The legal requirements involved with payroll are complicated and constantly changing. Payroll involves more than writing checks to your employees. More than 100 employment laws and regulations exist today for businesses. The IRS penalizes one out of every three business owners for payroll errors — but employers can reduce their legal risks.
A good way to minimize risk — as well as to save money and time for your organization — is to outsource payroll services. You’ll still need an HR department, but they can focus on improving your business and other matters, rather than getting bogged down in tax code.
Why Your Business Should Outsource
PEOs (professional employer organizations) calculate payroll and tax obligations for each employee, print and deliver checks, and provide management reports, all of which greatly benefit companies.
If you’re considering outsourcing payroll for your business, here are five legal reasons why it’s a good idea to do so.
- Tax Code and Regulations. Tax regulations are the subject of constant change. Businesses must deal with federal, state and local tax rates and reporting. Even more rules exist for multi-state operations. Using an outside firm lessens the burden of having to keep up these changes. When you choose one, they become the responsible party should a mistake occur. Another area of concern (and one that some businesses overlook) is employee handbooks. Omitting legal provisions from handbooks can be costly, but PEOs have expertise and training when it comes to this area. The penalties for making mistakes in payroll are more expensive than the actual cost of payroll. Businessweek reports that, each year, 40 percent of small businesses pay the IRS an average penalty of $845 for improperly filing their payroll taxes.
- Check Fraud. Check fraud and embezzlement through a company’s payroll system is one of the most common forms of fraud that companies face. Payroll services can help to eliminate this. The Nilson Report, the world’s leading source of news and commentary on consumer payment systems, says annual check fraud losses exceed $20 billion.
- Deductions. Payroll involves calculating deductions for income taxes, Social Security, Medicare and wage garnishments for court-ordered child support payments, when needed. If these deductions are not properly processed, fines and headaches will occur. Wage garnishments, in particular, can create legal vulnerabilities. Take out the wrong amount, and your organization will be fined. An outside service assumes the role of administrative employer and reports the client’s employees under its tax ID numbers.
- Tax Credits and Benefits. PEOs can find tax credits and benefits for your business that you might not have been aware of. This can mean thousands of dollars per employee.
- Legal Consulting. If you outsource your payroll, you have support if your organization runs into any legal issues. You can consult the PEO with problems or questions concerning the law. When the tax code is changed, your PEO should alert you and advise you on the steps that your business needs to take.
Reduce Your Risk by Outsourcing Human Resources Functions
Payroll is one of the most commonly outsourced HR functions. This is because payroll is the most problematic process businesses face. Most businesses don’t have a staff member who is well-versed in taxes and accounting. When you outsource your payroll, the legal responsibility shifts to the PEO (although your company is ultimately still responsible). It’s in their best interest to make sure they don’t make any costly mistakes.
Whether you have a small organization or a large one, it’s advisable to work smarter by focusing on what your company does best — and leave payroll to those more experienced with its intricacies.
About the Author: Jerry Baldwin is a contributing writer and small-business owner who has outsourced some of his own operations to several HR consulting firms over the years.