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Outsource Your Payroll For many businesses, payroll services offer an attractive and valuable alternative to in-house processing. Chosen correctly, they provide a less expensive, simpler means of paying your employees, filing your taxes, and performing a host of other duties these companies' sales reps can't wait to tell you about.

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Even the most meticulous and experienced professionals find that payroll can be a headache. Slap on a stiff penalty for a tax filing omission, and now we're talking a full-blown financially-induced migraine.

For many businesses, payroll services offer an attractive and valuable alternative to in-house processing. Chosen correctly, they provide a less expensive, simpler means of paying your employees, filing your taxes, and performing a host of other duties these companies' sales reps can't wait to tell you about.

However, choosing poorly is like starting a new job you weren't right for in the first place -- it's a hassle to leave, but if you stay, you'll be perpetually frustrated.

Companies often initially process payroll themselves for any number of the following reasons:

  • they consider in-house processing to be more cost-effective than outsourcing
  • they are protective of wage information
  • they want to maintain control over payroll data to handle last-minute changes.

In truth, smaller firms with a stable, salaried staff and minimal changes in tax obligations may well be better off processing internally; it can certainly be more convenient and efficient if your needs are straightforward. But many ultimately discover it's not all that cheap -- especially when you factor in the time spent managing the process.

Plus, without the proper knowledge of payroll procedure and access to a sound payroll program, it's easy to make mistakes. Employees as well as federal, state, and local tax collection agencies need to be paid in full, on time, and in the proper manner. Usually, late payments are cause for monetary penalties.

Finally, using a payroll service can ease your mind. The Internal Revenue Service has reported that one out of every three employers has been charged for a payroll mistake, with total penalties reaching into the billions of dollars. And given the ever-changing nature of tax regulations, it's easy to make an error that can grossly affect your bottom line. can help you select the right payroll service--as well as coach you on switching to a new one. In addition to offering up the nitty gritty on payroll services, we will simplify the industry and empower you with solid working knowledge to apply to your search for a provider.

When to outsource

While the majority of U.S. businesses process paychecks internally, this is not always cost-effective. At minimum, internal payroll processing requires the purchase of a computer or manual accounting program and extensive training to use it. In addition, businesses need to keep up to date on changes in personnel, deadlines, and tax requirements on an ongoing basis.

Using a payroll service generally makes sense if your payroll changes with each pay period. If your company has employees working varying amounts of hours each week or has a significant turnover rate, a payroll service can be a time-saving and cost-effective alternative to internal processing. Using a payroll service can also be helpful if you have to pay payroll taxes for multiple states.

On the other hand, if your payroll expenses are quite stable, you may find handling payroll internally to be just fine for your needs.

Services provided

A payroll company's basic services include calculating payroll and tax obligations for each employee, printing and delivering checks, and providing management reports. Paychecks can be issued on a weekly, bi-weekly, monthly, semi-monthly or yearly payroll basis.

In addition, payroll firms can offer services such as automatic check signatures, envelope stuffing, and direct deposit of checks. Payroll firms also issue W-2 forms for an additional fee of about $1 per form.

Many services now offer tie-ins with 401(k) and Section 125 mutual fund plans, allowing employees to designate automatic deductions from their paychecks. And for larger companies with more complex processing needs, some payroll providers have even begun to offer integrated HR software systems that track employee benefits-related information in addition to regular payroll data.

Choosing a provider

Besides offering the services you require, a payroll service should offer a high level of customer service. Unlike some other business services, you will need to communicate regularly with your payroll provider.

If your sales representative will not be handling your account, make sure to speak with the customer service reps to ensure you will be satisfied. Also, consider requesting references from current clients to gain a better sense of the provider's level of customer service.

You should look for a payroll provider that is within reasonable driving distance, allowing you to pick up checks in case of an emergency. Also check that the company is bonded to ensure your company will not suffer from any potential financial mishandling.

Filing payroll taxes

Many payroll services offer the option of filing state and federal payroll taxes for your business.

Typically, this service is offered at little or no cost. This is because the payroll provider will impound the tax due at the time paychecks are issued, earning interest on the funds until the money needs to be handed over to the government.

Most services assume responsibility for penalties resulting from incorrect filing; however, your company may be liable for any interest charges.

Keep in mind that many companies will not calculate local or city payroll taxes. Make sure to inquire about this if it is a significant issue for you.

Filing electronically

With the Electronic Federal Tax Payment System (EFTPS) your company banks by phone with the government, transferring funds electronically rather than relying on checks to keep your "account up to date. If your company paid more than $200,000 in taxes in any year since 1998, then you are required to pay taxes electronically through EFTPS within the following two years. If for example, your company paid over $200,000 in taxes in 1999, then by January 2001, you must pay taxes electronically.

Many payroll services do offer electronic tax payments as part of their package, but in truth, electronic filing is not as difficult as it first appears, and businesses can easily enroll and learn how to do it on their own.

For more information, call EFTPS Customer Service Unit at 1(800) 945-8400 or 1(800) 555-4477.

Relaying information

Each pay period, payroll data has to be "called in" to the service provider. This can be done via telephone, fax or computer.

The telephone is the traditional way of communicating information. The biggest problem is typically finding a mutually agreeable time for both people to be on the phone.

A fax machine eliminates scheduling conflicts and miscommunicated facts, but can bring up security risks concerning who receives the faxes and who will oversee the fax being sent.

Communicating payroll by modem is often the most efficient method, especially if you have a larger payroll.

Since 1998, several national payroll providers have offered payroll data transmission over the Internet. This simplifies payroll for many businesses, allowing them to download payroll information from any computer that is Internet accessible.


The market for payroll is competitive and reflects local market conditions. The basic service costs between $0.80 and $2.00 per check, plus a base account fee. The amount of the base fee depends on the pay period, with the less frequent payroll periods costing more. Over a year, however, less frequent payroll periods will cost less to maintain.

Added services such as tax filing and direct deposit can cost between $4 and $9 per payroll period. With direct deposit, there is often a nominal transaction charge per check in addition to the base fee.

Furthermore, there can be fees for adding or dropping employees, adjusting employee information, or setting up your account. Fees can differ dramatically across services, so it is important to check them out before signing up for a service.

Since pricing for services is relatively negotiable, try to avoid multiple unnecessary charges by knowing which service features you are most interested in before choosing a payroll company. In general, watch out for providers that offer low base processing rates with expensive add-on features.

Questions to ask


  • What does your basic service include?
  • How quickly can you re-run a payroll if there is a mistake?
  • How long does the average client stay with you?

Tax filing

  • If I use your tax filing service, do you cover the penalties and/or interest charges?
  • Do you provide filing assistance for local taxes?
  • What is the cost to file taxes for multiple states?


  • What is the cost for your service for one year, including year-end W-2 forms?
  • How long are these rates in effect? What rate increase should I expect after that?
  • If there are payroll data mistakes, how long will it take to reconcile the errors and what will it cost?

Questions for references

  • How responsive is the provider to your questions?
  • Have you had any problems with accuracy?
  • Have you used another payroll service? If so, why did you switch?

Buying tips

Look for a stable provider
If a firm's only business is payroll, make sure to check the number of clients it supports. To ensure stability, a payroll service should ideally maintain at least several hundred clients.

Double-check the math when switching
Transitioning to a new payroll firm rarely occurs without glitches. Be especially thorough in reviewing the first paychecks issued through the service as well as the money paid to cover tax obligations.

Watch prices over time
Do not be swayed by services that waive charges upon sign-up. Often rates go up or charges start accruing after six months to a year of service.

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