How to Determine if Payroll Outsourcing is Right for You

The Complete Guide to Payroll Solutions

How to Determine if Payroll Outsourcing is Right for You

Use this step-by-step approach to learn what really matters when considering payroll outsourcing.

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Introduction

For many businesses, payroll can be one of the more complex functions within the organization. Between ensuring compliance with tax laws and keeping sensitive employee data safe, you may find that managing payroll in-house is becoming more challenging—and consuming more of your resources.

Fortunately, third-party payroll providers can assume those duties for you. In fact, the scope of services available in the marketplace continues to grow to meet the demands of today’s employers and the expectations of their employees. The key to making a decision is understanding the scope of payroll services—and how they align with your organization’s needs. In this guide, we’ll examine how to make that call by exploring everything you need to know about modern payroll services.

 

Chapter 1 Understanding Your Payroll Needs
Understanding Your Payroll Needs

If your business has been handling payroll in-house, you may be looking for ways to optimize your processes and free time for other priorities. Outsourcing payroll services can help ease that burden. First, let’s clarify the definition of the term.

What are payroll services? Corporate payroll services are offered by a third-party provider that oversees and manages the administrative and compliance tasks associated with payroll. For example, you may choose a vendor to simply process payroll and take care of tax filings. Alternatively, you can opt to outsource the function in its entirety.

Why does my company need payroll services?

Payroll refers to the process by which employees receive their wages through several key steps, including:

  • Calculating wages and overtime
  • Managing deductions and exemptions
  • Paying employees
  • Providing paystubs
  • Filing and reporting tax withholdings
  • Maintaining records

6 Reasons You May Need Payroll Services

No matter the size of your business, outsourcing payroll functions may be a good solution for your company. Is this approach right for you? Let’s find out. Here are a few reasons some companies opt to outsource payroll.

1 Gain Expert Tax Support

Did you know you can face potential fines for improperly calculating tax obligations or not making the deposits on time? For example, you’ll pay a 10% penalty for deposits made 16 or more days late. It’s not uncommon for small businesses to incur tax penalties due to missed payroll deadlines. Payroll providers use online software that automates tax calculations, withholdings, and filings and ensure accuracy and timeliness. Furthermore, the vendor will be responsible for any penalties you suffer because of their mistakes.

2 Save on Necessary Resources

Running payroll internally requires dedicated resources, including time and staff. According to a QuickBooks study, business owners spend four hours and 52 minutes calculating, filing, and paying payroll taxes each pay period. When you partner with an outsourced payroll provider, they’ll take care of all the daily, weekly, and monthly tasks involved with paying your employees and keeping up with taxes, freeing you and your staff to focus on revenue-generating functions to position your company for growth.

3 Access Compliance Assistance When You Need It

Making sure that your business is compliant with federal and state wage/hour laws can be overwhelming. For example, when you manage payroll, you need to follow requirements regarding:

Each of these payroll requirements carries the risk of penalties for non-compliance. If you outsource to a payroll provider, however, they’ll guide you through legal requirements to ensure you get payroll right. With a compliance expert in charge, you won’t have to spend the time and effort to stay on top of all the regulations yourself.

4 Future-Proof Your Payroll Operations

Payroll vendors can provide as much or as little support as you need in every aspect of workforce management. That means that as you grow, you can incorporate comprehensive and integrated payroll, HR, benefits, and compliance support all in one place.

5 Enhance Security for Your Business

Outsourcing payroll can mitigate the danger of inadvertently exposing sensitive employee information or falling victim to phishing attacks. Payroll vendors offer protection to prevent sensitive information leaks by restricting your data to only authorized personnel. They typically use firewalls, DNS filtering, and anti-phishing, spam, and virus prevention technology.

6 Increase Employee Satisfaction

Incorrect calculations on paychecks or late payments can frustrate employees and negatively impact retention. Just two payroll errors can cause 49% of employees to start job hunting. With outsourced payroll services, you’ll consistently pay employees accurately and on time through the vendor’s automated processes.

Even with all the reasons to consider outsourcing, some business owners may have reservations about making the switch.

Complete Payroll Services: Common Misconceptions When Outsourcing

Sending payroll out-of-house to a provider is a major step, which, understandably, may inspire a little trepidation. Here we’ll take a closer look at the facts and debunk several myths about outsourced payroll.

Myth 1

Outsourcing Payroll Services is Too Expensive

Generally, you can expect to pay about $200-$250 per employee per year for basic payroll outsourcing. Compare this to the median salary to hire a payroll coordinator at your company, which is $44,020. Depending on the vendor you choose, you may be able to save on your costs by bundling payroll with other core services rather than purchasing these services a-la-carte.

Myth 2

My Company is Too Small to Outsource

Typically, small business owners spend about 5 hours each pay period processing payroll. Even if you only have a few people on staff, the number of steps and calculations involved can be overwhelming. For example, you’ll have to include overtime; deductions and exemptions for payroll taxes and benefit contributions; and factor in state laws regarding direct deposit and paystubs. Furthermore, ensuring that these pieces of information are accurate is critical to avoid potential penalties.

Myth 3

It’s Not the Right Time of the Year to Switch

Although it may be easier to start with a vendor for the first payroll in January, you can switch anytime. Switching midyear requires one simple step: you’ll need to provide the vendor with your payroll history for the current calendar year by employee. Fortunately, most payroll vendors provide a template so that you know what information will be needed and when.

Myth 4

A Complete Payroll Service is Too Complicated for My Business

A payroll provider’s job is to make things easier. In fact, it should be much less complex to have someone else process your payroll than to do it yourself. An outsourced provider takes care of the daily, weekly, and monthly tasks involved with paying your employees, alleviating your burden.

Myth 5

I’ll Have Less Control

Your payroll vendor is your partner, and the right partner will structure your payroll to give you as much visibility and input as you’d like. Many payroll vendors understand that companies have differing levels of comfort with outsourcing and will customize a process that works for you.

Myth 6

Payroll Services Are Not Secure

Sharing sensitive employee data can be scary. And that can make many companies pause when it comes to outsourcing payroll. But it’s important to understand that running payroll in-house has its own set of risks and can oftentimes be less secure. Outsourcing can help mitigate these risks by partnering with a secure vendor that has protections in place to prevent the leak of sensitive information.

