Choosing a Payroll Services Provider


Posted by: Altura Benefits in Money

choosing a payroll services provider
Many people underestimate how complicated managing payroll is – until they find themselves responsible for payroll deductions, overtime calculations, and regulatory requirements. A payroll services provider relieves employers of this burden. However, choosing a payroll services provider is also complicated. Failing to consider possible complications may lead to bigger headaches.

The Advantages of Using a Payroll Services Provider

As companies grow, they usually hire more employees. Whereas these employees are necessary to carry out operations, managing the growing workforce may become a full-time job. As a result, employers also need to hire HR departments and individuals with accounting and compliance experience to handle payroll. Alternatively, they can outsource these duties.

A payroll services provider is a third-party company that handles payroll operations on behalf of other employers. Payroll services providers are popular due to their many advantages:

  • By using a payroll services provider, companies grow without worrying about a bottleneck effect caused by overwhelmed HR departments. This makes it easier to scale and take on new projects, which may be instrumental to the company’s long-term success.
  • Payroll services providers specialize in payroll functions. They should be experts in all the tax and compliance issues that go along with payroll, which puts them in an excellent position to help employers navigate these issues.
  • Payroll services providers may be less expensive. Although costs vary, paying for third-party payroll services tends to be less expensive than hiring the staff necessary to keep these operations in-house.

When things go well, a payroll services provider will help employers focus on their business goals, achieve growth, and protect their bottom line. However, things don’t always go well.

The Worst-Case Scenario

The United States Attorney’s Office, District of Maryland, says a payroll services company stole approximately $2.6 million from clients – money that the company had set aside to pay federal and state taxes. Over the course of several years, the payroll services provider diverted funds into a personal account, while only paying a portion of the money the company owed to the IRS.

In another case, CBS News says a payroll company abruptly closed after allegedly diverting approximately $35 million from employee checks and accounts. This led to an FBI investigation – but that didn’t help the many employers who were left without a way to pay employees.

Incidents like these are worst-case scenarios. Employers that use payroll services need to give the services access to their funds, which, in the case of dishonest payroll companies, could lead to disaster. When a payroll company diverts funds, employers may be unable to pay their employees or the IRS.

If a payroll services provider does disappear with your money, the IRS won’t let you off the hook. According to the IRS, “If the third-party fails to make the federal tax payments, then IRS may assess penalties and interest on the employer’s account. The employer is liable for all taxes, penalties and interest due. The employer may also be held personally liable for certain unpaid federal taxes.”

Other Potential Pitfalls

The idea of a company absconding with your payroll is frightening, but it doesn’t happen often. Most payroll services providers run legitimate businesses and don’t steal funds. However, this doesn’t guarantee they will be competent. Plus, even if they are competent, it doesn’t guarantee they’ll be a good fit for your company.

For example, a payroll services provider could make mistakes. If the payroll company miscalculates withholdings or wages, your business may be left owing the IRS or employees additional amounts. Regulatory issues are another concern. Payroll regulations are complicated – it’s one reason many companies choose to outsource payroll services. If the payroll company fails to comply with rules or provides bad advice you then follow, your company may be on the hook for the legal or tax consequences.

Other problems emerge if the payroll company isn’t compatible with the other systems and providers you use. Employee benefits are a major area of concern. If your company is already using a system for employee benefits and you adopt a payroll services provider incompatible with that system, you’ll be in a difficult position.

How to Choose a Payment Services Provider

Using a payment services provider is a smart move – as long as the payroll company is a good fit for your company. When reviewing your options, there are a few questions to ask:

  • What do other businesses say? Reading reviews and talking to current or former clients will give you an idea of what to expect. Whereas any information may be helpful, it’s especially important to consider the experience of businesses similar to yours. A payroll company that met the needs of a small employer may be unable to handle a large employer. Conversely, a payroll company that treats large employers well may not be as responsive when it comes to smaller clients. Find out what companies that are roughly your size have to say.
  • What reports and monitoring tools are available? When you use a payroll company, you’re trusting that company with your funds and employee satisfaction. Reports and monitoring tools help you stay on top of what’s happening. Find out what reports are available and whether they meet your needs.
  • Will the provider scale with your business? One of the advantages of a payroll company is it may help your business grow. Therefore, it’s important to consider whether the provider will be able to scale with your business. Consider the payroll company’s capabilities as well as the pricing structure and additional services available.
  • Does the provider make economic sense? Costs vary. However, the cheapest option isn’t always the best. By crunching the numbers, you can determine whether outsourcing payroll services makes financial sense. Also think about the future: as your business grows, will this option continue to make sense?
  • Is the provider compatible with your current systems? Verifying compatibility ahead of time will save you many headaches. Look at your current HR and employee benefit systems and determine whether they will be compatible with the payroll company.
  • Does the provider have good security? Even if the payroll services provider doesn’t steal your funds, lax cybersecurity could allow criminals to do so. Find out what cybersecurity measures are in place and consider whether they are sufficient.

To avoid problems, it’s smart to work with your employee benefits provider before selecting a payment services provider. Your employee benefits provider is already familiar with your company and may have some good recommendations. This is also a good way to avoid any incompatibility problems.

Altura Benefits specializes in group employee benefits, insurance, and human resources support. Although we do not offer payroll services, we are happy to discuss potential payroll options with our clients to ensure they find a service that’s a good fit for their needs and won’t cause additional headaches. Contact us.