Payroll is a compliance issue – not just accounting. Compliance takes a lot more than sorting, counting, dividing, and writing checks. A very small business owner may be able to administer payroll with a half-decent software program and/or the advice of the business’s CPA.
Eventually though, the employee headcount will make the administration difficult and compliance very risky. A better HRIS program or a PEO contract will take care of both issues. However, the employer bears the accountability for compliance, so it is something you need to monitor even when you have confidence in the vendor.
Financial administration for the non-financial manager
- Journals record accounting transactions. Small companies can use a general ledger, but you may prefer to see the transactions recorded in a Payroll Journal before they are summarized in the General Ledger. HRIS programs post these transactions immediately.
- W-2 Forms must be issued before the end of January of the year following the earnings. Copies of the form go to the employee and to the taxing authorities served. It reports all types and amounts of income as well as the types and amounts of withholding and/or payments made on behalf of the employee. The calculation and assignment of the numbers is tedious and demanding. More important, considering that the recipients include taxing agencies, accuracy is vital.
- W-3 Forms report Social Security withholding and go to the Social Security Administration showing each employee’s total earnings plus the Social Security wages, Medicare wages, and tax withholding. This involves layered calculations because the withholding percentage varies from obligation to obligation, including FICA, FUTA, SUTA, and others.
- 940 Form reports earnings for purposes of Federal unemployment tax. The calculation has to adjust for state unemployment taxes paid (where applicable). Where the unemployment tax due conflicts with the tax paid, the employer pays the underpaid tax.
- Direct Deposit transactions must be recorded. This is difficult to do manually when some employees opt out of direct deposit. An increasing number of employers require direct deposit to simplify and secure the administration.
- Payment Debit Cards are increasingly popular because they reduce the cost of administration. Cards are issued on paydays in lieu of checks or direct deposit. These are particularly helpful to employees who do not have bank accounts. Outsourcing the task relieves a clerical nightmare.
- Audits and Filings are the bane of payroll administrators. In-house or outsourced payroll administration is subject to scheduled and unscheduled audits. Due diligence audits of payroll are demanding and unnerving unless you have the administration fully secured.
- Compensation Administration differs from payroll administration in that it complies with the business’s compensation structure. It helps cost jobs, but it also assures non-discrimination in the payroll issue.
Options
Look at the employer’s options here. From day one, self-administration is time-consuming and risky. Time costs the small business owner market-share and creative time. Risk can put you out of business. From day one, you need the confidence and integrity of a quality HRIS system or a PEO certified for its performance. This gives you the criteria and vocabulary to make your outsource shopping easier.
Carolyn Sokol is founder and President of PEOcompare.com as well as Business Development Director to compareHRIS.com, both of which help match businesses to the right HRIS or outsourced HR provider for their particular needs. She is currently a member of SHRM and writes on HR issues that affect small businesses.
