Outsource your payroll problems
By Jenny C. McCune • Bankrate.com

People running companies seldom start them to handle back-office chores and red tape. That's why more firms are outsourcing payroll functions, one of the most important -- and administratively annoying -- responsibilities a business owner faces.

"It's a headache and payroll outsourcing is affordable, so why not do it?" asks David Schnitt, CEO of Ledgent Inc., a Torrance, Calif.-based company that handles payroll and human resources services for clients.

Carlos Rodriguez, president of ADP TotalSource, a Miami outsourcing company for HR services and benefits for small and mid-sized businesses, estimates that between 40 and 50 percent of all small companies hire an outside firm to handle payroll. In fact, his firm's corporate parent, ADP is one of the largest payroll processing firms.

Save time, resources and money
Once a company signs up with a firm like ADP or Paychex, the payroll process becomes automatic. The hiring company typically needs to call, fax or e-mail any changes to the payroll administrator once a month or once a week, depending on how often the company's employees are paid.

Shifting the payroll burden to another firm means less work for in-house staff, eliminating the need for them to learn new, specialized duties. For example, a company that outsources payroll doesn't need to know about tax withholdings.

"It can reach a high level of complexity with different rules for state, city, federal, which then change every year," Rodriguez says. "And there can be high penalties if your company makes an error."

Plus, the outsourcers argue, companies that specialize in payroll management know all the nooks and crannies so the job will be done right.

And it can actually save the hiring firm money, letting employees focus on their core jobs instead of spending time on payroll. "Handing it over to a payroll provider vs. doing it in-house can save between 25 percent and 40 percent," Schnitt says.

Just one paycheck required
How many employees does a company need for payroll outsourcing to make sense? One.

"You can be as small as a company with one employee, yes," says Michele Sortino, senior product manager for payroll at Paychex Inc., Rochester, N.Y.

Although Paychex says it's willing to work with a company with only one employee, most players in the field say that usually 10 or more employees is the "sweet spot," where benefits outweigh costs.

In addition, where your employees are based can also play a part in your decision.

"Say you have 300 employees in four different states," says Rodriguez. "That's a great client for us because even though they have 300 employees, they're spread out.

"It makes more sense to hire us than to have four different HR departments, each for only 75 employees," Rodriguez says. "We take care of everything, without them having to add infrastructure."

The price of paychecks
In terms of cost, companies charge by the complexity, length and frequency of a firm's payroll.

A company with 10 employees who are paid monthly by actual checks (vs. direct deposit) would pay less than a 100-employee firm that pays biweekly and also wants the payroll company to handle W-2s and other payroll-oriented tax issues.

Paychex offers two sample payment scenarios:

1. A small business with five employees and a biweekly payroll would pay an average cost of $38.20 per pay period (less than $1,000 annually) to have the company pay employees and handle tax withholdings.

2. A company with 15 employees paid biweekly would spend about $55.45 per pay period (less than $1,450 annually) to have Paychex take care of its payroll.

To find a reputable agency check with your professional advisers.

"Most small businesses have a trusted CPA or attorney that they can ask for referrals," Rodriguez says. In fact, many CPAs who used to handle payroll for clients have phased out of the business. Specialized companies such as ADP and Paychex are more efficient and cost less.

Searching your local Yellow Pages or Internet also can provide leads, says Schnitt. "For example there's Firmbuilder or the Outsourcing Institute or the Outsourcing Center," he says.

Check out your paycheck company
When you hire a payroll outsource firm, the process should be the same as any hiring situation. Verify the payroll company's references, and, if possible, check out its facilities.

"If it's feasible, take a tour of the facility where your work will be handled, and meet the people who will be working on your account," Schnitt says.

Of course, the beauty of payroll management and automation is that your company doesn't need to be based anywhere near its payroll handler.

And make sure the service knows about all the federal and sate government regulations.

Outsource everything
An alternative to a payroll manager is to outsource all back-office operations to a professional employer organization (PEO).

PEOs take over as employer and then "lease" your employees back to you. They handle benefits, health care and payroll. This works well for many small businesses that often don't have the time, energy or know-how to keep up with the government filings that are required.

"Every time the government passes a new rule it helps us," says ADP TotalSource's Rodriguez. "As the tax codes become more complex and there's more government red tape, the more people turn to us. We love red tape."

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: Aug. 17, 2001