Payroll-task outsourcing lures small businesses

By Marcus Green
(Louisville, Ky.) Courier-Journal

Jennie and Rick Day can reel off reasons why small businesses outsource payroll operations. The couple owns Payday Solutions in Louisville, Ky.

Employees are freed up for income-generating work. If a third party makes a mistake in withholding taxes, it pays interest and penalties. And the task of calculating local taxes is left to someone else.

Then there is the one reason that would make even the stingiest employer smile. "We take the burden of dealing with the IRS off the client," said Rick Day.

Farming out work to third parties so companies can focus on their core businesses grew popular in the 1990s as corporations downsized and cut costs. Now smaller businesses are joining the trend.

Businesses with annual revenues of less than $20 million are expected to devote nearly 40 percent of their budgets to outsourcing by next year, according to the 2002 Strategic Outsourcing Study by Michael F. Corbett & Associates Ltd. in New York.

At Payday Solutions, the bulk of the 400 clients are businesses with fewer than 100 employees.

Outsourcing's fastest-growing segments are in areas with heavy transaction volumes: payroll, collections, travel expense management and employee benefits administration.

In addition to processing paychecks, many vendors provide employers with 401(k) reports, quarterly and year-end tax summaries, W-2 and 1099 forms and calculate local and federal unemployment insurance liabilities.

Small businesses often choose outsourcing when growth outstrips resources. Suddenly, one or two workers are overwhelmed by processing payroll that has grown with staff.

Outsourcing also provides continuity and stability. Jennie Day said companies are often unprepared when a key employee leaves, and someone unfamiliar is thrust into managing payroll. "You have such a small employee base that when one person leaves it takes a big part of the knowledge out of the business."

To help make small businesses comfortable with outsourcing, Payday Solutions assigns a single employee to work with each client.

Outsourcing gives employers other safeguards. It helps keep payroll confidential and can help reduce the chance of embezzlement.

William Carroll, a certified public accountant and partner in Strothman & Co. PSC, advises clients to do research when choosing a payroll vendor:

• Look at costs. Make sure payroll outsourcing fits into the budget and provides the right savings.

• Evaluate quality. See whether the check stubs are professional and processed on time.

• Has the vendor had tax or bank problems?

• Know what other services a vendor offers for possible future use.