Flexible Payroll Solutions Meet the Diverse Needs of Small Businesses

By Don McLoughlin


A friend of mine who owns a small business once comically lamented, “I have more hats than heads.” If you can relate to that sentiment, chances are great that you not only own a small business, you handle the back-end functions as well. You are not alone.

According to ADP research, 71 percent of small businesses still prepare payroll in-house, while 29 percent outsource (15 percent use a service bureau, and 13 percent use an accountant’s services).

Payroll and tax compliance can be time-consuming and burdensome for any business. However, a U.S. Small Business Administration (SBA) study, “The Impact of Regulatory Costs on Small Firms,” showed that America’s small businesses are the hardest hit financially. The study found businesses with fewer than 20 employees faced a 45 percent greater federal regulatory burden than their larger business counterparts. Small businesses annually spend $1,304 on tax compliance per employee, 67 percent more than larger companies with 500 employees or more.

Luckily, technology is transforming the day-to-day operations for small businesses. Today, there are a variety of tools available to help small business owners manage payroll in a cost-effective and simple way. Some seek a do-it-yourself software solution while others prefer to have an outside provider handle it all. In this article, we will review how companies select their payroll method, and the benefits of each type of payroll solution.

In-house Payroll

A 2006 national payroll survey by the National Federation of Independent Business (NFIB) Research Foundation found that the most common reason given for doing payroll in-house was that it is the cheapest way. Without dedicated administrative staff, many small business owners run the business during the day, and then spend evenings and weekends catching up on everything else, including bookkeeping, payroll and taxes.

However, many business owners don’t realize that there are “hidden costs” of payroll. Doing payroll in-house is both error-prone and time-consuming. According to ADP research4, companies with 20 employees or more spend upwards of half a day per pay period. On a weekly payroll schedule, that averages out to two full days a month dedicated to payroll.

Then there are risks. Given that local, state, federal tax laws are subject to change, remaining up-to-date and compliant is a formidable task. And the failure to deposit payroll-related taxes in a timely fashion is a frequent cause of tax penalties.

Lastly, when calculating payroll by hand, simple math errors are more common, which can cause employee dissatisfaction – endangering the success of your small business.

Do-it-Yourself Software

In increasing numbers, small businesses are turning to technology for help with their payroll to speed-up processing and improve accuracy.

Do-it-yourself payroll programs are ideally suited for small business owners who seek full control over their payroll processing and tax filing. Software solutions are typically cost-effective and give an “in-control feeling.” Once you input your payroll information, the software automatically calculates net pay for each employee. Product features are typically available 24/7, so you can process payroll whenever it is most convenient.

Outsourcing Payroll

Another option for small businesses is to outsource payroll. By outsourcing, small business owners pass on the responsibility of payroll to either an accountant, bookkeeper or third-party service provider, so that their time can be redirected to other strategic initiatives.

Once you are set up with your payroll provider, the owner simply submits hours worked by each employee. The provider calculates your payroll, including the deductions and withholdings for all relevant tax jurisdictions. Then professionally printed checks, pay vouchers and reports are delivered to your door on payday. Many service providers also manage W-2 creation at the end of the year, allowing seamless integration with accounting.

By working with a national payroll service provider, you can feel confident that payroll will be accurate, on-time and fully compliant with federal, state and local tax regulations. Based on ADP research5, the reasons companies decide to either change payroll processing method or the vendor used for the service delivery are to: save time (33 percent), effort (25 percent) or reduce costs (20 percent). Other reasons cited were tied to customer service, internal issues and familiarity.

Choosing the Right Solution

Ultimately, payroll is a task that every business needs to get done, but each business owner must decide the best approach. With the technology available today, many are choosing to evolve from manual pen and paper to either software or outsourcing – depending on how involved the owner wants to be in the payroll process.

Before moving forward, it is important to evaluate goals. Are you willing to dedicate time to payroll, but want to increase accuracy and compliance? Or do you want to lessen the burden of payroll administration completely?

No matter which payroll method you choose, it’s important to select a software package or outsourcing provider that best meets your needs. Evaluate your options, determine what is most important to your organization, and ask for references from your peers. This is especially important when selecting an outsourcing provider. Your success is based on the expertise and reliability of your partner – it’s essential that your goals and values are aligned.