As you can see, there are more than a few misconceptions about payroll outsourcing. What’s more, some companies aren’t aware of the breadth of services that today’s payroll vendors can provide.

 

Chapter 2 Modernizing Your Payroll Process
Modernizing Your Payroll Process

Modern payroll solutions offer benefits that extend far beyond the nuts and bolts of payroll services. They also incorporate features that help you sidestep potential pitfalls and streamline complex tasks.

Did you know that fifty-four percent of workers have experienced a payroll problem, from a late payment to incorrect total earnings? Fortunately, payroll software companies are always updating features to improve payroll accuracy, timeliness, and engagement. Let’s review the trends driving payroll solutions that help you simply your processes.

Fifty-four percent of workers have experienced a payroll problem

Payroll Solutions Trends: 5 Technologies and Features to Watch

If you’re thinking about updating your legacy payroll tools with modern approaches, here are the top five payroll solutions trends to consider.

1 Flexible Pay Options

Whether employees are on site or remote, faster, more convenient access to their wages is essential. Direct deposit and paycards are common methods to meet employees’ needs, but several emerging methods are becoming popular:

Digital wallets Digital Wallets: If your employees prefer to use their smartphone instead of cash, they might prefer to have their paychecks deposited directly into a digital wallet, such as a Venmo account or Apple Pay. Keep in mind that providing a pay stub in states where it’s required may be challenging unless you partner with a payroll provider that supports this feature.
Instant Pay Apps Instant Pay Apps: These phone-based apps, like ZayZoon and Rapid!, allow employees to access earned wages before their regular payday. This method satisfies the desires of a majority of US workers, 83% of whom believe they should have access to their earned wages at the end of each workday or shift. Be sure to verify if you or your employees will be charged fees for implementation and usage.

2 All-in-One Workforce Management Solutions

Comprehensive HRIS workforce management systems that can be used throughout the entire employee life cycle are gaining increased attention. With this approach, you’ll have a single employee record that feeds payroll, HR, time and attendance, and benefits. Your business can realize benefits such as:

  • Avoiding duplicate data entry – and the risk of errors
  • Accessing all essential information from a single dashboard
  • Being able to share data across systems
  • Gaining more actionable reporting

3 Cryptocurrency as a Pay Option

Cryptocurrency is making a move to the mainstream—especially among young workers. In fact, 36% of millennials and 51 % of Gen Z say they’re willing to get half their salary in cryptocurrency. Depending on your employees’ interests, you can either distribute their salary in US dollars and then convert the funds to the digital asset of their choice, or you can pay in the cryptocurrency itself.

4 Mobile and Remote Accessibility

Old payroll systems may not be capable of meeting the needs of off-site staff effectively and efficiently—a relevant challenge in today’s world of remote work. That’s where mobile and web-based access come in. Depending on what software is used, your employees may be able to use their phones or computers to:

  • Clock in and out with online time and attendance
  • Access their pay and tax information
  • Check PTO balances
  • Get instant payments

5 Artificial Intelligence Capabilities

Companies are increasingly employing AI for everything from HR tasks to payroll. Just a few uses of AI in workforce management include:

  • Automating workflows to track and compute employees’ hours and pay rates and send the information to payroll for processing
  • Using algorithms to calculate the average earnings, deductions, and taxes
  • Using pay rule engines to manage data sets
  • Helping with pay and salary considerations

The key is finding the challenges your payroll team faces and matching them with AI capabilities that can eliminate human error, decrease the burden on your staff, and boost employee efficiency.

It’s also important that the features your payroll system offers match your employee’s priorities. For example, many employees have new expectations for payroll transparency, which can be improved with a vendor offering payroll portal features.

Top Features to Look for in a Payroll Portal

In today’s labor market, meeting employees’ expectations for payroll information access, transparency, and engagement can help boost satisfaction. An employee payroll portal can go a long way toward fulfilling those needs.

What is an employee payroll portal? Employee self-service (ESS) portals are web-based tools through which employees can access relevant information and conduct certain transactions from a central online site or gateway. They can make it faster and easier for employees to complete certain actions themselves instead of contacting you or your HR staff.

As you evaluate payroll portal software options, here are some of the top features that can benefit your employees and your business.

New Hire Onboarding

New Hire Onboarding

With onboarding as part of your payroll portal, your new employees can complete all their new hire forms electronically, enroll in benefit plans, stream training videos, and more. In addition to speeding up the onboarding process, using this feature frees up you and your staff, increasing everyone’s overall productivity.
Pay and Benefit Information

Pay and Benefit Information

To enhance convenience, many employee payroll portals allow workers to perform compensation-related tasks, such as:
  • Viewing their paystubs
  • Displaying year-to-date earnings and total compensation
  • Downloading their W-2s

Providing anywhere, anytime access to these functions gives employees more control while decreasing the number of requests you and your team must address.

Time Management Functionality

Time Management Functionality

To more accurately track workers’ hours, especially among remote employees, payroll portals that integrate web-based time and attendance data collection are especially useful. These options enable employees to clock in and out from anywhere and automatically integrate with payroll, simplifying the process for you and your team as well as eliminating error-prone data entry.
Training and Employee Development

Training and Employee Development

In the past, learning and development platforms were often separate from payroll portals. But this siloed approach made it difficult to track employee progress. Today, you can use payroll software to add your own training programs or integrate with an LMS. By synching records, you can see which employees completed particular modules and use that data to create individual performance milestones and development plans.
Access to Company Information

Access to Company Information

With changing laws and regulations requiring regular updates to employee handbooks and policies, a portal can make a great place to house these dynamic documents. With this approach, you can ask employees to review and sign off on any new workforce rules you’re putting in place.
Mobile Capabilities for On-the-Go Access

Mobile Capabilities for On-the-Go Access

With mobile surpassing desktop as the primary way to access the internet, it’s vital that your portal meets employee expectations for immediate 24/7 mobile access. Software with these capabilities can enable employees to log in from their phone, tablet, or laptop from anywhere and accomplish the same tasks with greater convenience and satisfaction.
Performance Management

Performance Management

With performance reviews evolving, an employee portal can enable employees to complete self-evaluations, set goals, and review and respond to evaluations. These functions can improve employee engagement while also benefiting your HR staff by having all compensation and performance management data in a central location.

