From the January 2000 issue of Entrepreneur

Like doing payroll? A recent survey by International Communications Research (ICR) found that the average small business spends 50 hours per year on payroll--about an hour per week. So how's it going? Do you find processing payroll to be a productive use of your time?

The problem is, processing payroll doesn't just mean cutting checks and updating your books. You also have to fill up all those federal, state and local tax pots with money--you know, the FICA, FUT and US contributions--in a certain way on a certain schedule. And let's not forget the monthly, quarterly and annual payroll reports that have to be filed in ways that can vary by company and even employee.

According to the IRS, the average entrepreneur has to comply with more than 50 payroll tax regulations at all levels of government--a good portion of which change frequently. In fact, they change so often that, by IRS calculations, America's small businesses spend about $16 billion per year just keeping up with the paperwork.

Nonetheless, it's a job that has to be done. But does it have to be done by you? Not when you consider there are people who actually enjoy navigating these confusing waters. They're called payroll service providers. Maybe you should donate your payroll headache to one of them so you can spend that extra 50 hours a year doing something that actually brings dollars to your bottom line--or at least, to the top line.


Mike Hogan isEntrepreneur's technology editor, and he can be contacted at mikehoganentrepreneur@juno.com

The Electronic Ideal

The perfect payroll system would simply send employee hours and pay rates already entered in your PC-based accounting program over the Internet. Your payroll service would then authorize the necessary fund transfers from your bank account to your employees' accounts (and to government coffers, of course) just in time. You'd want the results of those transactions downloaded during the reporting phone call so you could update your accounting files with a few mouse clicks--much the way online bill-paying works.

Unfortunately, this end-to-end automation is only available to a limited number of businesses today, and not in every state. The technology is there, but so are implementation hurdles that a payroll service hoping to match all the different state-reporting regulations to variations in different PC-based accounting systems must face. Even where electronic alternatives are available, small businesses are often slow to take advantage of them. "A lot of businesses want to keep something as important as payroll in the top desk drawer and work on it in-house," says Gene Polisseni, senior vice president of marketing for Paychex."

Brad Smith, ADP vice president and general manager of ADP's e-business services, says electronic payroll services will eventually solve that objection by delivering greater efficiency with greater control than can be accomplished by doing payroll in-house. Both market leaders are committed to Web-based payroll solutions but are still getting their pieces in place. In the meantime, most customers report payroll the same way they have for decades: by developing a brief report of employee hours and other necessary information and submitting it by phone or fax to their payroll service two to three days before payday.

Paychex's Paylink software adds more flexibility by letting you transmit your employee hours to your Paychex branch office via the Web or make changes until the actual transmission of payroll data and then use any Web browser to surf over to the Paychex site and download a report of the transaction to your PC the day after payday.

ADP hopes to have a similar solution in place this month. EasyPayNet will let you log onto the ADP Web site using just a browser to upload hours and download payroll reports from any location with an Internet connection. Payroll can be submitted until 3 p.m. the day before payday with paystubs for direct deposit or paychecks downloaded electronically.

In both cases, employee hours must still be typed into the forms on the software program, although by the time you read this, both companies hope to be able to map their downloads to popular PC accounting programs like QuickBooks, Peachtree Complete Accounting and M.Y.O.B. Until the hook-up is electronic from end to end, it will be difficult, Polisseni admits, to lure small business away from the old ways.

More Automation

A shining example of Internet payroll is QuickBooks Payroll Service from Intuit. You simply upload employee hours and other pertinent information already in the QuickBooks accounting program over the Internet two days before payday. A transaction report is downloaded, so you can review it and, with a few mouse-clicks, add the necessary debits and credits to the appropriate accounts. All data transmissions are encrypted before being sent over the Internet.

Donna Piehl, co-owner of Alpha Tool Co. in Franklin Park, Illinois, finds this payroll service complete enough that she can do the company payroll from her vacation home 400 miles from the office. Piehl, 46, figures the 200 hours per year she used to spend in the office doing her weekly payroll has been cut to 12. Most of the time savings, she says, comes from not having to deal with government reporting requirements.

