Why are so many firms afraid of Payroll
The majority of clients I have met over the past 30 years seem to believe that Payroll is some huge Monster best left to specialty firms to slay. The reality is that the Payroll industry has simply capitalized on the government’s ability to evoke fear in business leaders with their fines for no or late payments of taxes. As they should – these are serious matters. However, Payroll Companies only issue checks and file government forms that you provide all the information for anyway. More frustrating is they charge a huge premium for this, which they justify through the use of fear.
“Why pay a fine when you can outsource payroll and let someone else deal with the responsibility of filing on time.”
Typical Sales message of a Payroll Service
Let’s look at two hypothetical businesses. The Fear Factor Corporation is a firm that has been in business for 10 years and currently has 200 employees. They have never done payroll in house and have contracted with one of the most popular payroll vendors. They pay their employees on the 1st and the 15th. They use the Payroll firm’s software to input all the payroll information, hours, commission, bonuses, and salary information. Since they have over 50 employees they needed to ensure compliance with all the federal employment laws. This required they also contract with this vendor for Human Resources to track OSHA and EEOC data.
Every pay period they log on to the internet for 3 hours or more to input all the payroll data: changes in pay rate, hours worked, etc. The payroll vendor processes this, then ships the actual checks to the company, charging them for each check and their courier service on top of a base monthly fee. Additionally there are quarterly and annual fees for filings and reports, W2’s and deposits for taxes with the appropriate agency.
The company still has to do all payroll entries into their accounting system as journal entries and they have to transfer the appropriate funds to their payroll bank account, otherwise they are subject to the usual fines. (Even though they outsource – they can still end up paying fines)
The upside is the majority risk of fines or late fees is transferred to the payroll vendor. For this “convenience” they pay $1,750 per month, plus additional fees for reports and W2’s. Their annual cost is $24,000.00.
“In House Payroll typically pays for itself in less than a year, after which your savings can be tremendous if not astronomical”
Mark Richards, Business Process Design Expert.
Company two, The Smart Young People, LLC, also has 200 employees and provides a paycheck on the 1st and the 15th to its employees. They looked at doing Payroll in-house and determined that the very small additional work – essentially doing reports and printing checks is well worth the savings in time and money. They added Payroll and Human Resources to their accounting system for a small initial investment. [when I first wrote this article Payroll and HR still carried a fee in Dynamics GP – Today these modules are included in the core package of Dynamics GP and thus there are no additional fees to customers – adding even more value, other ERP systems typically also charge a fee for this module.]
They enter their payroll information directly in to their accounting system. This generates all of the information necessary to print checks, and handles all of the General Ledger entries at the same time. They also use the full Human Resources system and in addition to being OSHA and EEOC compliant, they track about 50 metrics on each employee from skill sets to rate changes and promotions. The reporting they gain is hugely helpful in promoting a positive work environment and mentoring employees to reach their full potential.
Company Two saved the entire cost of outsourced payroll – Over $120,000 during the next five years!
What about the risk Factor? Company two assigned HR & Payroll to a trusted member of the accounting team who would have been collecting and entering the data anyway, so very little additional work was necessary. A bonus incentive was established for not incurring any late fees or fines. Believe me, people do respond well to financial incentives in this area. More importantly the company took control of their processes and were able to make use of the HR data in house. This company now plans to deploy benefit management and Employee Self Service which will allow their team members to review checks, look up and request vacation time and make changes to their 401K and other benefits. The savings to having these inquiries made to an Accounting team more than cover the costs of the deployment of these features, which also raise moral by delivering hands on tools to all of the team members.
Sometimes we need not look farther than our own internal departments to save money and enhance our working environment.