Attention Summit County entrepreneurs: DIY payroll processing has pitfalls
October 3, 2013
I'm usually all for do-it-yourselfers …there is great satisfaction in mastering new skills and being self-reliant. But, one area that I strongly advise against it is your payroll processing. Many small business owners assume that, since most small businesses need payroll processing, it can't be that tough, or they have a bookkeeper with years of experience and assume they have it under control.
There are a few parts of payroll that make it extra tricky and extra painful if mistakes are made. For one, payroll and payroll tax processing have a variety of deadlines and the deadlines are very spread out. For example, if a medium-sized payroll is run every other Friday, then federal withholding and FICA taxes are due to the IRS within two weeks, state withholding taxes are due monthly, state unemployment taxes are due quarterly and federal unemployment taxes are due annually. Add to this the various returns, new hire reporting, and other form filings, and it can be a confusing mess.
To make things more challenging, the penalties for late filing of payroll taxes can be significant. From an IRS and state perspective, when you withhold money from an employee, then send the money into the appropriate government agency, you are in a position of trust. If your company fails to make the payment on time, it the equivalent of stealing an employee's money and the government agencies act accordingly. I've seen penalties as high as $4,000 for a tax payment being submitted one day late over a holiday weekend when banks were closed. Trust me, you don't want to be on the receiving end of that penalty letter.
Let's say you're convinced and it's time to outsource your payroll, what's the next step? I highly recommend hiring a third party to process your payroll, but not just any third party. I have always recommended using Intuit's services, which are outsourced and serviced by local accounting firms, and I've had great experiences with Paychex as well, but a recent Wall Street Journal article sealed the deal for me.
The WSJ published an article about a new trend in smaller payroll companies popping up to serve small businesses, but several of these smaller companies have filed bankruptcy. So, they collected taxes from employers, but failed to remit the taxes to the government agencies and then filed bankruptcy. These cases are still being investigated, but it's not clear yet whether the small businesses will still be held liable for the payroll taxes that were never remitted on their behalf. In other cases, these small firms have a greater risk of fraud and theft due to less sophisticated internal controls, and the service company employees have skimmed money from the companies they are processing payroll for.
As a small business owner, this is just one of the hundreds of decisions you make a year. I know it can be overwhelming, but I haven't heard too many folks working with a large-scale payroll service provider and not feeling like it's worth it!
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
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