A lot of business owners aren’t experts in accounting or have training or experience in running their own payroll. Payroll processing can be challenging and confusing to small business owners, and the fact that the IRS can impose penalties if not filed correctly makes payroll processing somewhat intimidating. Because of this, most small business owners leave payroll processing to experts –either by outsourcing payroll, or processing it in-house (also known as traditional payroll).
1. Outsourcing Your Small Business Payroll is More Cost Effective
If a small business owner uses a certified public accountant (CPA) to perform in-house payroll processing, costs could be anywhere between $260 and $480 per payroll run –not per month, but each time payroll is run.
For in-house payroll processing, using a CPA is the best way for having your payroll done correctly because CPAs are specially trained in accounting and payroll procedures. However, CPAs charge between $65 and $120 per hour and at approximately 4 hours per payroll processing run, the cost can be quite substantial. And if your small business runs payroll bi-weekly or weekly, you’ll double or even quadruple this amount. Even without a business degree, everyone knows that the lower your expenses are, the quicker you can become a profitable small business owner.
Outsourcing your small business payroll can give you all the benefits and accuracy of having a CPA do your payroll, but will run you at a fraction of the cost. It’s the best of both worlds; easy, accurate, and cost effective. Outsourced payroll can save you thousands of dollars per year.
So how much can you really save? Let’s compare how much it would cost for Small Business Inc. to run payroll for its four employees once a month. Just to be conservative, we’ll use $65 per hour to estimate the traditional in-house payroll cost –the low end per hour cost for a CPA.
Outsourced Small Business Payroll
Base price of $44.95 per payroll run + $1.85 per employee = $52.35
[$44.95 + ($1.85 x 4)]
Traditional In-house Small Business Payroll
Four hours at $65 per hour = $260
Outsourcing payroll saves Small Business Inc. $207.65 per month.
2. Outsourced Payroll Helps Small Business Owners Avoid IRS Penalties
So what happens if you can’t afford a CPA and you decide to try your hand at calculating, paying, and filings your own small business payroll? Because of the complexity and ever changing payroll laws, it’s easy to make mistakes.
Each year, approximately 40% of small business owners are penalized by the IRS for paying or filing their payroll taxes incorrectly. That’s a pretty high percentage, and at approximately $850 a year in penalties, doing your own small business payroll processing might not be as cost effective as if you had a specialist do it for you. Payroll outsourcing companies such as Online Business Payroll automatically calculates, pays, and files your small business payroll taxes for you. Because of the automated process, you’ll never be late or miss a payment or filing.
3. Outsourced Payroll is Easy
Payroll processing done through an outsourced small business payroll service is easy to use. Although setting up your employees could take a few minutes, the actual payroll run can be done in just a few minutes.
Just log into your outsourced payroll service’s secure online portal and enter in the hours each employee worked during the pay period. After you enter in your employees’ hours, review the information, and click submit. Your payroll is done.
4. Outsourced Payroll Takes Care of W-2 and 1099 Forms for You
At the end of the year, small business owners must give their employees either a W-2 form or a 1099 form by January 31st of the following year. W-2s are forms that let employees know how much money they earned as well as how much federal, state, and local taxes were withheld during the year. Form 1099 is for independent contractors who you paid more than $600 to during the year.
Not only do you need to give these forms to your employees and independent contractors, but you also have to file certain forms with the IRS. Again, if you don’t know what you’re doing, this could cost you in IRS penalties.
Outsourced payroll companies keep track of this information and file it for you. At paperless companies such as Online Business Payroll, small business owners can print W-2s and 1099 forms for their employees right on the spot. Small business owners are able to get tax forms to their employees faster by being able to print these documents for them, rather than employees waiting for their tax forms to arrive in the mail.
5. Outsourcing Payroll Services Let You Maintain Control
Most outsource payroll services, allow you to maintain control over your payroll while taking care of the tough payroll tax calculations in the background. Outsourcing your payroll is a beneficial relationship because it allows you to stay in compliance with tax laws, but also allows you to focus on your business instead of trying to become an expert in payroll processing.
Entering your payroll information online allows for you to maintain control of your payroll processing and helps eliminate double entries or typing mistakes often associated with calling or faxing in your payroll information to a customer representative. You enter it, you review it, you approve it –you’re always in control of your small business payroll processing.