In addition to incorporating payroll portal features, you’ll want to consider one of the crucial benefits of outsourced payroll: access to paperless records.

Crucial benefit of outsourced payroll: access to paperless records

Paperless Payroll for Employers

Because completing payroll can be a frustrating and time-consuming process, you may be thinking about ways to ease the burden on your company. To that end, paperless payroll could be a good fit for your organization.

What Is Paperless Payroll?

Paperless payroll is an entirely electronic payroll process. That means you can process every step electronically using payroll software or an outsourced payroll company without generating any paper files that can clutter up your workflows.

What Are the Benefits of Going Paperless?

By automating the process of running payroll, your organization and employees can realize many benefits. These include:

Employer Benefits of Paperless Payroll

  • Greater accuracy
  • Improved efficiency
  • Lower cost
  • Decreased environmental impact
  • Reduced storage requirements

Employee Benefits of Paperless Payroll

  • Timely payments
  • Anytime, anywhere access
  • Added convenience

How Do I Get Started with Paperless Payroll?

Whether you choose to use your own payroll software or partner with one of the outsourced payroll companies available, the following steps will set you on the path toward success.

1 Select a payroll software or outsourced provider. Read news coverage on software and outsourced payroll companies, check with industry associations on recommendations, or ask peers about their experiences.

2 Migrate your payroll data. Enter critical information into the system, such as tax ID numbers, employee data, and pay history.

3 Enroll employees in self-service portal and provide training. Ensure that your employees have created an account and entered their personal, tax, and banking information that will be needed to process payroll.

4 Introduce your paperless pay method. Educate your employees on how to use the new system and set their expectations.

5 Set up payroll reports. Run the needed reports and deliver them by email to HR or company executives.

6 Integrate with your other software. Combining systems can help you take advantage of added efficiencies.

Are There Any Laws to Consider with Paperless Pay?

To provide paperless pay, be sure to check your state law about any rules governing this approach, including:

1 Offering paper checks as an option: Some states may allow you to provide paperless pay but only if you also offer paper checks as a payment option.

2 Requiring consent: Other states require you to obtain employee consent prior to implementing paperless pay.

3 Providing paystubs: Since paper paystubs go away when paper paychecks do, you’ll need to pay close attention to paystub rules to ensure you’re in compliance.

The benefits of switching to paperless are merely the tip of the iceberg. You may want to consider the other ways that modernizing can improve your payroll processes.

A Business Case for Modernizing Your Payroll Process

Is it time to upgrade your payroll process? The impacts on your business can include a range of potential economic and efficiency gains.

The following are several reasons you may want to update your payroll process.

Time Savings

Time Savings

By modernizing your payroll process through outsourcing to a third-party vendor, you’ll spend much less time completing your payroll each pay period. An outsourced provider will take care of all the daily, weekly, and monthly tasks involved with paying your employees, which will help alleviate the burden on you and your staff so that you’ll be able to concentrate more on revenue generating functions.
Fewer Mistakes

Fewer Mistakes

With modern payroll services, you’ll increase the accuracy of payroll and tax calculations thanks to automated technology that helps eliminate common math errors, keeping you in compliance with various federal and state requirements.
Lower Costs

Lower Costs

You can incur significant expenses when you run payroll yourself. You’ll need to factor in the average cost of payroll software and fees for employees. And if you have another employee take over the task, consider their salary as well. (The midpoint salary for a payroll coordinator/administrator is $44,020.)

Using a payroll provider may be more affordable than you think. Generally, you can expect to pay about $200-$250 per employee per year for basic payroll outsourcing. While it may be a little more expensive than calculating payroll manually, using software, or having your bookkeeper handle the tasks, it’s important to keep in mind that payroll mistakes like delays in tax filings can be costly. In fact, almost half of all small businesses get fined an average of $850 every year for late or missed tax payments.
Enhanced Payroll Process Timeliness

Enhanced Payroll Process Timeliness

By using an outsourced payroll provider, you’ll consistently provide timely payment to employees. Most payroll companies offer paperless pay methods such as direct deposit and same-day pay that ensure employees receive their wages on time.
Improved Compliance

Improved Compliance

With an outsourced provider, you’ll gain access to a team of experts who will help guarantee you stay on the right side of the law, advising you on the steps needed to abide by tax regulations, wage and hour rules, and other applicable requirements.

We’ll delve deeper into the payroll tax compliance considerations in the next chapter.

 

Chapter 3 Managing Common Payroll Challenges
Managing Common Payroll Challenges

Compliance with payroll tax laws is one of the most challenging—and complicated—issues businesses face. If you incur penalties for getting withholding requirements wrong, it could become a major problem for your organization. Understanding the complexity of tax regulations is an important factor to weigh in payroll decisions.

Issues With Multi-State Payroll Tax Withholding

With the increase in remote and mobile workers, many businesses hire employees who live or work out of state or work in multiple states, which makes withholding and remitting payroll taxes confusing. In fact, 48% of employers indicate that multi-state payroll taxes are either currently a major issue  or a growing concern for their organization as workers become more mobile.

What Are the Types of State Payroll Taxes?

Your business must withhold and deposit payroll taxes from your employees’ paychecks to cover several obligations. At the federal level, these requirements include income taxes, the employee’s and employer’s share of Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes.

But you may also be responsible for state tax withholdings, including:

  • State income tax
  • State unemployment benefits
  • Temporary disability
  • Paid family and medical leave

These withholdings will vary from state to state. To understand exactly what you need to withhold, the first step is determining the correct state for purposes of income tax and ancillary taxes. Here’s a review of some common questions you might have when navigating multi state laws.

How Do I Determine Where to Withhold State Payroll Taxes for Employees Working Out of State?

To answer this question, let’s break down the differing tax categories you’ll need to consider.

Income Tax

As a general rule, you’ll use the state where your employee performs work to determine your withholding obligations. But in some situations, determining which state governs income tax withholdings can be more complicated, such as when an employee lives in a different state than where they work. These workers are called “dual-state” employees, and they typically file income taxes in both the state they reside and work in.