The service's shortcoming is that it's only available to the estimated 2.5 million QuickBooks users; not even the 3 million businesses that use Intuit's Quicken personal finance manager to keep their books can use it. Fortunately, a simple file transfer can upgrade you from Quicken to the $120 QuickBooks99, an amount you can probably recover in savings during the first year of using Intuit's payroll services.

A small business with five employees and a biweekly payroll can subscribe to payroll and tax-deposit services for $30 per month. Add $15 per month for direct deposit of employee paychecks, and, with a few extra charges, the annual bill comes to around $555. That's an approximate 35 percent savings over the $845 per year the Beacon Research Business Consumer Guide says is the national average for full-service biweekly payroll costs for a company with five employees. Paychex's prices vary among its branch offices, but the same services typically run well under $1,000 annually, depending on services chosen. ADP's charges also vary but are estimated to be $800 annually for basic payroll and tax filing services.

Going To The Web

Another option is OneCore.com, a Web-based company that offers diversified financial services to small businesses. OneCore.com will not only automate your payroll processing but also integrate the reporting procedure with your 401(k) contributions recordkeeping and your checking, bill-paying, credit card fulfillment and other banking services.

You can submit your payroll hours and employee information from any Web browser 48 hours before the checks are issued. The cost depends on the size of the company (It costs about $125 per year for a five-person company with a biweekly payroll). There is an additional charge of $25 per month to be a OneCore.com member, which helps defray the cost of the back-end integration of OneCore.com services, including the mapping of data generated by your payroll/401(k) reporting sessions directly into popular accounting programs.

OneCore.com is just one of many partners who provide a front end for the payroll processing services of Computer Resources Inc. (CRI), the same nationwide provider that Intuit purchased earlier this year for its QuickBooks Payroll. CRI has serviced approximately 25,000 clients through intermediaries like OneCore.com, and Intuit says it will continue to do so.

Protection From Your Uncle

No matter where your payroll service falls on the data integration scale, it will save you from wasting time trying to keep up with ever-changing government regulations. Assuming you don't make a data reporting mistake, almost any payroll service will indemnify you against government penalties that result from an error or a missed deadline.

"That's a very big deal," notes Tina H. Anderson, owner of Burlingame, California-based Tina H. Anderson Consulting, who ticks off a dozen subtle variations that a single small company may have to account for when filing tax payments. Regulations vary by state, the size of your company, its incorporation status, the frequency of your paydays, whether you have workers in the office or in the field and whether any are unionized. And, adds Anderson, the government keeps squeezing reporting deadlines with the objective of having all tax payments filed electronically on the same day that paychecks are cut--or sooner.

The process is so onerous that nearly 40 percent of small-business owners polled by the ICR survey report having been penalized by the IRS for late or inaccurate payroll tax filings, with the average penalty being $845. The IRS admits to almost $9.7 million in discreet assessments against businesses for tax year 1997--and you know it isn't corporate comptrollers making the most of those mistakes.

According to Thor Muller, 28, CEO of San Francisco-based cooperative e-commerce company Trapezo, whatever comfort he gets from cutting payroll checks himself is overwhelmed by the specter of this liability. Muller has done payroll in-house and used bank services, but he is now a OneCore.com customer.

Add up the savings in productivity, cost and general hassle, and payroll service prices look like a great deal. "The Web allows us to outsource all that administrative stuff to people who can do it better," Muller says. "People should focus on what they do best--building a business and servicing their clients."

Paychex

(800) 322-7292

http://www.paychex.com

ADP

(800) 225-5237, ext. 5091

http://www.adp.com

Intuit Inc.

(800) 332-4844 or (415) 944-6000

http://www.quickbooks.com

OneCore Financial Network Inc.

(888) ONE-CORE or (781) 938-1001

http://www.onecore.com

Contact Sources

ADP Payroll Services, (800) 340-6590, http://www.ebs.adp.com

Alpha Tool Co., (847) 678-5275

Intuit, (888) 2-INTUIT, http://www.quickbooks.com

Paychex, (800) 322-7292, http://www.paychex.com

Tina H. Anderson Consulting, (650) 343-8345, tharleen@aol.com

Trapezo, (415) 431-2038, http://www.trapezo.com