We Recommend Outsourcing Payroll By Employee 2, Or Earlier

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The minute you hire a W-2 employee, payroll becomes a headache that’s worth hiring someone else to do.

You’ll need to understand the recordkeeping requirements set forth by various laws, from the Fair Labor Standards Act to the Lilly Ledbetter Fair Pay Act. You must keep meticulous records of every Form W-4, Form I-9, employment contract, and pay stub—and then some.

Withholding taxes from your employees’ paychecks becomes your responsibility, too. So does paying those taxes to the local, state, and federal governments.

And of course, you’ll need to prepare and run payroll every two to four weeks, depending on your preference—and local laws.

If you miss a tax payment date or make some other obscure mistake, you could get hit with all sorts of penalties.

The good news in all of this is that payroll services are surprisingly affordable. It typically costs a base price of about $40 a month plus an extra $6 to $8 per employee.

Not too bad, right? It’s a lot cheaper than hiring an employee to do in-house payroll, and for most small businesses, a payroll service is all you need.

Why to Outsource Payroll Early

You might be tempted to wait until you have two, three, or 20 employees before you finally spring for a payroll service.

A lot of companies don’t outsource payroll until they’re penalized for missing a tricky tax payment. Or until they have to use retroactive pay after messing up an employee’s paycheck.

Why wait? The value of payroll outsourcing is there, even if you only currently spend a few hours a month running payroll. The more you grow, the less it makes sense not to outsource.

Plus, if you’re proactive about outsourcing payroll, you get to choose when you switch. You can have everything prepared for a smooth transition. If you wait until a payroll crisis hits, you’ll be scrambling to switch everything over during an already stressful time.

The Best Part of Outsourcing Payroll

The best part of outsourcing payroll isn’t the cost savings. Saving time and money is always nice, but the best part of handing the duties over to someone else is that you have someone to call when issues come up.

And this will happen. The bigger you grow, the more likely it is that you’ll run into a compliance issue. Or a tricky question about paying out-of-state or international employees. Or a misclassification snafu with one of your independent contractors.

Even offering expanded capabilities, like remote employment or PTO, can raise questions you aren’t prepared to answer.

When you outsource payroll, you’ll have a service provider that wants everything to be accurate and correct just as much as you do. They deal with payroll 24/7. Everything will be fixed, documented, and done according to IRS standards.

If you run payroll yourself, on the other hand, you’re on the hook for everything. Every time there’s a problem, you’ll need to step away from your regular duties to fix it.

An established payroll processing company has already figured out every possible question with hundreds of other companies. Which means you don’t have to stress about any of it, and your regular business operations get the attention they need from you.

Payroll Outsourcing Options

Not all payroll outsourcing solutions look alike. There are a few different choices to consider, depending on your circumstances. Let’s take a look.

Payroll Services

A payroll service provider is a company that takes on another business’s payroll responsibilities. Most payroll services offer these core payroll tasks and features:

  • Running payroll every pay period
  • Tax withholding and payments to the IRS
  • Wage garnishment
  • Compliance management
  • Employee self-service portal
  • Annual and quarterly reporting
  • Timekeeping and employee scheduling
  • Processing year-end tax forms, like W-2s and 1099s
  • 24/7 client support

While payroll service providers do a lot, there are some tasks that businesses have to do themselves. Maintaining payroll records according to state and federal law is one of them. And while some providers will manage employee benefits for you, others don’t.

Finally, the IRS makes it clear that payroll service providers do not assume tax liability for businesses. Your company will still hold the ultimate responsibility for all local, state, and federal taxes.

HR Outsourcing

If you’ve handed over your payroll to a third party but still find yourself struggling to keep up with HR tasks, it might be time to outsource HR. Or, you can get ahead of the game and outsource certain HR tasks right away.

Here’s what an HR service can do for small- to mid-sized businesses:

  • Recruit and onboard new employees
  • Run background checks
  • Manage employee relations
  • Ensure compliance with state and federal laws
  • Train employees
  • Develop employee policies and handbooks
  • Monitor employee performance
  • Administer employee benefits
  • Process payroll

Most businesses with 1 to 50 employees can benefit greatly from outsourcing HR. Once you get in the 51-250 employee range, though, you’ll need to think about bringing things in-house. The bigger you grow, the more necessary an in-house HR department becomes.

Professional Employer Organization (PEO)

A professional employer organization (PEO) handles many of the same tasks that a third-party HR company does. But it’s different from those HR services in one key way: unlike an HR service, a PEO becomes a legal co-employer of the people on your team.

This means that you and the PEO you work with sign a contract that divides the legal and tax liabilities between your two entities.

This is helpful if you run a remote or hybrid office and want to hire out-of-state employees. A PEO not only helps take on the burden of complying with each employee’s state and local regulations, but it also takes on some of the liability.

If you want to hire employees internationally, you can do so with an international PEO or an employer of record (EOR).

Unlike a PEO, an EOR takes on full responsibility for the international employee and becomes their legal employer. Essentially, an EOR acts as your company’s “branch” in the country, or countries, where your international employees live.

Using a PEO to help manage out-of-state employees or an EOR to manage international employees saves you a lot of money. You won’t have to establish actual, legal entities in areas where you don’t live and work—which costs a lot of money.

Instead, you can pay a PEO or EOR to take on that role on your behalf. Read our guide to learn more about the best PEO services.

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