Given It’s complex nature, processing payroll in-house most often can cost more in the long run than what you might think you are saving on the front-end. By focusing on payroll instead of the critical business priorities you should be focusing on – you are taking time away from efforts that will take you from where you are today, to where you desire to be in the future—from your current state, to your desired state.
… In essence, you might be losing time and resources better spent on growing the business, while also taking on significant tax penalty risks. As it may come as a surprise, payroll takes into account a lot more than just adding up hours & writing a check.
Running payroll is an essential part of operating any business, no matter the size or type of industry. If and when things go wrong, it often comes with a high price. In recent years, business owners have paid payroll tax penalties in the billions of dollars to the IRS due to payroll mistakes. Payroll, is a necessary evil that many business owners have to take care of.
To prevent the many pitfalls that can happen, here is an overview on how to run payroll, calculate wages, and avoid the hefty fines if taxes are not filed correctly. As a business owner, you have several options when it comes to running payroll, including outsourcing the process.
Running payroll
Businesses must first identify if the person they're hiring is considered an employee, or an independent contractor, since each classification falls under different rules. If done so incorrectly, businesses can be forced to pay back employment taxes – which are not cheap. It's also necessary to calculate the correct taxes on compensation from regular pay, overtime, vacation pay, sick pay, commissions, bonuses, stipends, benefits, as well as workers’ compensation.
First, let's start with the different types of pay:
· Gross pay: This is the amount an employer pays on an hourly or annual schedule. This is the amount that employees receive before deductions.
· Net pay: This is the amount an employee takes home, after deductions.
· Bonus pay: This refers to additional compensation provided as a reward for high performance (both cash and non-cash bonuses are subject to income tax withholding and other payroll taxes).
Payroll taxes
Employers generally have to withhold both federal and state income tax from all of their employees' wages based on what employees enter on their W-4s. There is also a few mandatory payroll taxes to do. Here is a few of them:
· Federal income tax: This is withheld from employee's wages or salary and reported to the Federal Government and applied to the employee's calculated tax liability at the end of the year.
· Social Security and Medicare taxes: This tax is generally paid equally by the employer and employee in order to fund these entitlement programs.
· Federal employment tax: This is paid to provide funds for paying unemployment compensation to workers who have lost their jobs.
There is also the state unemployment tax that subject employers must pay. With the exception of a few states, state unemployment taxes aren’t deducted from an employees' wages.
Processing mistakes
As previously mentioned, failure to pay mandated taxes can result in severe penalties. Inaccuracies on employee paychecks can also damage worker morale, engagement, and harm your business reputation. In other words, your businesses financial position can be impacted in ways much greater than just the fines you might be required to pay.
DIY payroll processing also can come with some of these frequent mistakes as well:
· Paying the wrong amount: It is important to double-check all employee information, withholding amounts, as well as all payment information. If the initial data is entered inaccurately, you're bound to have payroll problems and errors later on.
· Processing payroll late, or not at all: Business owners have so much on their plate, they may get so consumed by day-to-day duties that they forget to process payroll altogether.
· Overlooking bank holidays: It's important to know which holidays your bank closes on and adjust your payroll-processing timelines accordingly. Bank holidays are different from standard holidays, and regular business days.
· Depositing and reporting employment taxes incorrectly: After you have collected payroll taxes from your employees & have contributed your share, you need to submit those taxes to the federal, state, and local tax authorities. Failing to complete this on time could result in something called a failure-to-deposit penalty as defined by the IRS.
· Misclassifying employees as independent contractors: If a business misclassifies employees as independent contractors, they will need to pay retroactive payroll taxes as a consequence.
Time-consumption
Given It’s complex nature, processing payroll in-house most often can cost more in the long run than what you might think you are saving on the front-end. By focusing on payroll instead of the critical business priorities you should be focusing on – you are taking time away from efforts that will take you from where you are today, to where you desire to be in the future—from your current state, to your desired state.
According to recent research, approximately 50% of small business owners spend up to 5 hours/month doing payroll in-house. Meanwhile, another 14% spend up to 10 hours/month! Moreover, 1/3 small businesses estimate the cost of doing their own payroll ranges from $1,000 to $5,000 each year; combine this with the amount of TIME SAVED that can be allocated back to revenue-generating activities, as well as the potential FINES for malpractice, as well as the damage to employee morale, and business reputation too, the benefits simply cannot be ignored.
It should come as no surprise, how much a business can improve the bottom-line by deciding to outsource payroll.
Key benefits of outsourcing payroll
There is way too much at stake for business owners to commit their golden hours of work time to time-consuming (and potentially expensive) payroll processing errors. Consider the benefits of using payroll services from a professional provider:
· Time saved: There’s no need to input data and double-check for errors like you’re turning in a college paper every pay period.
· Greater efficiency: Look for a provider that allows you to import multiple files at one time, seamlessly from one location, this way you don't need to wait for each file to complete before processing a new one.
· Money saved: Save money, or eliminate completely, costs from printing & distributing paychecks, and generating reports for in-house and accountant use.
· Greater security: Protection against identity theft, embezzlement of funds, and tampering with records for personal gain.
· Professional know-how: Payroll providers have expertise on how to run payroll properly and can help you at any point during the process if necessary. No more swimming in unchartered waters.
Staying up to date with all of the legal complexities of employee withholdings, minimum wage legislation, IRS forms, as well as the RAPID CHANGING REGULATIONS associated with COVID-19 can be extremely daunting. Outsourcing payroll can help alleviate the burden that often comes with all of this - including mitigating your businesses risk of penalties for late or inaccurate payments. If you think the time is right to closely examine this option, learn more about how to transition from in-house to outsourcing solutions. You may also want to compare payroll services to see what can work best for your business.
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