As an attorney who makes his living resolving tax liabilities, the majority of my clients are businesses that have accrued 941 employment tax liabilities. There are numerous reasons as to why a business accrues a 941 tax liability. These reasons range from mere lack of funds resulting from both internal and external issues to simply lacking the experience and knowledge about the rules, due dates, and overall criteria involved regarding the remittance of employment taxes.
In my experience, I have found that the majority of the reasons that a business accrues employment tax liabilities can be mitigated, if not completely eliminated, by hiring an outside payroll service provider who specializes in ensuring that employment taxes are paid properly and timely. Being proactive with payroll and the resulting employment taxes can save a business immensely in unnecessary tax penalties and interest. The following addresses the benefits and misconceptions of using an outside payroll service provider as well as how to properly choose one that works for you and your business.
Benefits of payroll service providers:
- Time Savings One of the biggest benefits of using an outside payroll service provider is the convenience they offer and the time saved by not having to have an employee perform this function. Payroll processing is a very time consuming and tedious process. One has to keep track of new hires and terminations, employee garnishments, various benefit deductions, employee vacation and sick time, as well as any changes to federal and state tax regulations, just to name a few items. Additionally, around the beginning of every year, a significant amount of time needs to be spent on preparing W2’s to ensure that they are accurate and remitted timely as required by law. An outside payroll service provider eliminates the need to have an internal employee spend their valuable time handling these tasks, which in turn allows that employee the ability to concentrate on other tasks that will presumably benefit the business.
- Cost Savings It is often argued that a downside of using a payroll service provider is that it is more expensive than handling payroll internally. While this may seem to be a sound argument if one simply focuses on the upfront costs, the argument becomes less persuasive when taking into consideration all of the indirect costs of doing payroll in-house. This is particularly the case for small and medium size businesses that do not have as many resources available to devote to establishing a payroll department. More often than not, the cumulative costs involved in determining the payroll time period, printing, signing, distributing payroll, purchasing and maintaining payroll software, training, keeping one apprised of changes to existing tax rates and laws, preparing and filing employment tax returns, preparing W2’s, and dealing with employees who have pay garnishments (again just to name a few necessary tasks) is significantly higher than one would initially anticipate. Moreover, the overall cost of using an outside payroll service provider is generally substantially less than the associated costs of accruing a tax liability and associated penalties and interest that result from missed, late, or incorrectly made tax deposits and/or returns.
- Convenience In addition to the cost savings, using an outside payroll service provider is typically more convenient. Many small to medium size businesses assign the payroll function to an already overworked office manager. This can become detrimental due to the fact that employees inevitably get ill, resign, or go on vacation. A business owner does not have to worry about any of these issues with an outside payroll service provider as their sole function is to handle these tasks. Furthermore, using a payroll service provider enhances confidentiality when it comes to payroll as it eliminates an in-house employee from becoming privy to the wage or salary of employees. This in turn reduces any possible issues or company drama resulting from this information being disclosed to other employees.
- Security Security is a major concern when dealing with payroll. There is a risk of identity theft, embezzlement, losing information, or even the possibility of unsecure payroll software being hacked. The majority of reputable payroll service providers have current technology that implements state-of-the-art systems that can spot and alert various types of payroll fraud. Additionally, payroll service providers typically have multiple server locations and perform routine backups in order to protect their client’s critical personal data.
- Avoidance of Tax Penalties The IRS estimates that about 40 percent of small to medium-size businesses in the United States end up paying a payroll penalty each year for failing to deposit withholdings, depositing the wrong amount of withholdings, or for incorrect filing. On average, the resulting penalties totaled to about $845 a year. Errors on employment taxes can be very costly and can be completely avoided by either paying careful attention to detail or through hiring a professional payroll service. Securing an outside payroll service provider whose sole function is to handle these matters greatly reduces the risks of errors and mistakes that could ultimately result in costly tax penalties. Moreover, a payroll service provider could even reduce the possibility of being selected for an IRS audit. Due to government rules and regulations periodically changing, it is beneficial to have a profession payroll service provider who has a staff that is dedicated to keeping up to date with any changes to rules, regulations, or changes in the tax rate.
- Peace of Mind Arguably, one of the biggest benefits to a business of using an outside payroll service provider is peace of mind. Once the information is provided to the payroll service provider, they take care of the rest while ensuring that everything is done without any errors and that all tax returns and deposits are made on time and in full. In fact, many payroll service providers guarantee their tax services. If a mistake is made on the part of the payroll service provider, they will immediately fix it and will even pay any resulting penalties or interest. This allows the business owner the freedom to focus on running a profitable business while not having to worry about potential payroll issues.
Choosing a payroll service provider:
The three primary things to consider when choosing an outside payroll service provider are price, service, and reputation. Clearly, they must be affordable. On average, the cost of using one of these services averages about $3 per check. However, this is typically about half the cost of doing it in house as it eliminates the need to hire a full time payroll manager thereby freeing up employee time to work on other business functions. In addition to just payroll, many service providers offer many more optional services such as direct deposit, employee retirement plans, management reports, calculating employee tax obligations, and preparing W2 forms for their clients.
There are numerous payroll service providers available, so choosing one based on reputation is important. Fortress Financial Services has found that, of the large national payroll service providers, Paychex provides reasonably priced, quality services that can assist our clients in meeting all of their payroll requirements. This allows businesses the ability to remain current with all taxing authorities thereby minimizing their chances of accruing any additional tax liabilities, which in turn assists us in securing affordable resolution of their already outstanding tax liabilities. If interested in exploring how a payroll service could benefit your business, please contact the Fortress representative with whom you are working. If you are not working with Fortress, please contact me directly.