Oftentimes a business owner is unprepared to take on the task of processing their employee’s payroll. This can be for a variety of reasons, including business growth, or lack of understanding the complex laws relating to proper payroll processing.
If you are unfamiliar with these intricate laws, then you could be putting yourself and your company at risk, or at minimum you might find yourself faced with some substantial penalties for not filing the proper reports in a timely manner.
While there are multiple options to choose from, you’ll likely find that the most common choices would be to outsource your payroll responsibilities to either a payroll outsourcing company or a PEO. Below we will look at each one to help you understand the differences. I will also walk you through some of the advantages and drawbacks of each of these outsourcing vendors.
Simply put, this is a company that you hire to process your employees pay using the data that you submit to them. This can be done on a weekly, biweekly, semi-monthly, or monthly schedule.
A payroll company will calculate the employee’s gross wages and deduct their tax liability according to their elected withholdings. From here you will find vast differences depending on the payroll company and your agreement with them. Therefore it is important to make certain that you have a clear understanding of who is responsible for items like:
Some service providers will provide these services, while others will give you the numbers, which is often referred to as self-reporting.
The most distinct difference between a payroll service provider and a PEO is that you retain your employer status over your employees.
A PEO is short for Professional Employer Organization. This type of organization specializes in a variety of services, Payroll being one of them. Other services that they handle include Human Resources, Workers Comp, Safety Compliance, and Unemployment. With a PEO, you can expect that they will take on all aspects of your payroll and therefore you will not need to negotiate self-reporting responsibilities. A PEO will remit all tax payments, garnishments, and issue payment to your employees in the form of a check or direct deposit. They will also become the employer of record for the employees.
While this sounds great, there is a drawback and frankly, it can be a big one. The PEO industry is laden with a terrible reputation. Unfortunately, you are only covered from liability if the PEO does exactly what they should do and what you’ve contracted them to do. However, if their business folds for any reason and tax payments or garnishments have not been remitted for your employees, then you can count on receiving a sizable penalty and finding that you still owe taxes on wages and garnishments that you already paid the PEO to process.
While technically you could sue the PEO, in most cases where this has been an issue, the PEO is no longer in existence, leaving you with no one to go after to recoup your losses.
This is not meant to scare you away from considering PEO’s to service your business. But, it is wise to do your research and make sure that the PEO that your considering has an unblemished reputation and a long standing history of providing excellent service. There are definitely some great PEO’s out there.
So, the bottom line is that it depends on what you’re looking for in terms of a complete takeover of responsibility or simply someone to crunch the numbers and handle the tasks that you agree on. But, make sure to do your research and know who you’re dealing with and that they have an established firm reputation.
Nora Wade founded Beyond Paper Profit Advisors in 2017 after spending over 20 years in the corporate world. During this time she worked her way up from processing payroll to Human Resources management. She also consulted with other businesses to help them to develop their processes and work flows to eliminate bottle necks and improve efficiency. From developing strategic business plans for start-ups to helping established businesses to reorganize their internal flow, she helps businesses to become more profitable.