironically, it’s misconceptions about affordability and convenience that prevent many organizations from taking advantage of the many services offered by payroll vendors.

"There is this mindset that outsourcing payroll is costly," says Ireland. "The truth is, shifting payroll processes over to a vendor is more cost-effective. A good example is the cost of cutting checks — it usually costs companies who have in-house payrolls $5 to $9 per check. This is much higher than the cost if this process is outsourced. For instance at AppleOne Payroll and Tax Filing, we charge around $1 to $2 per check."

And the savings extend to even more critical levels: Inaccuracy is always a payroll risk that can lead to costly consequences. The problem with doing it in-house is that the organization becomes liable for any errors, which means it’s up to them to pay for resulting penalties and interest. "Working with payroll service specialists means employers can eliminate disruptions that can easily take place in an in-house payroll process when there are changes in local, state and federal laws," says Ireland. "By outsourcing, employers can have peace of mind knowing their vendor will always be up-to-date when it comes to any new payroll and tax rules and regulations. Furthermore, it’s part of a vendor’s service to assume full responsibility and accountability over their products and services."

Ultimately, however, the most compelling reason for outsourcing payroll is that it allows businesses to return the focus of their personnel to primary functions. Now that companies are trying to operate as leanly as possible, each member of the staff is a crucial team player. By not diverting them to extraneous payroll tasks, they can better focus on what they were hired to do in the first place. More importantly, by leaving payroll in the hands of vendors who can take care of this process in the most accurate and timely way possible, employers will be able to concentrate on running their business.

Deciding Factors

With a few more months to go, businesses still have ample time to decide whether or not to stick with their current payroll method or shift to a new one. "Determining which payroll method is right for you depends on the complexity of your payroll and the actual time and resources it takes to prepare it," says Ireland. "Thanks to the abundance of innovation, payroll options that were previously considered expensive have now become much more cost-efficient, making them the ideal solutions for businesses of all sizes."

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