Charles Read, CPA, USTCP, IRSAC
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The answer to that is a resounding YES. But not for every company. In fact for the vast majority of businesses trying to do payroll in-house is a mistake.
Payroll is far too complex to do as a side job. The software helps, of course, I would never suggest doing payroll by hand as it was done 50 years ago. But if you don’t know what you don’t know, then you can’t have the software do what you need it to do.
Outsourcing payroll makes sense for most businesses with under 500 employees. At 500 employees (give or take) the cost of having dedicated professionals to handle payroll begins to make sense. Then quality software is very necessary to the job.
In companies with under 500 employees, definitely under 100 employees, if payroll is done in-house it is a side job for someone. As a side job, there is never the time to keep up with all the laws and regulations, the continuing education, the reading, the certifications, and more. A dedicated payroll professional spends time: reading and acquainting themselves with all the changes going on in the industry; reading the trades; reading the IRS newsletters; keeping up with the States their company operates in both unemployment taxes and normally State income tax withholding; going to conferences and Payroll Association meeting; interfacing with other payroll professionals and doing the continuing professional education for their certifications. They then use this knowledge to get their software to do what is needed to create and distribute payroll, payroll tax deposits, payroll tax filings, and management reports. These deposits and filings must not only be correct coming out of the software but must be made or filed on a timely basis and comply with all legal requirements. Then, when there is a problem, whether it was internal or external, (because the IRS and the States make millions of mistakes every year) the payroll person has to fix the problem. Creating the payments to employees is the easy part. Compliance is the real job of the payroll person.
The IRS alone in FY 2019 issued over 13 BILLION dollars in employment tax penalties according to the IRS Data Book. Over half of these penalties were subsequently abated. They were abated by people who understand how to deal with the IRS. No software can teach you how to deal with the regulators, Federal and State. That knowledge is either learned from those who have done it or by doing it and learning from your mistakes.
Now of course software is critical to payroll service providers like my company. But more important is the fact that we stress payroll education at every level for all of our employees. This lets us guide our clients on a day-to-day basis. We also constantly update our clients on changes in the laws that affect them. We can also, by taking an IRS limited Power of Attorney (Form 2848), advocate for our clients with the IRS and with the States using a State-specific POA. This puts a dedicated payroll professional dealing with the regulators, not someone who handles payroll as a side job and has never before been subject to the pressure tactics of an IRS or State revenue officer or collector. Not someone who does not know the law, regulations, and procedures that the regulators are required to follow. Not someone who does not know how to get penalties and interest charges abated or how to negotiate a settlement. Forty prevent of small businesses are hit with a tax penalty every year. If a company’s payroll person does not intimately understand what is going on they are either going to have to hire an outside expensive professional or lose in the fight with the IRS or other regulators.
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