6. First Month Free
The best thing about using an outsourced payroll service is a lot of companies allow you to try their service for free. You have nothing to lose, why not give outsourcing a try.
Deciding the right rate of pay
Employers look at what the job entails, what competitors are offering for similar work roles and the abundance or lack of in the relevant skills. For new businesses this process is more straightforward but for established employers, it is slightly more complex. Existing employees set a precedent with their pay rates and therefore creates less flexibility to agree a pay rate different from one already given to current payroll employees in the same or similar job roles.
Established employers recruiting new payroll staff, does provide an opportunity to review pay rates generally. It is not always simple to stick to the rates currently being paid to existing employees, as external factors, such as shortages of skills in specific areas, can have an effect on rates of pay. Employers unaware of this issue can face difficulties in recruiting new employees, but may also suffer when current employees become attracted by higher rates of pay elsewhere.
An employer must decide where they want to position the business and the rates of pay being offered. To attract the best payroll employees, employers may wish to pay a ‘top of the market’ rate. At the other end of the scale, employers who are unwilling or unable to pay premium rates may have to compromise on the calibre of employees they recruit.
The law requires employers to pay a fair and equal rate of pay for equal jobs, regardless of who is doing them. The National Minimum Wage is a standard minimum amount prescribed by law and is the lowest amount an employer is allowed to pay to any employee. There are three rates of the National Minimum Wage in force from 1st October 2009.
- £5.80 per hour, for those aged 22 or more
- £4.83 per hour, for those aged 18 – 21 inclusive
Apprentices aged 19 and above qualify for the National Minimum Wage after the first 12 months of their apprenticeship.
- £3.57 per hour for 16 and 17 year olds (above compulsory school leaving age)
16 and 17 year old apprentices are not entitled to this rate.
The minimum wage figures are reviewed and updated regularly by the government. Failure to pay the minimum rate is a criminal offence.
What the Law says
There are key regulations that you should be familiar with, which lay down rules regarding how much you pay your workforce, as follows:-
- National Minimum Wage – minimum rates you can pay your employees.
- Equal Pay Act – states how men and women are to be paid an equal rate for the same and similar roles.
- Part-time Workers Regulations – part-time workers doing the same or similar jobs as their full time colleagues should be paid the same rates based on the number of hours worked pro rata.
- Fixed-term Regulations –fixed-term employees total pay package must be the equivalent to that paid to comparable permanent employees in monetary terms.
- Employment Equality (Age) Regulations 2006 – discrimination on the grounds of age is unlawful. Pay and benefits schemes, are potentially discriminatory on the grounds of age if based on the length of service. Limiting pay and/or benefits schemes to 5 years’ service would enable employers to operate fairly. Reward schemes based on length of service of more than 5 years must be objectively justified.
Under HM Revenue and Customs rules, employers have other legal duties regarding pay such as the deductions of tax and NI. These deductions must be paid directly to HM Revenue and Customs on behalf of the payroll employee. The employer is then required to provide each employee with a written statement or payslip at the time of paying staff to indicate the gross pay, deductions of tax and National Insurance, fixed deductions (e.g. loan repayments or Trade Union subs) and net pay total.
Only in certain circumstances are employers entitled to make other deductions from pay:-
- Where written authorisation from the employee has been given prior
- If employee’s contract of employment has a clause that allows the employer to make deductions
- A Court order, e.g. an attachment of earnings order
Our advice to you.
An employee’s pay rate is a term of employment which by law must be specified in the terms and conditions of the written statement of employment, given to employees within their first 2 months of starting. When an employee receives a pay rise or is promoted or a change in role occurs, the pay rate may be renegotiated.
Individual employees can undertake very different roles from one another and therefore require different pay rates. However, when a number of employees perform the same or similar roles, pay should be made on an equal terms. To pay different rates to different people based on gender or employment status is discrimination and unlawful. There are some important age exceptions to this provision as described above.
Regularly review your rates of pay to help you attract and retain good payroll employees. It will ensure that differences do not arise in the rates given to employees doing the same or similar jobs or highlight areas where this has occurred. There are circumstances where differences in pay rates legitimately do occur, e.g. where an employee’s job role demands a higher level of skill or competency. In these instances, make sure you can justify the differences in pay. Reasons for pay differences must be objective, measurable and noted down, helping you avoid potential claims of discrimination. You must be able to demonstrate that the differences are due to reasons other than age or gender.