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For many businesses with hourly employees, this week marks the first paycheck reflecting the recent increase in the minimum wage, which went up to $7.25 as of July 24th. Washington's Economic Policy Institute estimates that these "raises" will add up to $1.6 billion this year -- an especially staggering figure for small businesses, which by some assessments devote nearly 80% of operational expenses to labor costs. The Small Business Administration has calculated that the smallest companies spend 45% more than larger companies per employee each year to comply with federal regulations, and 37% more on employee tax accounting and computation.
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Why is compliance with tax laws and other regulations so expensive for small businesses? One reason is that small business bookkeepers and payroll services don't always come cheap, and so many small business owners choose to process payroll themselves, learning as they go. That decision can result in costly penalties when mistakes are made. So what's a small business owner to do when confronted with the costs of payroll outsourcing versus the time and resources it takes to process payroll him- or herself? Using an outside payroll company can be the right choice, as long as you keep the following guidelines in mind.
How Payroll Services Work
Typically, you'll set up an account with the payroll company that employee wages will be drawn from and into which you deposit the specific amounts before each payday. Some services require a reserve amount or minimum balance or even access to your own business bank account in order to ensure that funds are always available to cover wage disbursements.
When you set up your payroll processing account with the payroll service, you'll need to provide all relevant financial information: employee salary amounts, W-4 and I-9 forms, employee savings account and other benefit information, as well as employee bank routing numbers (if you plan to offer direct deposit). If you have hourly employees or some that work on a bonus or commission structure, you'll need to "call in" or enter the specific pay information before each pay period.
This procedure also varies from company to company. Some allow online payroll processing, in which you log in to the provider's website and enter your information. The most common transmission method, however, is through provider software, which resembles tax preparation software. You enter the information using the program installed on your own computer-- hours worked, bonuses, commissions, sick days, etc. -- for the applicable pay period, and then transmit the information to the provider. Some companies also allow phone calls and faxes to transmit pay information.
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Service Options And Costs
Payroll companies work on month-to-month arrangements and on longer-term contracts. The more extensive the services you require, the likelier it is that the company will require a formal agreement. Payroll companies don't just calculate and pay wages; they can also calculate and transfer federal and employee withholding amounts via the Electronic Federal Tax Payment System (EFTPS), calculate and administer employee benefits (making deposits to tax-deferred savings accounts, managing employer contributions to savings and other benefit plans, etc.), and process end-of-year paperwork (distributing employee W-2s).
Basic payroll packages (processing employee paychecks and providing pay stubs) typically costs a few dollars per employee per pay period, plus any costs associated with setting up the account. Payroll companies also usually charge fees for making changes to payroll information, such as adding a new employee or changing withholding amounts, exemptions, and so on. The total cost of using a payroll service can vary widely depending on things like the number of employees served, the length of each pay period, and services performed, so it's tough to approximate an exact cost without first talking to a few vendors. Very basic services for a ten-employee firm can cost as little as $50 a month, while more advanced service options can run up to $600 or more.