In some cases, there may be reciprocal agreements between neighboring states, which means one state will not require income tax withholding from the other state’s residents working there.

Once you know the state where you’ll need to withhold payroll taxes for employees working out of state, that knowledge will dictate your rate. The Federation of Tax Administrators has a list of each state’s tax agency’s website. You’ll want to check every year since the tax tables can change, and you always want to make sure you’re working with the latest versions. Bear in mind that there may be other scenarios that complicate determining which state governs employee tax withholdings, for which you can consult our guide. For instance, if an employee resides in a different state than where they work, they typically file income taxes in both the state they reside and work in.

Unemployment and Other Ancillary Taxes

State unemployment.

Unemployment is generally an employer-only tax. But in some states, you’ll need to withhold the state unemployment tax from employees’ wages and remit it to the state.

Identify your jurisdiction for remitting state unemployment insurance taxes to determine if you will need to withhold state unemployment tax in one of these states. Usually, you look to the state where the employee performs services. However, some exceptions exist, particularly for employees who work in multiple states. In such cases, you will need to consider four factors:

  • Whether your services are localized in a state
  • If your base of operations and some of the services are performed in the state
  • If you exercise direction or control in the state
  • If these first three factors don’t result in a determination, then the employee’s state of residence is used

Paid Family Medical Leave (PFML).

An employee’s state for unemployment purposes may also dictate your responsibility for withholding other taxes for paid family and medical leave programs.

Temporary Disability Insurance (TDI).

Whether you need to withhold state disability taxes is also tied to the state where you’re responsible for remitting unemployment taxes. Thus, if your employee’s unemployment state is Rhode Island, you would also be responsible for withholding taxes for temporary disability insurance (TDI) from a worker’s paycheck. The eligibility requirements vary in states with TDI programs, so familiarize yourself with the rules if you need to remit TDI.

What Are Multi-State Withholding Requirements?

Once you’ve identified which states you need to withhold taxes for, these three steps will ensure compliance with the regulations:

Step 1

Register

Each state will have its own taxing authority that you’ll need to register with for income tax withholding.

Step 2

Calculate State Tax Withholding

Reference state rules to determine the withholding amount for workers.

Step 3

Make Timely Deposits

Follow state rules for making the deposits and submitting any necessary filings that report how much you withheld.

How to Get Multi-State Payroll Right

With so many states approaching tax withholding differently, multi state payroll issues can be very challenging. Any mistakes in this arena can result in costly penalties and interest for you as the employer. To avoid financial consequences, these state and federal resources provide help to keep you compliant in your local area. Keep in mind that there are even more special considerations for certain protected groups of employers, like non-profits and churches.

Payroll for Churches and Other Religious Organizations

The U.S. is home to approximately 380,000 churches and more than 80,000 religious charities and nonprofits. These organizations have unique circumstances when it comes to payroll for their employees.

What is Considered a Church or Religious Organization under the IRS?

The Internal Revenue Code doesn’t specifically define a “church” for federal tax purposes. However, there are certain characteristics that the IRS lists as generally attributed to churches, including:

  • Distinct legal existence
  • Recognized creed and form of worship
  • Definite and distinct ecclesiastical government
  • Formal code of doctrine and discipline
  • Distinct religious history
  • Membership not associated with any other church or denomination
  • Organization of ordained ministers
  • Ordained ministers selected after completing prescribed courses of study
  • Literature of its own
  • Established places of worship
  • Regular congregations
  • Regular religious services
  • Sunday schools for the religious instruction of the young
  • Schools for the preparation of its members

You don’t have to necessarily meet all these criteria, but the IRS will use this list along with other information to determine if your organization is considered a church.

How Do I Set Up Church Payroll?

When it comes to setting up payroll for your church or religious organization, the same five steps that apply to other entities should also be followed:

1 Gather employee information

2 Determine whether workers are employees or 1099s contractors

3 Understand exempt vs. non-exempt status

4 Pick a pay frequency

5 Calculate wages and deductions

What Taxes Are Churches Exempt from Paying?

Churches and religious organizations are generally exempt from income tax and receive other favorable treatment under the tax law. To receive this treatment as a 501(c)(3) organization:

  • You must be organized and operated exclusively for religious, educational, scientific, or other charitable purposes.
  • Your net earnings may not benefit any private individual or shareholder.
  • No substantial part of your activity may be attempting to influence legislation.
  • You may not intervene in political campaigns.
  • Your purposes and activities may not be illegal or violate fundamental public policy.

Do Churches Pay Payroll Taxes?

Even though churches are considered tax-exempt organizations, you’ll still need to withhold payroll taxes from a non-clergy employee’s payroll.

Are Ministers Considered Employees or Self-Employed?

Generally, duly ordained, commissioned, or licensed ministers of a church in the exercise of their ministry are considered employees for federal income tax reporting purposes. Yet, for these individuals, you’re not required to withhold income tax from the compensation you pay. Instead, the income a minister earns in performing their services in the exercise of their ministry is subject to Self-Employment Contributions Act (SECA) taxes unless they are exempt. That includes any salary or fees for things like performing marriages, funerals, and baptisms.

How Do I Handle a Clergy Housing Allowance?

A minister’s gross income generally doesn’t include the fair rental value of their home provided as part of the compensation for services performed as a minister.

Do I Have to Pay Church Employees Overtime?

While ministers aren’t covered under the Fair Labor Standards Act (FLSA), other church employees may be subject to the law’s minimum wage and overtime rules if they meet the criteria for either enterprise coverage or individual coverage.

Are Church Musicians Considered Employees?

If your church pays musicians to perform during services or other events, you’ll need to determine if they are employees or independent contractors. The biggest distinction between W-2 employees and 1099 workers is the amount of control you have over them.

With a W-2 employee, you have the right to direct the work that is performed. That means giving instruction and providing the tools, training, and equipment to complete the work.

Conversely, according to the IRS’s fact sheet on employee versus contractor designations, the general rule is that a worker is an independent contractor if you have the right to control only the result of the work, not what will be done, how or when. As a result, 1099 contractors use their own methods and tools for completing work.

In addition to handling common tax considerations, there are other payroll situations that can lead to payroll challenges. Let’s take a closer look at a few of these.

