Small Business Payroll

Calculating payroll was a simple matter 20 years ago. For each pay period, you deducted federal income tax, FICA, perhaps state tax and a union contribution from your employees' wages. Payroll is a different story today.

Payroll Responsibilities

As a small business owner, you must be aware of the many payroll deductions that reduce income and increase the complexity of payroll systems. Regardless of your business's size, employees expect to be paid wages due, and the government expects to be paid taxes due. If you miss a filing deadline or fail to pay the correct amount, you may face potentially significant Internal Revenue Service (IRS) penalties.

For many small businesses, the complexity of the payroll process is best left to experts, and many are choosing to outsource. Payroll services keep up to date on the law, and in many cases, they are less expensive than going it alone. If an outside payroll processing company could do it for less, it made sense to use its services.

However, businesses are looking beyond basic economics. Unless you're in the business of payroll processing, doing your own payroll is not a revenue-generating activity. Let's consider the options.

In-House or Outsource?

Small business owners have two basic payroll processing options. Payroll can be processed in-house either manually or using a payroll software program. In this case, employee payroll obligations, payroll adjustments and payroll-tax responsibilities are calculated, payroll checks are made and payroll data is recorded. In most cases, taxes are filed manually.

The second method is to outsource payroll processing to a payroll service. The payroll functions performed can range from basic services such as calculating employee payroll and tax obligations, producing checks and management reports to optional services, such as filing payroll taxes, direct deposits, automated check signing and preparing W-2 forms.

The decision to outsource depends on the complexity of your company's payroll and your payroll processing costs, which should be analyzed based on the time and resources required to do the job. When making this decision, calculate how long it takes to train personnel to perform payroll-related responsibilities, gather employee payroll-related information, perform federal and state tax calculations, and research changes in federal and state payroll tax rules.

Calculate other costs associated with processing your own payroll. If you have decided to use in-house payroll software programs, calculate the cost of the software, the cost to train personnel to use the software, and the cost to purchase software updates. Remember, if you incur any IRS penalties, the amount of money paid must be factored into your overall payroll processing cost.