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By Karen E. Klein
MAY 18, 2000

How to Make a Payroll Service Pay Off

Look for accuracy, timeliness, and a wealth of services


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Q:  What do you think of payroll services? How do I choose one?

-- A.B.O., Chicago

A:  Outsourcing the payroll is a smart and cost-effective move for small businesses, experts say. The field is extremely competitive, and the price per employee goes down as your company gets bigger. But even for outfits with only a handful of employees, using a service can pay off if it frees up time that one of your in-house staffers could put to better use. "We recently advised a business owner whose wife was doing the company's administrative and accounting functions to get a payroll service," says Tom Bargsley, a partner at Bargsley & Associates, a CPA firm in Austin, Tex. "It turned out she was taking a lot of time to go to the bank, make deposits, and complete payroll forms when she could have been spending that time making phone calls that would improve the company's cash flow."

Another consideration is the importance of proper collection, reporting, and remittance of payroll taxes. The nation's businesses collect 70% of the U.S. gross federal revenue annually through the 4 billion paychecks they issue each year to 130 million workers, according to American Payroll Assn. statistics. The complex paperwork that goes along with that process must be filled out properly and filed on a timely basis, or your business may face the wrath of the IRS and your employees. If you outsource the process to a reliable service, it should agree to pay for any mistakes it makes in tax preparation and reporting.

An Internet search on "payroll services" will turn up dozens of local, regional, and national companies, most of which not only issue paychecks and withhold taxes but also offer additional services such as direct deposit and tracking employees' sick and vacation time.

SPECIAL NICHE. So, how do you go about choosing a service? Although there are excellent local and regional payroll companies, experts often recommend using one that is national in scope because even small companies frequently find themselves adding employees in remote locations nowadays, and it helps to have a contractor that is familiar with the tax laws in other states. "Your big worry with payroll is accuracy and timeliness, and making sure that the service is paying the taxes that you're liable for," says Mae Lon Ding, of Personnel Systems Associates in Anaheim Hills, Calif. "And of course, you need to be careful that you don't use an unreliable service that will take off with your money."

Look for a company that has established a special niche working with small businesses and has a written policy of making good on tax mistakes, Bargsley says. If you want the flexibility to expand your relationship in the future, such as adding on 401(k) management, human-resources reports, or additional accounting work, make sure you choose a company with a wide range of services. Especially important is ensuring that the outfit has an account representative assigned to work with you and a technical services department that can respond quickly to problems that may arise on payday, Bargsley says.

A couple of large payroll services companies you may want to investigate are Automatic Data Processing, and Paychex. You can also check out frontier's previous survey stories on payroll services and the BuyerZone primer on payroll companies. Some law firms and accounting offices also offer payroll processing. For more general information, check the Web sites of the American Payroll Assn. in San Antonio and the American Society for Payroll Management, based in Stormville, N.Y.

Have a question about running your business? Ask our small-business experts. Send us an E-mail at, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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