Sick Leave: The Most Common Issues Employers Face

First, let’s determine exactly what falls into this category. What is sick leave?

Sick leave is either a paid or unpaid employee benefit that allows workers to take time off from work for their own health needs. In some states, laws also allow employees to take sick time to care for an ill family member.

Since there are so many different regulations governing sick leave, below we address some of the most common questions employers may have about paying (or not paying) employees for time off when they’re feeling under the weather. Understanding how to answer these questions will go a long way toward ensuring compliance.

Does My State Require Sick Leave?

With the exception of government contractors, there are currently no federal requirements mandating that businesses provide sick leave; however, some state and local laws require employers to do so. Here, you can find a summary of the policies in all states with paid sick leave laws.

Does Sick Leave Have to be Paid?

Because there is no federal requirement for employers to provide sick leave, there is no requirement that any sick leave that you provide be paid. Again, exceptions exist for federal contractors. Individual states may also have different requirements.

Who is Eligible for Sick Leave?

In states where it’s required, most employees are eligible for sick leave benefits. Eligible groups may include:

  • Part-time workers
  • Seasonal employees
  • Temporary employees

What Type of Issue Qualifies as Sick Leave?

The allowable uses for sick time vary by state but generally include:

  • Physical or mental illness, injury, or health condition
  • Routine/preventative care
  • Dealing with the effects of domestic violence, sexual assault, or stalking

In some cases, only employees are eligible for sick leave. However, many states allow workers to use it to care for a family member as well. The definition of “family member” varies widely under state laws.

What Happens if an Employee Abuses Sick Leave?

Be sure to develop and share a clearly written policy that specifies the expectations and guidelines for using sick leave.

Do Employers Have to Pay Out Unused Accrued Sick Time?

When an employee is terminated, some state laws require that you pay for accrued vacation. Other than requirements stated in an employment contract, collective bargaining agreement, or other legally binding agreement, businesses are not mandated to pay employees for accrued but unused sick or personal time.

If I am Not in a Jurisdiction that Mandates Sick Leave, am I off the Hook?

Depending on your business size, you might need to provide unpaid leave. Under the Family and Medical Leave Act (FMLA), employers with more than 50 employees within a 75-mile radius must provide employees with up to 12 weeks of unpaid leave per year for qualifying reasons.

Even if your sick leave is airtight, other payroll issues can arise, causing unexpected complications.

Overpaying Employees: What You Can Do as an Employer

Inadvertently overpaying an employee happens more often than you might think. Thus, you need a plan in place to collect wages and avoid noncompliance with any applicable federal and state laws. However, you’ll want to check your state’s law to see if there are any limitations on when you can recover.

What Are Common Causes of Overpaying Employees?

Overpaying employees can happen for a number of reasons, including:

  • Keystroke mistakes
  • Time clock errors
  • Bonus pay withholding discrepancies
  • Paying the wrong employee

Can Employers Take Back Wages from Overpaid Employees?

Both federal legislation like the Fair Labor Standards Act (FLSA) and state labor and employment laws give employers the right to recover an overpayment in full.

What’s Required to Collect Wages from Overpaid Employees?

Follow the FLSA’s recommended process but also check your state’s laws. The following is a suggested process:

1 Determine how much you overpaid the employee during the pay period.

2 Contact the overpaid employee.

3 Inform them you plan to deduct the overpayment from their next paycheck or process a direct deposit reversal, which you have five business days to complete.

4 Provide any required documentation.

What Can Employers Do to Prevent Overpaying Employees?

Total hours at the end of each pay period and review them for accuracy. Another proactive step you can take to help minimize problematic situations is to have a written policy that instructs employees to check their paystubs and immediately report any errors in payment.

With all these compliance regulations to balance, businesses often realize tremendous value in outsourcing payroll solutions. However, you’ll want to evaluate your readiness before taking that step.

 

Chapter 4 Key Considerations When Weighing a Payroll Outsourcing Decision
Key Considerations When Weighing a Payroll Outsourcing Decision

When payroll responsibilities become overwhelming, they detract from running your company. That’s why 38% of companies choose to outsource. But how can you tell if your business is ready for a third-party vendor?

Top Signs You May Need Payroll Outsourcing Services

1 Payroll responsibilities prevent you from growing your business. One of the advantages of outsourcing payroll services is that the provider will take care of all the daily, weekly, and monthly tasks involved with paying your employees and keeping up with taxes, freeing up you and your team to focus on core business activities instead.

2 You’ve found manual, paper-based processes to be error-prone. A key benefit of outsourcing to a payroll provider is that they’ll use online software that automates tax calculations, withholdings, and filings for greater accuracy. And, consequently, they’ll be responsible for any penalties your company might incur because of their mistakes.

3 You lack the resources to maintain your payroll software. When you use payroll outsourcing services, vendors will automatically update their software seamlessly, with no action required on your end.

4 You don’t have the expertise in-house to meet compliance requirements. If you utilize payroll outsourcing services, however, the provider will guide you on legal requirements and ensure you get payroll right.

5 You worry a negative payroll experience will impact employee satisfaction. With outsourced payroll services, automated processes mean you’ll consistently pay employees accurately and on time.

6 Your company needs assistance with other HR functions. When you choose to outsource, you’ll find that payroll vendors typically offer as much or as little support as you need in all areas of workforce management.

After evaluating your readiness, it’s essential to factor in the cost of payroll outsourcing as well.

How Much Does Payroll Outsourcing Cost? A Breakdown of Pricing

As a business owner considering outsourcing, you may be wondering just how much a third-party payroll vendor costs. The short answer? It’s surprisingly affordable. Although pricing depends on a number of factors, you can generally expect to pay between $200 and $250 per employee per year. How you manage the following factors can help you decide if a payroll outsourcing solution fits within your budget.

How is Payroll Pricing Structured?

Most payroll companies take three common approaches. In the examples below, we’ll calculate the average costs for a company with ten employees that pays bi-weekly.

1 Per frequency. Charging fees per pay frequency is the most common way payroll companies charge for their services. That means however often you pay employees (weekly, bi-weekly, semi-monthly, or monthly), you’ll be charged for the number of employees you pay each pay period.

