QuickBooks Perspective: Is Doing Payroll Yourself Really Cheaper?

    June 28, 2004

So you’ve decided to do payroll yourself rather than outsource it. Welcome to the brave new world of complex rules and regulations at several governmental levels! Were you aware of the penalties and interest that can be assessed if you make your payroll tax deposits late – even by one day? How about the fact that you could be asked to file over forty different payroll tax returns over the course of a year? Ever hear of the “100% penalty?”

I’ve seen many small businesses evaluate the pros and cons of doing payroll themselves or outsourcing it to a third party like Paychex or ADP. The evaluation process usually consists of obtaining a single figure – what the monthly cost is of having a third party process the payroll for the business. The usual reaction is “this is too expensive.” Unfortunately, the evaluation needs to be much deeper than just the dollars and cents.

Do You Have the Expertise?

As I mentioned before, depending on the location of your business, you may be asked to file quite a number of tax returns. Are you comfortable with the rules and regulations that apply to federal withholding, state and local withholding, unemployment, workers compensation and a host of other payroll-related taxes?

Many times, I’ll hear the argument that “we’ve got a person on staff with the time available – we might as well let them handle the payroll.” Using that logic, you might as well consider them available to perform health care services for your staff, or maybe prepare the business tax returns. Put simply, most small businesses do not have the insight or expertise to comply with the multitude of rules and regulations that apply to payroll. Yet these same small businesses put themselves at great financial risk every payroll period.

How Bad Can the Government Get You?

The pain of payroll penalties and interest can be extreme. For example, when dealing with federal taxes (i.e. federal withholding, social security, Medicare, etc.), the penalty alone can range from 2% of the required payroll tax deposit to 15% of the taxes due. Remember, this is just the penalty (not including interest) for federal taxes. Similar penalties can be assessed by state and local taxing agencies.

Even worse, you may be subject to the “100 percent penalty.” Generally speaking, this means that you can be held personally liable for all income and FICA taxes that you willfully either fail to withhold from your employees’ wages or fail to pay to the IRS and your state tax agencies. Other penalties may apply if your failure to withhold was due to the misclassification of an employee as an independent contractor. Ouch!

Can’t Afford to Outsource?

In reality, you can’t afford NOT to outsource your payroll. The fees that outsourced payroll companies charge should be considered a cost of doing business, just like your utility bills, rent, and legal services, and budgeted accordingly.

Many small businesses are looking for ways to simplify rather than complicate. What could be simpler than phoning in (or submitting via the Internet) the hours your employees worked last week and making sure you have money in your bank account to cover the payroll? The outsourced payroll service can handle everything else in-between. If they make a mistake, many of these firms have guarantees that will cover the costs (i.e. penalties and interest) of their mistake.

Payroll is commonly referred to as a “non-value added” activity for most businesses. It’s not what you do best (unless you are a payroll service of course). Even though QuickBooks even offers a “Do It Yourself” version of payroll, I encourage you to take a closer look at the true cost (and potential hidden costs and penalties) of doing payroll yourself. Upon further examination, you may find that outsourcing your payroll is the better way to go.

Scott Gregory, CPA, QuickBooks ProAdvisor, Microsoft Certified Professional is the president of Bond Technology. Bond Tech provides a full suite of QuickBooks and technology consulting services to small businesses. Services range from helping clients save money on their initial or upgrade purchases of QuickBooks to installation and training, as well as computer installation and networking. Contact Scott at SGregory@BondTechLtd.com, or by visiting their web site at http://www.bondtechltd.com/.

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