Accounting Best Practices, Fifth Edition

17–27. Outsource the Payroll Function

A typical in-house payroll department has many concerns. Besides the task of issuing paychecks, it may have to do so for many company locations, where tax rates differ, employees are paid on different dates, and tax payments must be made to state governments by different means (e.g., direct deposit, bank deposit, or mail), and W-2 forms must be issued to all employees at the beginning of each year. Of all these issues, the one carrying the heaviest price for failure is a government tax deposit—missing such a payment by just one day can carry a large penalty that rapidly accumulates in size. All of these problems and costs can be avoided by handing over some or all portions of the payroll function to an outside supplier.

Payroll is one of the most commonly outsourced company functions. There are several good reasons for this. First, a supplier will undertake to pay all payroll taxes without troubling the company. The savings from avoiding government penalties for late tax payments will, in some cases, pay for the entire cost of the payroll supplier! In addition, the supplier can usually process payroll for all company locations; several suppliers have locations in all major cities, so they can handle paycheck deliveries to nearly any location. Other smaller suppliers get around not having multiple locations by sending checks to company locations ...