Making a January Payroll Switch to a Payroll Company

January 1st is just around the corner, and this time of year I tend to get a lot of calls from business owners and CEO/CFOs looking to outsource their payroll for the first time.

January is a great time to start your payroll outsourcing experience because all payroll tax balances have reset at zero. This minimizes the data that payroll companies have to enter into their system (outstanding payroll tax balances, etc...), and reduces the chance for an error during conversion.

If you have made the decision to outsource I recommend getting the paperwork and set up of your account completed early. There are a lot of companies who begin outsourcing or make a change in providers this time of year and you'd rather be in and done and not caught in a shuffle or near a deadline when your account set up is happening  - with so many other accounts being set up simultaneously, quality could be sacrificed.

Schedule a time with the sales representative of your payroll company to be live and on site for the first payroll to help ease the new experience.

Then figure out what revenue generating tasks your going to accomplish with your new free time now that the payroll company is taking the time burden of payroll off your shoulders.

How Direct Deposit Saves Business Owners and Employees Money

Have you ever received a check for a really small sum?

Did you cash it?

The other day I received a check for $.36 (not a typo, 36 cents!). It was the first time I remember thinking, 'it would cost me more money to cash this check, than this check is worth.'

How much does it cost your employees to cash their checks?

Math: let's say $3.80 for a gallon of gas today, 2 miles each way to the bank. Let's say 20 minutes door to door (standing in line at the bank or depositing via the ATM). And how much is your employee's time worth (20 minutes, 1/3 of what they make an hour)?

Some banks may charge fees for cashing a check if the employee doesn't bank there (it might be the closest one to the office), or doesn't have the right level of bank account. Also, if it's a deposit, funds may not be available for a few banking days (is rent due this weekend?).

...And how much does it cost you as an employer?

Bankers will tell you, often the only time people stand in line is on pay day. That's every friday, the 1st, 15th, and end of the month, and the next banking day after holidays. That 20 minutes might be more than 20 minutes.

Did they leave on their lunch break?
Will they make it back in time, or are you paying them to wait at the bank?
How much do they earn every 15 minutes, and how much in payroll taxes are you paying to the government on that employee while their away?

There's another option.

If you utilize direct deposit, funds are available on pay day, and no one has to leave the office to cash a paycheck. Offering direct deposit could save yourself and the employee a significant amount of time and money.

How to Understand Employee Labor Costs for a Small Business

The other day I was sitting in on a consulting session with a group of new restaurant owners who were sampling ingredients that would potentially make up their restaurant's new panini sandwiches. The group was comprised of approximately five or six people, only one of whom had extensive experience in the restaurant industry.

All of them, however, had experience in business. And one thing they understood was the cost to make the sandwich included more than just bread, lettuce, and other food ingredients.

The employee cutting the bread, slicing the tomatoes, and preparing the sandwich must also be paid, as do the IRS and State governments on employer taxes.

Dividing your employee's hourly wage plus employer taxes by 60 (as in minutes), you'll be able to understand your labor cost per minute. Knowing that it takes five minutes to make your special Chicken Caesar panini, you can add your labor cost for that time to your ingredients to get a better understanding of the your cost of that tasty sandwich. You'll have a better grip on price setting this way too, as, due to your costs, maybe charging $7.99 is more appropriate than $6.99.

Unless, of course, you're in the airport, where $14.99 seems to be appropriate:)

How to Choose How Often to Pay Your Employees

How often employees are paid within their company is known as their pay frequency, and how yours is set could contribute to something most small business owners dread...employee turnover.

Pay frequencies are typically scheduled weekly, bi-weekly (every two weeks), semi-monthly (twice a month), or monthly. Some other special circumstances enable pay frequencies outside of these, such as quarterly and others, but most non-owner, non-corporate officer employees, will fall in the weekly to monthly range.

As an employer, hiring on your first employee, you have the opportunity to set your pay frequency (which can later be changed) - but here a few things to consider:

Some states mandate weekly pay for employees within certain job categories, such as manual labor, and not abiding by these rules could result in penalties. Why is this?