This approach is good for businesses with fairly predictable payrolls that don’t have a lot of changes or extra payroll runs. You can expect to see individual employee charges that run from $1.50 to $5 per employee and base fees per pay period between $20 and $70. This means you would pay about $140 a month based on a fee of $3 per check and a base fee of $35.

2 Per Employee Per Month (PEPM). Because this approach often results in employer savings, it is increasingly popular. Instead of paying fees for each payroll, you can run unlimited payrolls and pay one monthly base fee plus a fixed rate for the number of employees you pay each month. PEPM is a good choice for companies that offer bonuses or commissions. With this option, you would pay a base fee of about $75 and around $6 per employee, making your total charge for the month, in our example, roughly $135.

3 Fixed Pricing. In some situations, especially with Do-It-Yourself (DIY) online solutions, a payroll company will charge a fixed rate per month that covers a set number of employees or a range such as $65 for one to nine workers, $125 for ten to 20, and so on. That’s the only fee you’re charged for payroll processing, no matter how frequently you pay your employees each month. If your business is fairly small with a consistent number of workers, this can be a simpler approach to outsourcing payroll.

What Factors Drive up the Price?

In many cases, the costs that an outsourcing vendor quotes are just for processing payroll. Any ancillary products or services—such as tax filing, check stuffing and sealing, and direct deposit—may result in additional costs. Some payroll companies may include one or more of these services in their base fee. But most often, you must either pay a separate fee for each add-on or buy a package that includes several popular services.

How Can I Save on the Payroll Outsourcing Cost?

As businesses seek less expensive options, Do-It-Yourself (DIY) online payroll software has become more popular. These DIY solutions can cost up to 50% less per employee per month because the employer assumes more responsibility, such as employee maintenance, payroll detail entry, and report production. These solutions are also paperless, so by paying your employees with methods such as direct deposit, you don’t incur costs for things like check delivery. But you’ll also being giving up some things with this approach. For example, many software solutions don’t include support as part of the service.

What Will My Total Price Be?

As you can see, there are many factors that can impact the total cost of payroll processing. But ultimately, your payroll outsourcing cost will likely be lower than what you’d spend fixing errors or paying penalties related to a compliance issue.

Disadvantages of Outsourcing Payroll: Everything Employers Should Know

No outsourcing solution is perfect. But if you understand the causes of potential problems, you’ll be better equipped to ensure your business can avoid them. Here’s a rundown that can help you work smoothly with a payroll vendor.

Delays in Paycheck Delivery

With outsourcing, you’ll need to plan ahead in order to meet the strict deadlines set by your payroll company to ensure they process payroll on time. If you’re like some businesses, you may worry that the time between when you send something to your vendor and when they receive it could lead to delays in payment to your employees.

How to avoid delays in paycheck delivery: The key to paying employees predictably is to adhere to a schedule. If you’re outsourcing, that means you’ll need to get the correct data to the provider in the agreed-upon timeframe. Another way to avoid delivery issues is to consider methods other than paper checks.

Payroll Systems Integration

Many companies use at least one HR or financial software application to handle many of the tasks of employee management. If so, you might be concerned that your systems won’t be compatible with a payroll provider’s platform or that you’ll have to make a technology investment to connect the two systems.

How to ensure your payroll systems integrate: Payroll vendors understand the need for seamless integration and will work with you to ensure a smooth implementation. Almost all cloud-based platforms are plug-and-play. However, you’ll want to ask certain questions of your vendor. For instance, ask how they’ll handle the transition and if you’ll have a dedicated team that devotes time just to your business.

Data Security

With the number of headline-making security breaches in recent years, including a tax and salary data breach at ADP that impacted one of its employer clients, you may be concerned about placing sensitive employee data in someone else’s hands.

How to protect your data with a third party: When evaluating payroll providers, make sure you perform due diligence. Find out if they’re reputable and have policies and procedures in place to protect your data by asking these questions:

  • Which accreditations are your processes and infrastructure compliant with?
  • Where is the data hosted?
  • Who can access data?
  • How is data backed up?
  • How is data stored and transmitted?
  • What on-site security is provided?
  • What kind of firewall/antivirus protection is used?
  • In the event of a breach, what are your protocols?

Vendor Stability

Some smaller payroll providers may lack reserved funds to cover the entire cashflow of a processing period. When funds flow in seamlessly from clients, this isn’t a problem. But it does pose problems if accounting errors occur or the business closes unexpectedly.

How to protect against vendor instability: Consult with colleagues or industry associations you belong to for referrals. Business and industry news outlets may also evaluate companies. When interviewing potential vendors, ask how long they’ve been in business, the number of clients they have, and their retention rate.

Once you’ve taken measures to qualify a vendor, the next step is to determine what kind of vendor aligns with your goals.

 

Chapter 5 Choosing the Right Payroll Outsource Partner
Choosing the Right Payroll Outsource Partner

Sorting through the various types of payroll partners on the market today can be overwhelming. How do you choose the best payroll provider for your business?

Types of Payroll Partners: Which is Right for You?

To help you find the best fit for your business, let’s delve into the advantages and disadvantages of the different types of payroll service providers.

Bookkeepers

Bookkeepers

A bookkeeper records financial transactions, posts debits and credits, creates invoices, maintains and balances the books and, in some cases, manages payroll using Excel or a payroll software like QuickBooks.
  • Advantage: Bookkeepers already maintain a general ledger in which payroll journal entries are automatically posted, providing a more accurate and complete financial picture. While the cost is dependent on how long it takes to perform weekly or monthly services, you can expect to pay $29.21 to $43.40 per hour for a freelance bookkeeper.
  • Disadvantages: A potential downside of using a bookkeeper for payroll is that you may need to worry about integration issues with a third-party software. In addition, you’ll have to ensure that the bookkeeper you use has specialized expertise in payroll.
CPAs

CPAs

As your business grows and you require more comprehensive financial reports and intelligence, an accounting firm can provide these advanced services. In addition to handling payroll processing and administration, CPAs offer tax and accounting consultations to aid your business in financial decision making.
Professional Employer Organizations (PEOs)

Professional Employer Organizations (PEOs)

