How To Make Payday Less Painful

Outsourcing can take the angst out of paycheck processing

Payroll is one of those no-win tasks. Your staff expects you to dole out checks dutifully on time. The Internal Revenue Service feels the same way about the accompanying paperwork. Do it right, and no one will thank you. Make a mistake, and you may never hear the end of it.

Take Marine & Restaurant Fabricators, a 29-person sheet-metal manufacturer in San Diego, which found itself at the wrong end of an IRS notice in 1995. The IRS told the company that its W-2 reports from the previous year did not match its quarterly returns and demanded an exhaustive accounting. "It's still vivid in my mind," says Office Manager Leah M. Dredge. "My bookkeeper took one look at the paperwork and said: `Leah, just pray.' It was a nightmare." It took nearly a year to resolve, and the IRS price tag, including interest on the overdue taxes, was about $1,000.

At Dredge's insistence, the company finally outsourced its payroll to Paychex Inc. the following year. "I couldn't be happier," she says now. "There's security in knowing that it's being done right--they know all the rules. Now, if you have a tax issue, you just say, `Hey, deal with this, guys."'

FINES COVERED. And they do deal with it. Payroll services stake their business on keeping up with every new tax form and law, and they will cover any penalties levied because of their error. The $4 billion industry is growing by 10% to 12% per year and handles checks for more than 29 million employees at thousands of companies, says analyst Gregory M. Gould of Goldman, Sachs & Co. in New York.

Granted, this service isn't for everyone. An inexpensive payroll software package might keep a lid on errors, too--provided you have time in between all your other tasks, keep the state and local tax tables up to date, and don't make any typing mistakes. And you'll still need to remember how much in payroll taxes you need to deposit, and when. Apparently, that's easier said than done. In 1996 alone, the IRS assessed more than $5.4 billion in payroll-tax penalties.

So how much does a payroll service cost? A 10-person firm that issues payroll every two weeks can expect to pay about $750 over the course of a year for such basics as checks, routine reports on payments and taxes, and yearend W-2 reports. Tax filing and direct deposit of employee checks can add a further $300, for a total of $100 annually per employee, but the total drops rapidly for larger clients. The fee for a 50-person company can be as little as $30 per head.

In the end, the cost is about the same as doing it internally. Let's say that you've got a payroll with 10 employees, and the person handling the job now earns at least $30,000, or about $14.50 an hour. The average company spends 55 to 60 hours per year processing payroll, including state tax filing. Do the math, and you will find that using a payroll service is probably a break-even proposition, and some firms may give you an even better deal if you're a good negotiator.

Even if you don't tend to make mistakes, allowing a service to handle your payroll can save considerable time. Justin B. Hectus, benefits administrator for Keesal, Young & Logan in Long Beach, Calif., discovered this when the law firm switched to a payroll service. Now, paying 155 employees at five locations on a weekly basis takes only six to eight hours per payroll. "Spending less than one day per payroll period is great, considering that we used to have someone doing it full-time," Hectus says.

Using a payroll service doesn't mean that you can delegate all of your obligations. For instance, if you have hourly workers or employees who need to be reimbursed for their expenses, you will still need to report the relevant numbers to the service with every payroll period. If there's a tax error, your service should pay the penalty, but you're still on the hook for the actual payment and any interest charged by the IRS.

And while outsourcers strive to make the process as easy as possible, glitches are inevitable, as Hiram M. Lazar found out in a December phone call to Ceridian Employer Services. "Earlier today, we were on the phone an hour and a half before we got through to somebody," said Lazar, vice-president for finance at Lebenthal & Co., a New York municipal-bond dealer that uses Ceridian. (Ceridian calls the delay a rare exception. Henry Edgar, the payroll firm's director of client services, blamed a rush of companies trying to move paydays because of the two four-day weekends created by Christmas and New Year's Day.)

EENY-MEENY. So which should you pick? Ideally, the service should have a nearby office to facilitate easy delivery of checks and to ensure the firm is familiar with local tax laws. So we focused on those with offices in at least 10 states and compared some of the basics, with an assist from their own customers. We questioned 20 clients of each service to gauge their satisfaction, asking how easy it was to send data, how flexible the service was with changes, whether the reports were useful and clearly formatted, and whether the price seemed fair.

Your first impulse might be to go with Automatic Data Processing Inc., the biggest name in the business. This company has the ability to handle complex payrolls and allows you to tap into the more sophisticated services demanded by some of ADP's huge corporate clients. Unfortunately, it's also the most expensive one in our survey, charging $906 a year for basic processing of a 10-person payroll. Some clients said ADP could stand to be more flexible about customizing reports and customer service. ("We are as flexible as any other service provider," says Raul Villar, marketing director for ADP's small-business division.)

By contrast, Dial-a-Check's basic payroll processing rates were the lowest, running $520 a year for a 10-person company. However, neither Dial-a-Check nor PrimePay ($810) provided data in time for us to interview their clients.

Midprice firms such as Advantage Payroll ($773), Interpay ($660), and Payroll 1 ($738) got some of the highest praise. Advantage and Payroll 1 won plaudits for their willingness to accommodate changes, while Interpay was cited for its easy-to-read reports and its "personal touch" that allows it to adjust its processing schedule if, say, your payroll manager is planning to be off on the usual payday.

NO FRILLS. Among these three, Interpay and Payroll 1 will do the job--and save a few dollars--if your needs don't extend beyond standard paycheck processing and a heads-up when a tax deadline looms. Moreover, you may prefer their practice of setting up service teams for each account, vs. a single dedicated rep at Advantage who may not always be available. But if you need more comprehensive service, including tax filing, automatic signatures, envelope stuffing, and employee favorites such as direct deposit, then Advantage has the edge: Those services are included in its basic price.

If these three aren't in your area, consider Paychex, one of the three largest payroll providers along with ADP and Ceridian. Price is a drawback: Paychex charges a 10-person company $876 for basic service, the second-highest fee in our survey. But Paychex built its hugely successful network of 121 offices in 36 states by catering to small businesses, which could explain the praise it received in our customer sampling. Paychex is comfortable with payrolls of up to 200 people, and claims a roster of 270,000 companies that employ more than 3.5 million workers. In fact, the service recently expanded its reach nationwide when Merrill Lynch & Co. tapped Paychex to offer payroll processing nationwide as part of the brokerage's cash-management service for small businesses.

Despite the cost, the money is usually well spent. "There is so much risk that it is just easier to outsource it," says William A. Wong, a tax manager at Ernst & Young in Milwaukee. "And they are relatively inexpensive if you can cut a good deal." In this case, at least, passing the buck seems like the right idea.

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