Managing payroll is one of the fundamentals of running a small business with employees. It’s also one of the most arduous tasks, which is why most businesses like to outsource payroll.
Hiring a professional to take care of your payroll used to be a much more expensive affair. Today, there are tons of payroll outsourcing companies that tailor their services to smaller businesses. If you’re thinking about outsourcing your payroll so you can focus on the other fundamentals of your business but aren’t sure how to go about it, keep reading.
What it Means to Outsource Payroll
Running payroll is time-consuming and incredibly tedious. There are also a lot of legal requirements involved, which means any mistakes you make can be risky for you and your business.
When we say “outsource payroll,” we’re talking about enlisting the help of payroll outsourcing services to do all the work for you. Payroll outsourcing companies, otherwise known as payroll providers, are specialists that will take on everything from calculating pay to filing the associated taxes. It all depends on the services you’re looking for and what you can afford.
In a nutshell, payroll providers take care of the following:
- Payroll record keeping
- Reporting and paying unemployment taxes
- calculating annual wage and tax reports (for both W2s and 1099 MISC form employees)
- Submitting payroll tax reports and payments to the IRS and states
- Scheduling and making payments to employees—usually through direct deposit
- Working out benefits and reimbursements
- Generating withholdings and deductions to create paychecks
- Sending out payments for benefits such as health plans, pension plans, wage garnishments, and non-employees
There are different levels of service you can get from your payroll outsourcing service. There are also two types of payroll outsourcing avenues you can choose:
Full-Service Payroll Providers
A full-service payroll provider will manage all of your payroll needs from beginning to end. The only you have to do is hand over the necessary paperwork for your business and employees.
Having a full-service payroll provider on your side makes life a whole lot easier. However, it does require that you have the proper file-sharing system in place. They will need access to things like your timesheets for hourly employees and documents that note any employee tax or work status changes. Additionally, full-service payroll providers tend to cost more.
Part-Time Payroll Service Providers
Part-time payroll service providers, also referred to as “DIY” payroll providers, only take on some of your payroll tasks. Typically, part-time providers will take on the more tedious tasks while leaving you with the basic administrative tasks. For example, you’ll be responsible for calculating employee timesheets and keeping records while they’ll take care of the pay, taxes, and other deductions.
You’ll also be required to set up a sharing system via software, which the company usually provides.
How to Outsource Payroll
If you’re thinking about outsourcing payroll, there are a few things you need to do: Get the proper paperwork and information in order and find the best payroll outsourcing services for your business.
You’ll also need to decide whether you want a full-service provider or a part-time service provider. This decision is usually directly related to what you can afford.
Your payroll outsourcing cost is minimal, determined by the volume and type of checks, filed reports, and payments made. Most service providers will charge you monthly, starting per employee plus a basic service fee. From there, depending on which extra services you want, the cost will increase.
Here are the steps you need to take if you want to outsource your payroll:
Determine the Level of Service You Need
Before you hire someone or a company to outsource payroll for you, you have to be clear about what you need.
You can start by classifying your employees. This is important, especially if you have a mix of employees and contractors working for you. Correctly determining who gets a 1099 MISC form and who gets a W2 will keep you from getting in trouble with the IRS for misclassifying your employees.
Next, you’ll need to determine a payment frequency for your employees. You can choose from monthly, bi-weekly, to semi-monthly (every two weeks). Semi-monthly is standard for most businesses. It’s also the most cost-effective—and it’ll keep your employees much happier.
Lastly, you want to figure out whether you need a service provider to handle all of the administrative tasks or if you’re going to share in those tasks.
Get Your Documents in Order
When you’re setting up payroll, you need to have some specific documents on hand for both legal purposes and for your payroll provider to be able to calculate the payroll. Here’s a list of the documents you’ll need:
- Direct deposit forms for your employees to fill out and sign
- Your employer identification number (EIN). You’ll be collecting payroll taxes from your employee for the government, so you need an EIN to pay your business’s federal taxes legally
- Your state and/or local tax ID number. If your state and local government charges income taxes, you’ll need to apply with your government agency for one or both of these ID numbers
- Your employees’ addresses and social security numbers
- Federal l-9 forms for all employees
- Federal W4 forms for your employees’ federal income tax withholdings
- State withholding allowance certificate for your employees. Depending on your state, a W4 form may be enough for tax withholding information
You’ll also need to find a small, local business bank to acquire company checks. Your payroll service provider does not provide this, but you will need a voided check to start with a payroll company. Using a local bank is an excellent way to support your local/small business economy.
Research Payroll Providers
The last thing you need to do is make a list of providers that meet all of your payroll outsourcing needs. Speak with each one directly to learn about the services they provide and what’s expected on your end. It’s also necessary to ask for client reference letters to gain insight from other business owners’ experience with each company.
Payroll Outsourcing You Can Trust
Outsourcing your payroll tasks will save you a lot of time, so you can focus on growing your business. If you’re going to outsource payroll for your small business, you want to find a payroll provider that you can trust.