When Outsourcing Your Payroll Is a Bad Idea

By August 10, 2016General HR, Payroll

A recent security breach at a major payroll service provider begs the question: is outsourcing your company’s payroll a good idea?

But talk to a room full of small business owners and right away you’ll see that, despite the risks, the number of businesses that outsource payroll is steadily increasing as more companies offload the non-core burden of paychecks, deductions, reporting, taxes, and everything else that comes with payroll administration.

Last year, 32% of North American companies outsourced some or all of their payroll process, and another 9% said they planned to do so either soon or in the long run. As the burden of paying employees and complying with reporting continues to rise, businesses that outsource their payroll see this as a good financial investment and a huge time saver. And indeed it can be.

In addition to potential data security threats stemming from the internal practices of some payroll providers, there’s a second hidden risk that should make small business owners think twice about outsourcing to a payroll service provider. Simply put, if the payroll processor chooses not to submit the required tax payments to the IRS – after you’ve paid the money to the payroll company each pay period – your company is still on the hook with the IRS.

One notorious case came to light in 2014 when a South Carolina payroll processor used its clients’ collected tax monies for personal gain instead of paying the IRS. Their clients – all small businesses – had been duped out of $11 million and faced devastating IRS consequences. An isolated case? Hardly. It’s so common that the IRS has a page dedicated to helping small businesses protect themselves from this kind of abuse.

A Smarter, Safer Solution
Fortunately, there is a solution that provides both the benefits of outsourced payroll with solid protection from IRS liability. Unlike a typical payroll provider, a Professional Employer Organization or PEO offers a distinct level of protection to its clients. When a small business partners with a PEO, the PEO becomes the “employer of record,” meaning any IRS liability for tax payments and reporting is immediately transferred from the small business to the PEO.

Additionally, PEOs can provide economies of scale in employee benefits programs, meaning companies of all sizes can offer Fortune 500-size benefits on a small-business budget. A good PEO can also manage recruiting, background checks, hiring, employment eligibility verification, onboarding and other non-core HR functions that can all be resource drains.

It all adds up to this: while outsourcing payroll is still a great option for many small and medium-sized businesses, business owners can derive more protection and benefit by partnering with a PEO.

Shane Loftus

Author Shane Loftus

Shane is a certified Health Care Reform Expert with an extensive business background that allows him to see eye-level with business owners of all industries and sizes. Although a generally happy person, give Shane some space if his BYU cougars lose a football game.

More posts by Shane Loftus