And Why are payday loans popular?

Cash flow is extremely important to small business owners, but just as important to the households of employees. Think processing your company's payroll twice a month versus weekly is a good idea because it could be slightly cheaper with your payroll company? Or maybe it's easier on your schedule? It might be pressuring employees to look for other employment.

Believe it or not, it's very common within the medical staffing industry to offer employees daily pay. Nurses and other medical professionals have switched from one staffing company to another simply because they can get their pay daily instead of at the end of the week.

Turnover may not be a case where employees aren't being paid enough - just not often enough.

None of this means that you should pay your employees every day or even every week, but it's important to note. The cost of an employee leaving the company could far exceed the cost or time savings of a less frequent pay schedule.

Ultimately, choosing a company pay frequency likely comes down to the types of employees you'll be employing. Don't be afraid to look at pay frequency as a retention tool, as believing the opposite (that it doesn't matter), could potentially cost you employees.

Preventing Payroll Fraud When Using a Payroll Company

The court case outlined in the link below deals with the issue of liability when payroll fraud is attempted when using a payroll company.

OPHTHALMIC SURGEONS, LTD. v. PAYCHEX, INC. http://www.leagle.com/xmlResult.aspx?xmldoc=In%20FCO%2020110131088.xml&docbase=CSLWAR3-2007-CURR

Is this case, the payroll manager at a small business would call in the company payroll to the payroll company. The payroll manager would call in multiple payrolls each week (instead of just the one normal payroll), and issue herself multiple direct deposits. The payroll company was not liable to reject the payroll manager's request since she was listed as a contact on the account who could call in payroll.

The business tried suing the payroll company for the amount the business' payroll manager embezzled through payroll fraud.

The court found that the payroll company was not liable as they had issued financial payroll reports to the company and that the company owner did not review the reports for discrepancies.

The opportunity for payroll fraud can be more limited when using an outside payroll company because of these payroll reports. Payroll reports from in-house systems have the potential to be modified (a payroll check issued and then wiped off or left out of the payroll reports). Payroll reports from payroll companies are canned - so when an employee gets two pay checks it will be there in plain sight.

Most payroll companies can have reports courier delivered and received by signature only. They can also separate the reports from the live checks and have them delivered to separate locations. Even one step further, some payroll companies can deliver electronic copies of the reports via email.

One or all of these options could be taken by the owner/CEO/CFO of the company as a checks and balances system to eliminate these kinds of payroll fraud opportunities from happening - provided the reports are reviewed, of course.

How Household or Domestic Employee Payrolls Work

Fulfilling the proper payroll tax filing and depositing requirements for household or domestic employees can be confusing, but here's how the process usually works...

Household, or domestic, employees are prevalent enough that the IRS issues a how-to guide with compliance requirements called Publication 926.

Its important to note that household employees are not reserved for high net worth individuals; Caretakers for the elderly and Nanny's for children of working parents are just two of the more common classifications for household employees.

For all employers with employees, payroll taxes are due at the Federal (IRS) and State level (and sometimes at the county, city, and local level).

For Federal taxes, most household employers are not required to file a quarterly form 941 as do most other employers with employees. Instead, household employers report their Federal Payroll Tax liability on a form Schedule H with their 1040 tax filing completed at the end of the year. Federal Tax deposits can be made with the Estimated Tax deposit schedule throughout the year (Estimated tax payments for 2013 are due April 15, June 17, and September 16, 2013, and January 15, 2014 - note this is a different deposit schedule than Employers who file form 941).

State Tax Filings and Deposit schedules and requirements may vary per state. Here in Washington, we file and deposit Employment Securities (WA State Unemployment Tax) on a quarterly basis for domestic employees earning more than $1,000 in a calendar quarter. Some states, for example, Texas, may allow filings and deposits to be performed annually, so check with your state departments of Revenue and Unemployment.

As challenging as some of this may seem. It is important to note that the individual employee will still need their proper payroll taxes deducted and paid for them as they would have under any other employer. They will also still require a W2 from you at the end of the year.

