Got the payroll blues? - Outsourcing could be the solution

Got the payroll blues? Outsourcing could be the solution

Smart business owners strive to spend their time working ON their business rather than handling all those time consuming and low value-add back office functions. One function they are likely to find both frustrating and time consuming is handling payroll - especially with the added requirements of KiwiSaver. It's not that payroll isn't important, but it is a standard procedure and one that is not core to your business activity. That makes it perfect for outsourcing.

But while it is a standard procedure, as every SME manager knows there's more to payroll than handing out pay and payslips to employees on time. Maintaining accurate records, making additions and deductions for individual employees, calculating and paying PAYE, arranging bank deposits and handling the inevitable follow up enquiries all soak up time that could be better spent on winning more business, improving operations or developing a new product.

It's likely that few business owners appreciate the hidden costs of payroll - and how few employers get it right. Doing payroll in-house is both error prone and time consuming, often involving the input of a number of people. In the U.S. the latest edition of the Small Business Administration (SBA) study, The Impact Of Regulatory Costs On Small Firms, estimates that small businesses annually spend, on average, the equivalent of NZ$1,700 on tax compliance per employee. Further, according to research by ADP (an international supplier of HR, payroll, and benefits administration solutions), companies with 20 employees or more spend upwards of half a day per pay period dedicated to payroll related duties.

Even a small error in calculating payroll can have major consequences. Applying the wrong salary rate, not understanding how annual leave rules operate, or miscalculating benefits rates will result in short-paying some, or maybe even all, of your employees. When the error is finally noticed the back cost can be huge.

Remaining up-to-date and compliant with changing payroll tax legislation is a formidable task. Your business may face penalties and even retrospective interest charges on moneys owed as the result of calculation errors or late payment. Even when businesses use payroll software they still have to invest in the software and software upgrades, train the people who will use the system, remember deadlines and process and pays.

Many small business owners are finding a cost effective and efficient alternative to their in-house procedure by outsourcing to a professional payroll services provider. Your role then reduces to providing, each pay period, the necessary payroll data (pay rate, deductions, and vacation time) to the payroll service provider, usually electronically.

Small business payroll service providers typically handle a range of payroll tasks including calculating the pay and tax obligations for each employee, and printing and delivering management reports. Pays can be issued on a cycle to suit the business. Additional payroll related services that may carry separate fees include direct deposit and preparing earnings records. Many small business payroll services offer the option of filing PAYE as well. Working with a payroll service provider you can feel confident that payroll will be accurate, on-time and fully compliant with regulations.

In outsourcing payroll you are paying for someone to reduce your workload and worry, so you want a reliable provider who can keep your accounts efficiently, accurately and up-to-date. For information on service providers and how satisfied their customers are check with your local Chamber of Commerce, banker or accountant as well as other business people and contacts who are outsourcing their payroll.

A checklist for a payroll partner would include consideration of their expertise (payroll should be their central function - ask for references from some of their clients); their familiarity with your industry; their response time to queries; if they can provide both hard and soft copy of reports; and, of course, their price structure (there are often fees for adding or dropping employees, adjusting employee information, and setting up your account). Make sure you are looking at comparable pricing when evaluating different providers - there is now a goverment subsidy available for small employers who use a bureau to meet their Kiwisaver requirements. When you do decide on a supplier have the details of the service you have agreed to and how the relationship will work (e.g. timescales for processing the payroll etc) written into a formal contract.

A 2006 national payroll survey by the National Federation Of Independent Business (NFIB) Research Foundation found that the most common reason given by SME managers for doing payroll in-house was that it is the cheapest way. Closer investigation of the real cost of payroll along with the risk factors involved in doing it yourself suggest that that assumption is questionable. Outsourcing payroll has the potential to reduce costs, save time and eliminate the need to keep up with changing tax regulations allowing you to concentrate on the real value producing activities.

For more information contact your RAN ONE business professionals at
Academy of Business Excellence Limited