There is a common story we see across small businesses of all sizes. Owners and operators of the company are focused on top line growth, hitting the pavement to bring in new business. They add employees to support the new business growth. They add benefits to keep those great employees. Before realizing it, the owners and small bookkeeping staff are overwhelmed with benefit and payroll administration. Is the company doing it right? Do owners and employees know what they don’t know?
At this point, the owners seek advice from other business owners and their CPA. Would outsourcing payroll make sense or should they add in-house staff to manage it better? After reviewing a few payroll services, the company is understandably faced with more questions about which service provides the best options — not to mention price.
Once decided on a payroll service, the real education begins. The company is still providing a lot of information to the payroll service to set up the structure and system, such as personnel information, their employment status, types of benefits and how each employee wants those wages and benefits managed through payroll. Later, staff also must reach out when there are new hires, promotions and changes to benefits. Depending on the payroll service, owners and operators might not get a lot of help understanding everything. They are also on their own to figure out internal processes that make information gathering and sharing simpler.
Let’s say the business expands even more to another state. Then the owner is faced with multi-state payroll complications. Although the solution to a well-managed payroll and benefits system takes time and strategy, the opportunity to address payroll complexity first lies with your CPA. This relationship can either simplify or increase complexity, so let’s look at some of the payroll pitfalls and questions every business owner should consider.
Pitfalls of Poorly Managed Payroll Administration
Businesses can face serious fines and penalties from the Internal Revenue Service and other tax authorities for failing to comply with timely payments and reporting. At a minimum, employers must account for federal income tax, federal and state unemployment tax, Social Security and Medicare. Many companies have run into trouble in the areas of paying unemployment taxes, making late payroll deposits, incorrectly classifying employees as independent contractors on 1099s and assuming that depositing payroll is the same as reporting.
Penalties can be classified and pursued as “failure to deposit,” “failure to pay” or “failure to file.” Worst-case scenarios if payroll issues aren’t resolved could include losing the business and/or being charged with a federal crime. Individual shareholders and even corporate officers can be pursued and assessed penalties under certain circumstances.
The Department of Labor’s impending changes to overtime exemption rules are creating even more angst in the area of wage and hour compliance. Employees previously exempt from overtime rules may now be considered non-exempt, leading to the need to track overtime hours and communicate possible changes in benefits. It may even require employers to dictate how employees can take time off or how they work outside of normal business hours. These changes tie directly into payroll administration and tax planning.
On the benefits side, employers can offer a variety of things to compete for talent as well as help employees work efficiently. Properly classifying these benefits and properly withholding for pre-tax or taxable benefits simply adds to the complexity. Handle something wrong, and you will have compliance problems as well as upset employees.
It is fair to say that payroll administration and compliance is a big deal, and the decision on whether or not to outsource should not be taken lightly.
Payroll is the most up-to-date KPI in a business — and the most expensive. Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.
Continue Reading: Things to Ask your CPA about Payroll Outsourcing
Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at firstname.lastname@example.org or 972-202-8000.
Blog originally published April 6, 2016. Updated on March 8, 2018.