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By Don McLoughlin
A friend of mine who owns a small business once comically lamented, “I have more hats than heads.” If you can relate to that sentiment, chances are great that you not only own a small business, you handle the back-end functions as well. You are not alone.
According to ADP research, 71 percent of small businesses still prepare payroll in-house, while 29 percent outsource (15 percent use a service bureau, and 13 percent use an accountant’s services).
Payroll and tax compliance can be time-consuming and burdensome for any business. However, a U.S. Small Business Administration (SBA) study, “The Impact of Regulatory Costs on Small Firms,” showed that America’s small businesses are the hardest hit financially. The study found businesses with fewer than 20 employees faced a 45 percent greater federal regulatory burden than their larger business counterparts. Small businesses annually spend $1,304 on tax compliance per employee, 67 percent more than larger companies with 500 employees or more.
Luckily, technology is transforming the day-to-day operations for small businesses. Today, there are a variety of tools available to help small business owners manage payroll in a cost-effective and simple way. Some seek a do-it-yourself software solution while others prefer to have an outside provider handle it all. In this article, we will review how companies select their payroll method, and the benefits of each type of payroll solution.
In-house Payroll
A 2006 national payroll survey by the National Federation of Independent Business (NFIB) Research Foundation found that the most common reason given for doing payroll in-house was that it is the cheapest way. Without dedicated administrative staff, many small business owners run the business during the day, and then spend evenings and weekends catching up on everything else, including bookkeeping, payroll and taxes.
However, many business owners don’t realize that there are “hidden costs” of payroll. Doing payroll in-house is both error-prone and time-consuming. According to ADP research4, companies with 20 employees or more spend upwards of half a day per pay period. On a weekly payroll schedule, that averages out to two full days a month dedicated to payroll.
Then there are risks. Given that local, state, federal tax laws are subject to change, remaining up-to-date and compliant is a formidable task. And the failure to deposit payroll-related taxes in a timely fashion is a frequent cause of tax penalties.
Lastly, when calculating payroll by hand, simple math errors are more common, which can cause employee dissatisfaction – endangering the success of your small business.
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