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SEPTEMBER 20, 2001

SMART ANSWERS
By Karen E. Klein

Of Checks, Balances, and Outsourcing
Putting payroll preparation in the hands of contract outfits can free entrepreneurs to concentrate on more important things -- like closing deals


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Q: I am a small-business owner, and recently we incorporated. I am shopping around for a payroll service. What should I look for?

---- M.N., El Paso
A: You can find many software options if you decide to do the payroll yourself, but outsourcing the task can be a good idea for a small business or new company. A small-business owner often will try to do everything in-house to save money -- and wind up spending a lot of time and effort for a low-quality result. In the case of accounting and payroll functions, if the work is not done correctly from the start, the business may face tough consequences at tax time.

Payroll can be outsourced to a company that specializes in cutting checks or offers your employees direct deposit, withholding employee and payroll taxes, as well as preparing and filing IRS forms. Comparison shop on price, setup fees and accessibility: An Internet search on "payroll services" should yield myriad options worth investigating. Even if you have a very small operation, many payroll companies charge on a per-employee basis, so you're not paying for 50 employees when you only have 5.

CHECKING CREDENTIALS.  Some of the services operate nationally, and others run regional operations. Make sure you sign up with an established firm (check references with several current customers) that is not only reliable, but easy to get a hold of on short notice. Few things could be worse than not having employees' paychecks on hand when there is a long weekend about to start and payroll reps have already left the office.

If you anticipate that your business may need periodic financial and management reports, make sure the payroll service offers those extras. You should also determine how your payroll data will be transmitted (fax, phone, Internet input, e-mail forms, etc.) and find a service that has the flexibility to make life easy for your company. The company you sign up with should guarantee to take responsibility for paying late fees or tax penalties if they are assessed because the company has filed late or calculated taxes incorrectly, experts say. Some of the larger payroll services are Paychex, Advantage Payroll Services, and PayMaxx.

As your business grows, you may find that you lack the necessary human-resource training, knowledge of regulatory compliance, or background in safety, insurance, and employee-benefit programs to manage your growing workforce. If you don't want to hire a human resources director, you can also look into outsourcing employee management, experts say.

TIME IS MONEY.  Professional Employer Organizations not only do payroll and tax reporting, they also offer retirement benefits, health insurance, and worker's compensation packages geared to small-business needs. Many payroll services have value-added PEO functions that can be opted into as companies grow. Check out the Web site of the National Association of Professional Employer Organizations, for more information.

The time spent on tasks that might easily be done at minimal cost by a third party can be considerable. And in many small-business startups, a sale lost because the boss is too busy attending to routine duties that don't generate revenue can represent the difference between red ink and black.


Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. 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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