If you dread payroll processing, you’re in good company. In fact, it’s becoming pretty common to outsource all or part of an organization's payroll tasks. According to a 2014 survey by Deloitte, 22% of North American organizations outsource all payroll functions. And among those who use a vendor for some payroll functions, “the most commonly outsourced functions in North America include year-end tax form printing (87%), payroll tax preparation and filing (76%), year-end tax form distribution (63%), check printing (57%) and garnishment administration (52%).”
So why do organizations choose to outsource? And what should you look for when doing so?
Inc. Magazine notes several reasons to outsource using a reliable and reputable vendor:
- Outsourcing frees up employees to spend more time on core business tasks, especially for small businesses where employee time and payroll expertise may already be stretched.
- Outsourcing saves time and headaches by turning over complicated payroll matters (think calculating taxes and keeping up with changing FLSA and other regulations) to trained experts, ensuring compliance.
- Outsourcing can allow companies to offer their employees access to their own employment records through cloud-based and mobile-friendly platforms.
Before you take the outsourcing plunge, be sure you have the bigger picture in mind. Inc. cautions that payroll is “not just a twice-monthly annoyance or a bookkeeping task. Payroll is how you reward and retain employees, compensating them for the work they've done. When there are errors due to miscalculations, you'll wind up with dissatisfied, unmotivated employees.” So - do your homework.
Find a Partner, Not Just a Service
Any company can run payroll for you. It’s important that when you choose a provider, you choose an organization that's more of a partner than a vendor. These tips from Entrepreneur Magazine are an excellent starting point:
1. Do the services offered match your needs?
Payroll vendors can provide any or all of the following: Calculating pay for hourly, salaried or contract employees; direct deposit or printed checks; new employee reporting; tracking paid time off (sick time and vacation hours); benefit deductions; 401K contributions; flexible spending accounts; IRA contributions; health savings accounts; bonuses; reimbursements; commissions; tips; wage garnishments; and payroll taxes.
You might need some or all of these. Knowing your own resources, strengths and limitations can guide your decision. And don’t forget to plan for potential future needs as your company grows. Look for indications your provider will do the same. One way to do this is to ask for testimonials. Here's one for Horizon - you should see positive testimonials about your prospective partner before moving forward:
2. Check Price Structure and Scalability
“For me, it’s simply about relationships and understanding our needs and challenges. Horizon is constantly suggesting ways to improve our system.”- Mike Klafehn, Senior Director of Stadium Operations, Kane County Cougars
Prices usually vary based on the number of tasks and the number of employees. Be realistic about your budget and whether you need to keep some tasks in-house. If you anticipate growth, find out how price points change and how many employees the vendor can handle. Ideally, your payroll partner will be flexible enough to anticipate and meet your future needs.
3. Are Set-up and Support Simple?
This is a huge fear for some. We’ve had clients who didn’t like their payroll provider but were afraid to engage in a new set-up. It doesn’t have to be painful. Find a partner who can hit the ground running with your accounts – setting them up and integrating them with ease. Be sure you have easy access to customer support, either by phone, email or online chat or tutorials.
Get confirmation that the onboarding will be easy. Check references and look for a testimonial such as this, from current Horizon client Margery Murphy, President of Acadia Lead Management Services:
4. Easy Access is Great, Strong Security is Vital
"To my surprise, the set-up was seamless. I would highly recommend Horizon to any business owner looking for a trusted partner in payroll."
Your employees will most likely be able to access their payroll records online and from mobile devices. You should also be able to log into your account to run payroll or add new users. The convenient time-saving nature of cloud-based computing means you and your employees can keep the system updated even from outside the office.
Of course, cloud-based access also means being wary of security risks. If you follow the news, you know it’s no longer a matter of if, but of when hackers will attempt to compromise sensitive data. “You'll want to verify that vendors keep data safe using the highest encryption standards available, including something called 256-bit Advanced Encryption Standard encryption, which helps defend against login and password theft,” says Entrepreneur. Security also includes the physical buildings where data servers are located – are plans in place to protect data in case of natural disasters or a break-in?
Your Role in the Outsourcing Partnership
A partnership means both parties have a role to play. Be sure to know what your ongoing payroll responsibilities are, even if payroll is fully outsourced. As the Society for Human Resource Management's Carolyn Hirschman says, “human resources directors are involved with payroll regardless of who processes it because many employment actions affect how workers are paid.”
5. Keep Tabs on Taxes
Yes, your vendor can calculate and file payroll taxes and make deposits on your behalf. But according to the Internal Revenue Service (IRS), “even though the employer may forward the tax amounts to the third-party to make the tax deposits, the employer is the responsible party. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer’s account. The employer is liable for all taxes, penalties and interest due.” Be sure your vendor is up on best practices.
One such best practice is the Electronic Federal Tax Payment System (EFTPS). A smart way to protect your company is to "enroll in the EFTPS and make sure your third-party provider uses EFTPS to make tax deposits. EFTPS gives employers online access to their payment history, enabling them to monitor whether the third party is properly making deposits," states the April 21, 2015 issue of Payroll Manager’s Letter. Sign up for a free account online at the EFTPS website.
Finally, be aware that the IRS sends all correspondence to the address on record. Confirm this is your company address and not the vendor’s address. You want to be sure to receive IRS notices directly and in a timely manner, and then communicate any issues to your payroll vendor.
6. Keep Your Partner Informed
Have things changed in your company? “New hires, promotions, benefits selections: HR must communicate these and other changes to an in-house payroll department or an outside vendor to ensure that payroll-system data is accurate and up-to-date,” says SHRM’s Hirschman. The sooner your account is made current, the more accurate your payroll data and calculations are. Your new vendor should know this.
Periodically review your services to make sure your needs are being met and to add or remove payroll functions when necessary. Establishing an in-house liaison with your payroll vendor puts a face to a name and keeps communication going between partners.
7. Be Sure You Aren't Just a Number
One way to tell the vendors from the true partners is how available they make themselves to you. Do they expect you to call an 800 number and speak to a computer when you have a question? Or will you have a dedicated account rep who not only returns your calls but checks in with you regularly to see how things are going? When dealing with payroll, timeclocks, software, taxes, and so on, you will inevitably need help or have a question. Before you sign on with a vendor, be sure they won't treat you like just another number, assigning you a different support rep based on your place in a massive call queue. If you prefer to communicate via email or a web form, be sure they offer those options as well.
The bottom line is – if you're considering outsourcing, be sure to choose a company that's willing to become your partner, not treat you like just another number. This will free you up to "focus on managing labor...and team members," (Horizon client Dan Apolito, Owner of Archer's Tavern), which is what a vendor is supposed to do in the first place.