Planing your Payroll Function is part of the path to Success

As I have worked with many, many new small business CEOs over the years, I have discovered that one of the least understood aspects of the start-up business is the payroll functions and responsibilities.  Therefore, in this last of my series of columns in which I have presented my 2019 challenge to every small business CEO (“get your business in order this year”), I will give some suggestions for your payroll responsibilities.

When you start a small business, you spend a lot of time thinking about the products and services you’ll sell, ways you can outdo your competition, and how to build an audience using a combination of marketing and social media. Something else you need to think seriously about is payroll.

While payroll sounds straightforward, it can quickly become complicated because there are many factors to consider beyond simply paying your employees.  No business is too small to consider payroll solutions; even one-person businesses may benefit from the tax implications of implementing payroll. Always consult with a professional to understand the specific needs of your business.

That said, small business owners typically have three main options when it comes to handling payroll:

  1. Do it yourself (DIY): Just as it sounds, you or one of your employees takes care of payroll for the business.
  2. Hire an accountant: A full- or part-time accountant takes care of payroll for you.
  3. Outsourced payroll: A third-party payroll service handles every aspect of your business’s payroll.

In mentoring clients, I summarize these options this way:

DIY payroll:   When doing payroll in-house, you or one of your employees takes care of it without having to worry about paying someone else. Many businesses take advantage of the payroll capabilities of accounting software, such as QuickBooks, to run payroll. Doing payroll yourself may be a smart option for small businesses with only two or three employees, but it still carries significant risks.

While, DIY payroll may seem easy, you may want to consider the following:

  • Are you fully versed in the federal, state and local tax laws that apply to your business?
  • Are you required to follow special regulations for workers who earn tips?
  • Are your employees exempt or non-exempt?
  • What will you do in the event of a payroll mistake?

Pros of DIY:

  • The most obvious advantage of handling payroll in-house is that it’s inexpensive. Another advantage is, because you’re handling all of the paperwork yourself, you will have an intimate understanding of who is getting paid what within your business.

Cons of DIY:

  • There are two fairly large drawbacks to keeping payroll in-house. The first is time. While it may be inexpensive to do payroll on your own, it also takes up time that could otherwise be spent making your business productive in other key areas.
  • Another drawback: Doing payroll yourself means you’ll need to stay on top of all the various federal, state and local tax codes that apply to your business. Tax laws are complicated and change regularly, making it difficult to stay aware of how each regulation might affect your business.
  • Some of the tax topics to be knowledgeable about include federal income tax, state income tax (if applicable), Social Security and Medicare taxes, federal unemployment tax  — and that’s only a partial list.
  • Hiring an accountant to do payroll: Some small business owners hire an accountant, either part- or full-time, to execute payroll.

Pros of hiring an accountant: 

  • The best thing about hiring an accountant is they should know the laws and regulations surrounding employment taxes. Further, any reputable accountant understands that the laws can change quickly and that it’s important to keep up-to-date. Another advantage of hiring an accountant is they can handle tasks in addition to payroll, such as filing your business’s taxes each year. An accountant will also save you time, allowing you to concentrate on other important facets of your business.

Cons of hiring an accountant:

  • One of the biggest disadvantages of hiring an account is they are not free. In fact, they can be downright pricey: Experienced accountants can charge $100 - $150 (or much more) per hour. You may be able to find an accountant who charges less, but that may mean they’re likely inexperienced and could put your business at risk of inadvertently violating tax law.
  • Another potential disadvantage: If you hire an accountant to handle payroll, you may become out of touch with your business’s payroll obligations and expenses. If you take this route, be sure to make a conscious effort to check in regularly and have the situation explained as necessary
  • Outsourcing payroll: Your third payroll option is to outsource it to a third-party company. This is often a full-service option that may include payroll management and human resources help.

Pros of outsourcing: 

  • Hiring a company to handle payroll has similar advantages to an accountant.  They know the ins and outs of payroll and employment tax law and hiring them will save you time because you won’t have to handle it on your own.
  • Knowing that you’re working with a professional service that is paid to understand the law can give you peace of mind.
  • Another advantage: Payroll services often offer a secure online portal that allows you to quickly and easily enter your business’s payroll information, view grids that show employee hours, earnings, tips and other pay information, and run and print customized reports.
  • An additional benefit:  Reputable payroll services offer a high level of data security, taking multiple measures to keep your employees’ personal information private.

Cons of outsourcing: 

  • Outsourcing payroll will cost your business money, but most likely not as much as hiring an accountant would cost. Consider what you spend on payroll services as a small investment that allows you to spend time improving your business in return.

About the Author(s)

Dean Swanson

Dean is a Certified SCORE Mentor and former SCORE Chapter Chair, District Director, and Regional Vice President for the North West Region, and has developed and managed many businesses. The Rochester Post Bulletin publishes his weekly article on a topic geared toward the small business community. The articles here are printed in their entirety.

Certified SCORE Mentor for the Southeast Minnesota Chapter

Key Topics

Plan your Payroll Function for Success