A PEO is also known as an employee leasing model, which means that the PEO hires your employees, and you lease them back. In this way, you’re technically both co-employers. Since your employees technically work for the PEO, the PEO handles any workforce management functions, including payroll, HR, benefits and compliance.
  • Advantages: Their full-service capability is one of the biggest advantages of using a PEO. In addition, potential cost savings on benefits may be better compared to what you could get on your own since you’ll be part of a larger group of employers.
  • Disadvantages: The downside is that some PEOs may charge you administrative fees of around 3% to 15% of wages; others will charge you a per employee per month (PEPM) fee. In addition, some businesses find that that a PEO isn’t right for them because the PEO technically has the right to hire and fire your employees.
Payroll Software Providers

Payroll Software Providers

For those with simpler payroll needs, moving from manual-based processes to a payroll software partner is a cost-effective solution. Think of this as a Do-It-Yourself (DIY) approach but with some level of support to ensure you’re doing payroll right.
  • Advantage: The software is programmed to automatically calculate wages and withholdings and is updated with the latest tax tables each year to minimize human error.
  • Disadvantages: The vendor may not have integrated solutions to address other workforce needs as you grow. Furthermore, you will need to run payroll each pay period, leaving the responsibility to do it accurately and on time with you.
Local and Regional Payroll Partners

Local and Regional Payroll Partners

These providers generally offer the same services as national payroll companies.
  • Advantage: A significant benefit to using a local or regional provider is that they’ll have an office—or more than one—where you can reach an individual for personalized support. Being personal and reachable is the biggest plus for these providers, especially if you want your vendor to feel like an extension of your business.
  • Disadvantage: A potential downside is that these providers do not always have the same breadth of offerings you may need as you grow.
National Payroll Companies

National Payroll Companies

National payroll companies generally offer bundled offerings to address all your needs – payroll, HR, and benefits – in one place.
  • Advantage: This approach offers some advantages like improved accuracy and efficiency since the vendor will use one integrated platform.
  • Disadvantages: With a full-service approach, you may end up overpaying because you pay for services you don’t use. Another potential disadvantage of bigger payroll providers is that they may be more impersonal. However, this is not true for every company, so you’ll need to get a feel for their customer services approach on an individual basis.

PEO vs. Payroll Service Provider

As we’ve discussed, a PEO is an employee leasing model, while an outsourced payroll provider handles the administrative and compliance functions of paying employees. Because these are the two common approaches to payroll that businesses take, the distinctions bear further analysis.

When deciding between the two of these, you may be worried about the impact of your choice on your business’s budget, operations, and employees. Let’s examine both to help you make a decision that is best for your business.

What are the pros and cons of a PEO vs. payroll provider?

Like PEOs, payroll providers can also assist with employee management functions, such as workforce management solutions, HR duties, benefits administration, and compliance tasks. Though benefits cost savings may be a draw for PEOs, these savings come at a price, including administrative and PEPM fees that can pile up. By contrast, a payroll provider will cost you significantly less.

Beyond these differences, other key distinctions merit scrutiny. We’ve listed them here.

Amount of Control Retained

PEO

PEOs control the benefit carriers and plans you offer your employees, so if you have a preference for your insurance offerings, you may not be able to pick and choose. Another thing to think about is who remains in control of your employees. In reality, the PEO has the right to hire and fire your employees.

Payroll Provider

Payroll Provider. When you choose to outsource to a payroll provider, you’re still the employer. That means you’ll continue to make decisions for your employees like benefits. When your employees remain “yours,” you can control who works for your company.

Effect on Company Culture

PEO

Because the PEO handles new hire documentation and onboarding, the arrangement may be confusing for your employees—especially because paychecks will come from the PEO instead of your business.

In addition, because the PEO handles HR responsibilities that were previously managed in-house, it could negatively impact your culture, especially if you have a tight-knit company. You’ll have to find a PEO that shares your organizational values to ensure a smooth transition.

However, you may see a positive impact on the workplace by using a PEO when employees recognize benefits such as on-time and accurate payroll each pay period. In addition, since HR administrative tasks will be handled by the PEO, you may be able to spend more time improving the employee experience.

Payroll Provider

With a third-party payroll provider, the administration of your payroll is the only function moved outside the company unless you take advantage of any of the provider’s other offerings. Generally speaking, the payroll company will manage your employee pay options as well as self-service administration for employees—but that’s about all employees will notice has changed.

Since 63% of companies in North America outsource payroll, many of your employees have likely been paid by a third-party vendor before, so it shouldn’t be cause for alarm. And, like using a PEO, outsourcing to a payroll provider can benefit your culture because pay will be accurate and on-time, which can go a long way toward boosting morale.

Responsibilities Under Each Arrangement

PEO

Under your co-employment relationship with a PEO, you’ll maintain on-site responsibilities such as assigning tasks and providing your employees with the tools and places to work.

Payroll Provider

When choosing to outsource to a payroll provider, you still manage all your day-to-day operations and your employees. The vendor will simply process payroll, unless you use them for other workforce services such as HR.

Contractual Obligations

PEO

With a PEO, you’ll need to sign a contract for a year or longer. Although a contract provides some stability and predictability, potential downsides arise should you terminate your arrangement. Specifically, when you transition out of a PEO, you’ll have to rehire your employees, give them benefits, and find another option to handle payroll (yourself or another vendor).

Payroll Provider

When you outsource payroll to a third-party provider, you’ll also have to sign a payroll agreement that outlines both your and the vendor’s responsibilities. But you can likely find month-to-month options that don’t require lengthy contracts.

Should I choose a PEO or Payroll Provider?

As you consider what’s the best fit for your organization, keep these points in mind:

Typically, PEOs fit companies that:

  • Want the purchasing power of a larger organization to lower benefit costs
  • Prefer to have less administrative responsibility for HR functions
  • Are uninsurable for workers’ comp or costs are too high

Payroll providers will work well for your business if you:

  • Only want to outsource payroll and related functions and want to keep other HR tasks in-house
  • Don’t want a long-term contract
  • Want to customize and control the benefit options for your business

Should you choose to hire a payroll vendor, the next step is to evaluate the marketplace keenly. Keep in mind that not all companies are created equal and it’s important to find a solution that’s the right fit for your business.