If this becomes overwhelming, there are payroll services companies that can help. Just be sure to work with someone at the company with a history of setting up these kinds of payrolls, as a lack of experience may cause some added challenges.

Feel free to contact me at Randy.Harris@adp.com if you would like more information on our payroll services options in this area.

2011 Form W-4, important dates and regulations

The following are a list of dates and regulations accompanying the 2011 Form W-4. (Information taken from IRS Publication 15 - 2011)

By February 15

Request a new Form W-4 from exempt employees. Ask for a new Form W-4, Employee’s Withholding Allowance Certificate, from each employee who claimed exemption from income tax withholding last year.

On February 16

Forms W-4 claiming exemption from withholding expire. Any Form W-4 claiming exemption from withholding for the previous year has now expired. Begin withholding for any employee who previously claimed exemption from withholding but has not given you a new Form W-4 for the current year. If the employee does not give you a new Form W-4, withhold tax based on the last valid Form W-4 you have for the employee that does not claim exemption from withholding or, if one does not exist, as if he or she is single with zero withholding allowances. If the employee furnishes a new Form W-4 claiming exemption from withholding after February15, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place.

Before December 1

New Forms W-4. Remind employees to submit a new Form W-4 if their marital status or withholding allowances have changed or will change for the next year.

Using Form W-4 to figure withholding. To know how much federal income tax to withhold from employees’ wages, you should have a Form W-4, Employee’s Withholding Allowance Certificate, on file for each employee. Encourage your employees to file an updated Form W-4 for 2011, especially if they owed taxes or received a large refund when filing their 2010 tax return. Advise your employees to use the Withholding Calculator on the IRS website at www.irs.gov/individuals for help in determining

how many withholding allowances to claim on their Forms W-4.

Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances.

Electronic system to receive Form W-4. You may establish a system to electronically receive Forms W-4 from your employees. See Regulations section 31.3402(f)(5)-1(c) for more information.

Effective date of Form W-4. A Form W-4 remains in effect until the employee gives you a new one. When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. For exceptions, see Exemption from federal income tax withholding, IRS review of requested Forms W-4, and Invalid Forms W-4, later.

Why Automated Payroll Check Signing Makes Your Life Better

I had a client, a small business owner, who told me he chose to sign each one of his employees paychecks because he liked to 'confirm the amounts of the paychecks he was issuing.'

He had 15 employees and paid them every other Friday.

Believe it or not, this is a very common practice. 

Because of this practice, this business owner was tied to his office every two weeks. Come rain or shine, wedding or childbirth, every other week he had to be there or his employees didn't get paid.

It doesn't have to be this way.

Most outsourced payroll services have a Payroll Check Signing service. They can have the business owner's signature (or multiple signatures) pre-printed on the checks when they are issued. The owner can be miles away, on vacation, with family, or conducting revenue generating business, and the payroll checks can arrive pre-signed and sealed in envelopes ready for handout.

But what about a signature stamp safe-guarded by a trusted office employee? Won't that work too?

A good point. A signature stamp does solve the problem of having to be in the office to sign checks. But then it potentially creates another problem - Check Fraud.

Phantom employees can easily be created by in-house bookkeepers or other office staff. And signature stamps can be used to authorize those checks without owner notice. Trusted staff member or not, most check fraud perpetrators are first-time offenders.

See the attached article from the Association of Certified Fraud Examiners on Ghost Employees and in-house payroll fraud. http://www.acfe.com/resources/view.asp?ArticleID=21

Not only can most Payroll Outsourcing Services pre-sign and seal paychecks, but most can produce electronic payroll registers that can be viewed by the business owner from any remote location. They can then verify the pay amounts before the checks are even sent from the payroll company.

This also makes it very difficult for in-house employees to hide ghost employees on the payroll.

This way, the owner:
1. has the same piece of mind of verifying their employees pay
2. drives down the chances of check fraud, and...
3. gains the personal satisfaction and empowerment of being a business owner who comes and goes as they please

...the way it was meant to be.