Payroll service options for your small business

If your business has employees, you'll need a system to handle payroll, either in-house or externally.

Many small businesses still handle payroll internally, but it's a time-consuming process prone to mistakes, especially with the tax rules often changing. Your time is valuable, and it may be worth the expense either to invest in payroll software or outsource these critical tasks to a qualified third party.

Here are some questions to review when trying to find the best payroll service for your small business or choosing an outside provider.

Who should use a payroll service?

If your staff is small, stable and salaried, and if your tax obligations remain constant, you may have no trouble processing payroll internally.

Payroll software for small businesses can help you or your bookkeeper manage the company's payroll and related tax requirements. But even with the right software and a steady employee situation, payroll and related Human Resources compliance tasks can eat up a significant amount of time.

If your company payroll does fluctuate per pay period, or you’re concerned about compliance with labor regulations, it might make more sense to outsource this important job (see below).

Think about the following to help you determine if you should use a service to assist you with payroll and HR tasks:

• Do you have hourly employees who work part-time, varying hours or earn overtime?
• Does your small business have a lot of turnover?
• Is your business a seasonal one with large swings in staffing?
• Are you paying payroll taxes in more than one state?

These common scenarios can quickly complicate your business's payroll and tax situation. Using an outside payroll service in these instances may prove more cost-effective in the long run.

Both software and payroll services help eliminate errors by automatically calculating employee withholding and the employer's payroll tax obligations.

What type of payroll service is right for your small business?

If you decide it makes sense to use an outside payroll service, spend time investigating the right one for your type of business. Payroll services do much more than cut paychecks.

In addition to printing and delivering checks, basic services typically include:

• Calculating employee pay, withholding and taxes
• Providing automatic signatures and direct deposit
• Employer tax payments and filings, as well as processing Forms W-2 and Forms 1099
• Benefits administration for health insurance, flexible spending accounts and retirement plans
• Tracking paid time off, sick days and overtime
• Filing required reports with federal, state and local governments
• HR forms management

A benefit of HR guidance

A payroll provider may also be helpful with some of the Human Resource aspects of running a small business.

When you run a business, complying with federal and state labor laws is no easy task, but a good payroll service will offer HR tools that not only help you maintain needed HR records, but it can also generate required HR documents.

You can expect your payroll provider will:

• Report new hire information to the appropriate agencies
• Make sure you comply with labor laws and overtime rules
• Offer alerts regarding any changes to local, state, or federal employment laws

Some payroll providers help with employee handbooks, job descriptions, labor law posters and training videos. The benefit of hiring a company with add-ons like these is that, not only does it simplify the running of your business, but it also reduces your risk of inadvertently being non-compliant.

Many online payroll services for small business also allow employees to edit their benefits information and contributions directly via the internet.

In general, a payroll service can cost anywhere from $20 to $100 per month for only paycheck processing. The price goes up as you add features, so you’ll want to decide which services you need and prioritize them.

Many services beyond the base package are offered a la carte, so it's important to understand your needs in order to compare costs. If you're a seasonal business with significant employee churn, be aware that some payroll programs charge additional fees for adding or dropping workers.

Payroll services handle your employees' sensitive data and pay the IRS on your behalf, so be sure to choose one that is bonded and insured. Ask for references and interview other clients about their satisfaction. Ask fellow business owners for their recommendations.

Here are some other questions to ask:

• What is the total cost for one year of service?
• If a payroll mistake is made, how quickly can it be corrected and what will it cost?

How to set up a payroll system

1. The first thing you need to start paying workers is an Employer Identification Number (EIN) from the IRS. An EIN is required for certain tax information reporting requirements. To apply for an EIN, go to the IRS website.
2. You must complete paperwork as an employer for filing payroll taxes and for your employees' withholding.
3. Check with your state and local tax authorities about whether they require their own state tax ID numbers.
4. New salaried employees must fill out Form W-4 so that the company can withhold the correct federal income tax from their pay.
5. Check whether your workers qualify as employees or independent contractors and report them appropriately to the IRS. Employers are not responsible for withholding taxes for independent contractors, nor do they have to pay taxes on their compensation. They do have to provide these workers and the IRS with a Form 1099-NEC statement at the end of the year, though, indicating the amount of money they were paid.
6. Next, determine your pay period. You can choose the interval that suits your business best. Be aware, however, that pay periods are sometimes determined by state law, with most favoring bi-monthly payments.
7. If you use a payroll service, make sure required tax information reports, forms and returns are being submitted correctly (they may be due quarterly or annually). Find out more about federal tax filing requirements at the IRS' Employer's Tax Guide.
8. The U.S. Small Business Administration recommends that business owners carefully document their employee compensation terms. That's how you handle and track paid time off, sick days, employee hours and overtime. Deductions such as insurance premiums and retirement contributions will also need to be withheld from paychecks and paid out accordingly.

Time and money are valuable to every small business owner, and payroll can take a big bite out of both. With a little research and planning, you can be confident you've made the right choice for managing all of your small business payroll responsibilities, both for your company and your staff.