The Best Payroll Companies: National Providers

Whether you’re looking to move to outsourced payroll for the first time or looking to upgrade providers, the marketplace has many options available. We’ve compiled a listing of the largest national payroll companies; however, bear in mind that a provider who caters to mid- and smaller-sized businesses and offers more personalized service may be a better fit.

Below, we’ve gathered publicly available information on these companies, so you don’t have to:

ADP

Headquartered in New Jersey, ADP (NASDAQ:ADP) provides payroll, global HCM, and outsourcing services in more than 140 countries and markets.

Gusto

Launched in 2012 as ZenPayroll, Gusto is an online people platform that helps small businesses take care of their teams. It serves more than 100,000 businesses nationwide and is based in San Francisco, California.

Intuit

The Mountain View, California, company Intuit (NASDAQ:INTU) is a global financial platform company. It was founded in 1983 and has 20 locations in nine countries.

Paycheck

Headquartered in Rochester, New York, Paychex (NASDAQ:PAYX) was founded in 1971 and provides integrated human capital management solutions for payroll, benefits, human resources, and insurance services.

Paylocity

Founded in 1997, Paylocity (NASDAQ: PCTY) is headquartered in Schaumburg, Illinois, and provides cloud-based HR and payroll software solutions.

How to Choose the Best Payroll Provider

Simply put, there’s just no way to compile a definitive list of the “best” payroll providers. The choice depends on your business’s unique needs. Your best bet for finding a good partner is to ask a lot of questions.

As you review vendors, be sure to inquire about the following:

As part of your due diligence, you may wonder why we didn’t include ourselves. That’s because we know that Complete Payroll Solutions isn’t right for everyone. However, we are a good fit if you’re looking for:

  • Seamless integration with your other business systems
  • Paperless payroll options that make pay instantaneous
  • Data security with 24/7 monitoring
  • A stable vendor
  • A team of local payroll specialists
  • Solutions beyond payroll, such as outsourced HR and employee benefits

We know that choosing a payroll company is a serious decision. Review our list of things to consider when choosing a provider to help make the best choice for your business. If you think Complete Payroll Solutions might be a good fit, see how we compare against our competitors to be sure.

In fact, we’ll help you make a comparison between our company and one of the large national providers.

Comparing Payroll Companies: ADP Vs. Complete Payroll Solutions

To see how we stack up with ADP, review our guide in which we’ve focused on features, cost, ease of implementation, and customer support.

What Packages Are Available?

Both ADP and Complete Payroll Solutions offer different payroll packages that include payroll processing as well as other support services. ADP breaks down their packages based on company size: they offer options for smaller companies (generally one to 49 employees—termed RUN Powered by ADP) and choices for larger companies (usually 50 and more employees).

By comparison, at Complete Payroll Solutions, we offer four options that are suitable for any sized business and can scale with your company as you grow.

Is ADP or Complete Payroll Solutions Better for Me?

As you review our guide, you’ll see that ADP and Complete Payroll Solutions both have their pros and cons.

ADP may be the right choice if you:

  • Like a do-it-yourself model and don’t need a lot of handholding
  • Want to be able to access support staff after hours, for example, if you run payroll late at night or on the weekends
  • Process international payroll
  • Are interested in a PEO for your payroll that includes group health insurance and workers’ compensation

Complete Payroll Solutions could be a good choice for you if you:

  • Want transparent pricing so you can accurately budget
  • Prefer personalized customer service from a dedicated payroll professional
  • Are looking for a more consultative approach during the sales process rather than requesting information and a quote online
  • Want integrated options like health insurance and retirement plan administration that are under the same roof (versus handled by a third party)

When comparing ADP and Complete Payroll Solutions, be sure to consider what, if any, additional products and services you want beyond basic payroll processing. No matter which payroll providers you evaluate, there are important tips to keep in mind when making a selection. Let’s review the key questions to ask to make an informed decision.

What is the Cost of Payroll?

Obviously, a critical factor to consider is cost; however, not all pricing is readily available. Generally speaking, you can expect to pay about $200 to $250 per employee per year to outsource payroll, although each provider charges a little differently.

Find out if the payroll provider posts costs online. If not, you’ll need to either call to get a quote or submit an online form for pricing specific to your business.

At Complete Payroll Solutions, our pricing is transparent. We include the costs for each of our offerings on our pricing page so you can know before you even start a conversation with us whether we offer a solution that fits your budget.

How Easy Is Implementation of the Payroll Solution?

No matter what payroll company you choose, making the switch takes a lot less time and effort than you may think.

Be sure to inquire about how long it will take the company to get your payroll up and running. Average times vary: some companies offer two-day or two-week transition times. However, be aware that the timeframe you are quoted may be dependent on the size of your organization. And find out if the payroll provider offers new client onboarding for a business of your size.

As a new client with Complete Payroll Solutions, it will take about three days to get your first payroll set up for a simple payroll to weeks if you’re a larger, more complex business. We will connect you with a business solutions consultant who will discuss your needs so we can customize your solution. You’ll then work with a dedicated implementation specialist for the transition; if you’re a larger company using additional solutions beyond payroll, you will also be assigned a project manager. In addition, we’ll provide training so that you’re prepared to run your first payroll and will remain engaged for continued support thereafter.

What Does Customer Support Look Like?

Some companies offer around-the-clock support, but it may not be personalized. For example, a payroll provider may offer automated support by phone or chat 24/7, as well as an online help center that provides access to how-to guides and support articles. Clients can also email questions to the payroll center at any time.

With Complete Payroll Solutions, you’re assigned a dedicated new client representative when you first sign on who will stay with you until you move to a permanent payroll specialist assigned to your account. With this approach, you’ll have access to the same contact who knows you and your business each time you call. These individuals are available by phone Monday through Friday.

Top Considerations When Choosing a Payroll Outsource Provider

As you can see, there is much to consider when selecting a payroll provider and ensuring you enter into a successful partnership. With the background knowledge in this guide, you’ll be equipped to make the right decision for your company. If it sounds like Complete Payroll Solutions may be a fit for you, then visit our pricing page for details on options.

At Complete Payroll Solutions, our people can become your people, providing the personalized service that mid- and smaller-sized businesses need. We work behind the scenes to manage complex compliance issues so you can focus on growing your business. Want to learn more? Let’s schedule a time to talk. We’re standing by, ready to answer any questions you have.