Outsourcing payroll services makes a business more attractive to talented employees and frees up owners to focus on mission-critical activities like growth.

Originally written in Inc. Magazine
Edited for brevity & clarity by Gleba & Associates

As a small or midsize business (SMB) owner, recruiting and retaining an effective workforce is fundamental to your success. On its surface, this seems a fairly straightforward proposition: your employees work on your behalf, and you pay them for their efforts. But of all the things that can – and often do – cause problems for growing businesses, payroll is one of the most persistent.

For starters, doing payroll in-house is time intensive for SMB owners, who already struggle with competing demands for their attention. Nonprofit business consulting organization SCORE found that 43 percent of SMB owners doing payroll in-house spend three to 10 hours a month on this task, and 11 percent spend even more. That means up to two or more hours a week is devoted to an activity that generates no revenue or growth but is still critical, because mistakes can trigger severe consequences, both financial and cultural.

“Inaccurate payroll truly undermines the bond you have between employer and employee,” says Jason Pourakis, CPA, a partner and group practice leader for entrepreneurial business services at accounting and consulting firm Mazars USA. “If an employee can’t trust that they are getting paid what they deserve, it not only impacts the morale of that employee, it then typically spreads to the rest of the staff.”

Frequent problems with pay “erodes trusts, causes stress, and fuels the gossip mill in the office,” adds Kate Zabriskie, founder and CEO of HR consultancy Business Training Works. “Furthermore, payroll errors focus people on payroll and not on what they’re in the workplace to do.”

Owners Should Focus on Growth

As Mark Bottini, senior vice president of sales at payroll service Paychex, Inc., points out, “Business owners have so much to consider and should spend their time focused on one thing: growing their business.” Once an SMB owner makes the decision to take on employees, the shift from being an entrepreneur to being an employer is very real. “Immediately, they become subject to many, if not all, of the administrative and regulatory responsibilities of being an employer – payroll liability being a major one,” he says.

Bottini cites Internal Revenue Service (IRS) statistics that every year, 40 percent of SMBs in the U.S. end up paying a payroll penalty, with interest, for failing to deposit withholdings, depositing the wrong amount of withholdings, or for incorrect filing. “This type of expense is typically unexpected, and it’s one that can be completely avoided by working with a professional payroll and HR service,” he notes.

Deciding whether to outsource payroll is a simple cost-benefit analysis, Pourakis says. “Ask any business owner why they got into business, and they will tell you great stories of what inspired them. No one will tell you they did it because they wanted to do payroll,” he quips. Outsourcing payroll helps mitigate financial risks, maintain or improve employee morale, and eliminate the opportunity cost of time spent by owners doing it themselves, he says.

Another argument in favor of SMBs outsourcing the payroll function is the challenge of staying abreast of constantly changing rules and regulations in this area, something John Cumbee, general manager of SurePayroll, a Paychex company, says is nearly impossible.

“The level of regulation and frequency of regulatory change continues to grow every year,” he says. “And as we see deregulation of certain requirements at the federal level, they are being replaced with new regulations at an individual state level, particularly in protections and benefits like workers’ compensation, minimum wage, and retirement funding.”

The changes resulting from recent tax reform legislation at the federal level provide a great example of how rapid and complex change can be on this front. The announcement of the planned changes came at year-end, one of the busiest times of the year for any business, Cumbee points out. Even for tax experts, it took weeks, at minimum, to analyze the changes and determine the effects they would have on businesses. “Now imagine keeping up with that, with individualized requirements across 50 states, and, in a growing number of states, requirements specific to local or municipal jurisdictions,” he says.

Make Your Business a Talent Magnet

In the most competitive labor market in recent memory, payroll also has an important role to play in attracting and retaining the best employees. Research shows that almost half of U.S. employees would start a new job search after experiencing as few as two problems with a paycheck.

“Delivering accurate and timely pay is the cornerstone of the employer-employee relationship, and businesses can’t afford payroll mistakes,” Bottini says. “But when considering payroll’s role in retaining top talent, accuracy is only a piece of the puzzle. Today’s employees expect the same technology conveniences they enjoy in their personal lives while at work and on the go.”

That’s why SMBs should partner with a HR services provider committed to delivering the latest technology solutions to drive employee engagement and productivity. Doing so “helps ensure you’re meeting the employee expectations of today and quickly adapting to the expectations of tomorrow,” Bottini says.

“With mobile solutions that allow an employee to do everything from check available vacation hours while out on the town making future plans with friends to quickly updating direct deposit choices when adjusting savings goals, payroll technology is a critical part of creating a culture that attracts and retains top talent,” he says.

Beyond basics like payroll tax support, there are several areas on which SMB owners should focus when choosing a payroll services partner, Cumbee advises. “You’ll want to consider the provider’s reputation and make sure you choose a provider you can trust,” he says. It’s also important to consider the provider’s longevity, internal audit procedures, IT security practices, business model, flexibility, and live help options.

Keep in mind, too, that some providers offer an array of services that go well beyond payroll. “Depending on the individual business’s needs, these can include compliance posters, 401(k) plans, works’ compensation, health insurance, and other protection and benefits, so make sure to select a provider with your future growth in mind,” Cumbee says.

If you need some guidance on payroll or HR third party companies, Gleba & Associates can help provide some options.