Another order needs to be shipped stat, a client drops by, Internet service just went down, and an IRS notice arrives — your employee tax withholdings were miscalculated. Now you owe a hefty fine.
Unfortunately, this scenario is all too common.
Back in the day, someone would become inspired, start a company doing what he or she loved best — repairing computers, say, or providing home health care, designing websites or flipping houses.
Fast-forward three or four years. Business has grown tremendously, employees have been hired, the daily scramble to get things done becomes nonstop, and the owner gallops through QuickBooks twice a month to crank out payroll.
One local company owner crunched the numbers wrong for several fast-paced years — and ended up with a sizeable penalty that destroyed his working capital.
Another entrepreneur trusted her accountant until an employee paycheck turned up short. After firing the accountant and hiring a payroll company, the owner is fortunate nothing worse happened.
When business owners become overwhelmed trying to piecemeal their own payroll and tax withholding, it’s no wonder.
“It’s just become so complex,” said Byron McCurdy, western region vice president for Resourcing Edge, and an accountant for 31 years.
“Depending on the size of your payroll, there are between 20 and 30 tax deposit and tax return deadlines in the state of Colorado every year.”
Payroll is a nonproductive function of the business – no matter how well you do it, you’re not going to make money at it.”
– Byron McCurdy, Resourcing Edge
“Payroll is a nonproductive function of the business — no matter how well you do it, you’re not going to make money at it,” McCurdy said.
Time spent calculating payroll means time lost for business development, client service and sales.
“People don’t get into business to be running and making tax payments. It takes them away from the productive parts of their business where they’re making money,” McCurdy said.
Amit Jain, division vice president, strategy and business development for ADP Small Business Services, echoed that statement.
“With all the federal and state tax laws, business owners could spend all their time making sure they’re compliant rather than actually running their business,” he said.
Think of the time and energy available for creative entrepreneurial pursuits, when payroll stress becomes a thing of the past.
“People put themselves into a box and most of them just hate it, so it’s a frustrating and time-consuming part of business. That’s where payroll processing firms come in,” McCurdy said.
For those who think carving out a few hours each week to handle payroll is sufficient, the statistics show otherwise. Forty percent of small business owners pay a penalty each year for inaccurate payroll tax filings.
The No. 1 pitfall many small business owners face is “making sure they’re compliant with payroll tax laws and HR [human resource] compliant,” Jain said.
“A lot of business owners don’t really understand the tax regulations,” he added. “The government is always on the go in terms of making them more complex.”
Since 2001, there have been 4,680 changes to the Internal Revenue Code.
“Speaking of the complexity of the tax laws — that’s crazy,” Jain said.
With payroll, inaccuracy is the biggest issue — not that business owners are intentionally overpaying or underpaying, but that they’re not aware of all the laws and therefore not calculating correctly, Jain said.
If handing over the chore of payroll isn’t enough incentive in and of itself, then there’s always the bonus of unhanding the burden of liability.
“When a company gets a tracer, a notice from the IRS questioning their payroll tax filing, it presents tremendous risk to the employer,” Jain said.
Not only the amount of time to manage that communication with the Internal Revenue Service, but “penalties can disrupt cash flow. For a small business, one of those penalties can actually wipe out your entire cash flow for a year,” Jain said.
Most payroll companies handle the calculations for federal, state, Social Security and Medicare tax withholdings, garnishments, child support payments, federal Form 941 quarterly filings, year-to-date reports, workers’ compensation insurance, unemployment insurance taxes, etc.
“Assuming the employer gave ADP the correct information … if ADP is your full-service provider, we provide the necessary paperwork, contest the penalty with the IRS and resolve that problem for you,” Jain said.
Along those same lines, Wells Fargo conducts audits of financials before accepting clients, to ensure data is correct. Once financials are up-to-date, the bank assumes liability if there’s a dispute with the IRS regarding payroll or tax withholding, said Ruven Lupovici, business payroll specialist with Wells Fargo Payroll Services in Colorado Springs.
“We keep track of tax law changes and regulations,” he said. Trying to do payroll by oneself or having a friend do it is “a huge risk.”
About six months ago, Springs-based Peak Analysis & Automation Inc. switched from a payroll service provider in Denver to an account with Lupovici at Wells Fargo.
Using the prior company involved much more verbal communication without immediate access to payroll records, said Michael Barnes, general manager for Peak Analysis.
“With Wells Fargo, I have access online instead of [the other company] having the information and communicating it over the phone,” Barnes said. “When employees request something, I can get the information faster.”
Not only that, but providing payroll information requires less time this way.
“We do the legwork on the back end. You tell us who’s getting paid, how much [per hour] and when,” Lupovici said. “It’s that simple.”
Payroll services aren’t expensive, either, especially when contrasted with hundreds or thousands of dollars in potential fees and penalties.
Payroll processing costs at various firms range from $15 per employee per month to about $140 for 40 employees for each bi-weekly processing period.
Peak Analysis has 20 employees and follows a bi-weekly payroll schedule. Barnes said the company pays about $30 less per processing period with the new provider.
Another advantage includes accurate data for workers’ compensation premiums (instead of estimating for the quarter), based on the actual number of employees. Of course, there’s no point in paying premiums for employees who no longer work at a company.
Concerned about the bottom line? Paying a provider now likely costs much less than paying the IRS later.
“It’s a cash-flow value proposition,” Lupovici said. “We can really help them protect their cash flow against any unforeseen financial penalties.” n CSBJ