Payroll Providers for Small to Mid-Size Businesses

Small business owners have a lot of decisions to make. For as much time that’s spent actually serving customers, you spend at least twice as much time managing business operations. That factor multiplies as you increase staff, revenue, and service offerings.

Growing your business in large part means staying ahead of technology and maintaining compliance. Outsourcing payroll can accomplish both, but many SMBs question the expense and whether they’re large enough to warrant a payroll provider. It’s not uncommon to see five people running a multi-million dollar business – is there an employee count or dollar figure that indicates a need for a partner?

There’s no hard rule about what numbers warrant a payroll provider, but calculating your cost-benefit ratio and considering your expansion goals will help define what’s right for your business.

Knowing when it’s time to enlist a payroll provider

More than 50 percent of SMBs spend at least three hours per month managing payroll; the more employees you have, the longer it takes. It’s not just cutting checks – it’s also filing taxes, managing deductions, and tax reporting.

Often, SMBs will avoid using a payroll provider to save costs, but at a certain point, doing payroll yourself costs more than it saves. Let’s say one hour of your time is worth $50 of potential revenue. From there it’s easy to do the math. If you’re the only employee, and it takes you half an hour per payroll to calculate earnings, cut the check, pay taxes, and do the reporting, then it’s not worth it to outsource – the $25 for your time is less than you’d pay a professional.

But the minute you have one employee in addition to yourself, everything doubles in cost and complexity. Not only will you have to spend more time on payroll, but taxes and other deductions become more complicated. Does your employee live in a different municipality or school district? Is she responsible for spousal alimony or child support? All of your employee’s life circumstances must be represented in payroll calculations. At that point, it’s usually time to enlist help to minimize your liability for errors.

Sometimes SMBs employ CPAs to support payroll in conjunction with other tax services. But using a CPA for payroll is cost-prohibitive and doesn’t provide options for structured payments like pay-as-yougo workers’ compensation. Though drastically varied by market and location, a CPA’s hourly rate can range between $90 and $300. Whether you’re an LLC with 10 employees or an INC with 150, it’s an expensive solution that doesn’t make the best use of a CPA’s capabilities or your money. One possible exception to this rule is if your CPA uses an automated payroll solution on your behalf, but you should compare your CPA’s rate to process the payroll with your own hourly rate to determine which is more cost-efficient.

If you plan to build your team, payroll complexity will continuously increase with each new hire. When you have just three employees, a payroll provider is probably going to save you money. Let’s go back to our $50 per hour example. Assume one hour for each employee, as you’ll now have to accommodate individual deductions. $50 x 3 = $150. With some basic payroll solutions that cost as low as $40 per month, you’d likely finish the task in only one hour and save about $100 per month.

Payroll providers automatically accommodate deductions for child support payments, wage garnishments, or flexible spending accounts – saving you time and money. If you plan to offer 401(k) savings or health insurance to employees, outsourcing payroll can help administer these benefits as well.

It’s hard to identify an exact tipping point for outsourcing payroll, since each business and industry varies. But once you’ve identified a need, you can benchmark against other industry trends to decide if a hands-on or hands-off model is best for you.

Understanding your options: online payroll versus outsourcing

Online payroll is a hands-on solution that works best for owners who prefer manual control and feel comfortable with a self-service platform. Online payroll requires owners to manually enter new hire information, edit existing employee data, cut individual checks, then review, make adjustments, and submit for processing. The payroll provider then directs the actual payment and files taxes. Users can pull their own reports from online systems.

Outsourcing is a hands-off solution that works best for owners who would prefer a representative process payroll on their behalf or who spend time in the field for work. In this model, an owner submits salary and employee information to the payroll provider. Then each week, he collects data on hours (through timesheets or attendance software) and submits it (usually over the phone) for processing. At that point, a payroll provider performs calculations to determine wages for the pay period, directs payment, and files taxes. Reports are prepared regularly and sent back to the owner to reconcile if desired.

Both options require partnering with a solutions provider. But how do you know which is right for you? There are some trends that offer insight into what’s working for specific industries.

Choosing based on industry trends

With millennials now a majority of the workforce, new and existing businesses are opting for online payroll systems catering to this digital-native generation. This is especially apt among workers at desk jobs, whose computers, mobile devices, and other tech tools are already closely integrated with the business’s day-to-day operations.

Shift work or skilled labor typically calls for the hands-off outsourcing option. Restaurants, for instance, often use time and attendance software to collect data, but they prefer not to process the payroll. Salon and spa owners, general contractors, and independent retailers all find benefit in outsourcing payroll, as their professions typically require time away from a desk or computer to complete work and manage the business.

Choosing online or outsourced payroll isn’t necessarily dictated by the size of a business, although having more employees does increase complexity. Larger businesses typically opt for the online approach in order to take advantage of bolt-on options. Tasks like HR administration, time and attendance software, and 401(k) management can all be integrated with the payroll process and controlled within the same platform.

Ultimately, payroll isn’t just payroll anymore. Outsourcing offers you an expanded business solution and an experienced administration partner. By way of payroll, you can manage health benefits, pay workers’ compensation, file taxes, and obtain insightful, big-picture reports on your business. And while SMBs and startups often have cash flow challenges, outsourcing payroll should still be a budget item – it can be the platform that helps you unlock the potential of your small business.