Outsourcing Payroll in .NET framework

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Outsourcing the payroll function means that the collection of payroll-related data is still kept in-house, but that the processing of that data is now the responsibility of a payroll supplier The supplier s facility contains a set of payroll processing programs and a related database that contains the payroll records submitted by its many customers The facility does routine payroll tax calculations on the submitted data and creates payroll checks or issues direct deposit payments back to the employees of its customers In addition to these basic tasks, the facility calculates all taxes due to various government entities and submits the tax payments along with any required tax forms Other services include the issuance of annual W-2 forms, quarterly wage reports, and the federal unemployment tax return Shifting the payroll function to such a supplier is nearly automatic for smaller firms, which can thereby avoid an array of in-house payroll costs, as well as avoiding the risk of incurring tax penalties for making late or incorrect tax payments to various government entities The decision to shift to a supplier is more difficult for large firms, who may find that the supplier s fees do not adequately offset the services rendered In this chapter,* we will explore the advantages and disadvantages of outsourcing the payroll function, cover the contractual, transition, and control issues associated with the change, and also note how the supplier s performance may be measured and managed
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Advantages and Disadvantages of Outsourcing Payroll
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There are a variety of good reasons for outsourcing payroll, which has led thousands of companies to pursue this option Here are some of the reasons: Avoid filing tax payments One of the primary reasons for outsourcing payroll is to avoid having to file payroll tax payments in a timely manner The gov-
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* This chapter is largely adapted with permission from 4, Outsourcing the Accounting Function, in Outsourcing by Bragg (Hoboken, NJ: John Wiley and Sons, 1998)
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228 / Accounting for Payroll
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ernment requires quite rapid tax filings and has imposed stiff penalties if taxes are not filed on time For those companies with a chronic tax-filing problem, handing over this task to a supplier may save them more money in tax penalties avoided than the total cost of having the supplier handle the payroll Avoid paying for software updates Companies do not want to pay their software providers for new tax tables every year so they can correctly calculate payroll taxes through their in-house software packages Since there are some incremental tax rate changes somewhere every year, a company that runs its payroll on an in-house software package must incur this expense every year in order to stay current By outsourcing payroll, there is no need for this software or related updates Avoid fixed costs By using a payroll supplier, there is no need to maintain any in-house software and its attendant annual maintenance fees It is also possible, though unlikely in smaller firms, that some in-house payroll personnel would no longer be needed Avoid nonstrategic activities If a company s management team wants to focus on only the most mission-critical activities, then payroll should be one of the first activities to go Paying employees is certainly an important function, but generally has little to do with a corporation s strategic direction Avoid creating W-2 forms A payroll supplier will accumulate all annual payroll information into W-2 tax reports for the company Otherwise, the in-house system would produce these documents and send them to employees Avoid printing paychecks A payroll printing can tie up a printer for a long time if a company has a large number of employees and this printing must be monitored by an employee to ensure that there is no jamming When the function is outsourced, the company can use both the printer and the employee for other purposes Use direct deposit Many in-house payroll systems do not allow direct deposit, since this requires a software interface that can be read by the local bank All major payroll suppliers, however, offer direct deposit This is a major advantage for those companies whose employees are constantly traveling and who are frequently not on-site to pick up and deposit their paychecks There is always a fee associated with direct deposit, so this is not a cost-saving feature, but it is very good for employee relations Use check stuffing A further convenience is for the supplier to automatically stuff all checks into envelopes for delivery to employees, which eliminates a clerical task for the accounting staff Use check delivery to multiple locations Though most payroll services will not mail checks to individual employees, they will send batches of checks to multiple company locations for distribution to employees This eliminates the risk that the company will forget to distribute checks, which can easily happen if the person responsible for this distribution is on vacation or sick Stamp signatures on checks Some company officers are burdened with the task of signing a multitude of checks every payday Ostensibly, this is neces-
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sary so that someone reviews all checks prior to delivery to employees However, since checks can easily be reviewed subsequent to distribution by perusing the accompanying payroll reports provided by the supplier, it is easy to correct payroll errors in the next payroll Taking this view allows a company to deliver signature samples to the payroll supplier, which automatically affixes a signature to each check and saves an officer the trouble of doing so Use custom and standard reports Most payroll suppliers provide a plethora of reports that cover the needs of most companies For special reporting needs, there is usually a custom report-writing tool available that allows the company to create any additional reports it needs, without special programming Link to 401k plan Some suppliers now link their payroll systems to an array of 401k investment options so that deductions can be made automatically from employee paychecks and deposited into employee retirement accounts, which eliminates a great deal of paperwork Despite the formidable array of advantages just noted, some organizations persist in not outsourcing their payroll activities There are a variety of reasons for this, ranging from inertia to company politics The two most legitimate complaints are excessive costs and the difficulty of converting the more complex payroll systems to a supplier s system Some of the more realistic disadvantages are: Cost Payroll suppliers can be quite expensive if all possible payroll services are used The most typical supplier ploy is to initially charge very low rates for the basic service of printing paychecks This is done to keep a company from shifting to the services of a competitor However, once the company has signed on with the supplier, it will find that additional services may easily exceed the cost of the basic service For example, additional fees will be charged for automatic signature printing, check stuffing, delivery to multiple locations, access to custom reporting software, and direct deposits A very large company that represents a major portion of a supplier s business has more sway in negotiating prices than will a small company Conversion problems There are a number of data items that must be properly converted over to the supplier s software to ensure that employees will continue to receive paychecks in the correct amounts and with accurate deductions If the conversion does not go well, the company may become so disenchanted with the supplier that it will revert to the in-house processing solution Conversions can be a problem because many companies want to convert to a supplier at the beginning of each year, which creates a considerable work overload for system-conversion employees of suppliers This problem can be avoided by conducting a gradual conversion of data to the supplier, so that only the most basic features are shifted to the supplier and debugged before more advanced features are added However, some highly complex payroll systems must be converted at once, so employees see no difference in the payroll services provided to them; in these cases, the risk of excessive error rates and company dissatisfaction is high
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