For many companies, regardless of size, the cost of maintaining a payroll department is prohibitive and the stress of dealing with issues is intense. One way around this is to send the work out.

A payroll vendor is a company that takes on the responsibility of your payroll department. They are provided with the information necessary to calculate and prepare the paychecks for your employees. They also can handle the record keeping necessary to prepare and file the complex tax forms that can so befuddle small business owners. In most cases, the cost of the service is more than covered because the company using them no longer needs extra employees or office space to handle this function.

The only real necessity is the ability to communicate payroll information to the payroll company in a timely and accurate manner. They usually can take care of everything else leaving the business owner to concentrate on the major priorities of his business. Employees are pretty funny that way in most cases. They expect their pay to be accurate and on time. This makes payroll preparation such a priority job that it is often better to outsource it to professionals than to attempt it in house.

The services of the various vendors are pretty similar. They produce paychecks and records. The factors that set them apart are cost and customer service. This is so often the case when selecting a professional service of any kind. The problem is that too many make cost the primary concern when customer service is ultimately more important. It is strongly recommended that the business owner does not fall into the cost trap when selecting a firm.

The level of customer service is going to be the important factor. The ability to communicate effectively and be responsive to your company's individual requirements is the single most important service the vendor offers. If you are looking for such a service, it is important to have some references. These references should be similar sized companies with the same payroll conditions as your company.

A small business that is local and hires a few long term employees has few problems, but a larger company with employees that might be in different locations or has high turnover would present a whole different set of requirements. As is often the case in the selection of any professional service provider, make a short list of those that you are sure can meet your needs and provide excellent customer service. Once this list is made, then make your cost comparisons.



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Employment taxes are often the bane of small business owners. They are the normal functions of large payroll departments and they are often misunderstood by employees.

Employment taxes are the tithe that must be paid to satisfy the requirements of Federal, State, and sometimes even local requirements. They are the bane of small business owners when they first hire an employee because of the complicated and detailed record keeping involved and the amount of paperwork required. In some cases, the employer is responsible for the tax. In other cases, the employer shares the burden with the employee. In the case of income taxes, the employer is merely obligated to withhold the entire amount from the employees pay and deposit and report it in a timely manner.

The major employment tax is Federal or State income taxes. This tax is calculated using information provided by the employee's W-4 form and following the guidelines in IRS Publication 15 and 15-A, the Employers Tax Guide and the Employers Supplemental Tax Guide. The State income tax, if applicable, is calculated in a similar manner. The taxes are withheld from the employee and must be deposited in a bank or financial institution that accepts tax deposits for the Government, and reported on IRS Form 941, Employees Quarterly Federal Tax Return.

The taxes mandated under the Federal Insurance Contributions Act (FICA) include Social Security taxes and Medicare Taxes. These taxes are shared on a 50-50 basis between the employer and the employee. Many employees are not aware that the employer is contributing as much to their FICA taxes as they are themselves. This is a hidden cost of employment that increases payroll. Another such tax is the FUTA tax. This is the Federal Unemployment Tax and it is paid entirely by the employer to provide funds for unemployment compensation.

The calculation and reporting of Employment taxes is normally done by the payroll departments of larger business concerns, but small business owners often find themselves struggling with the process. When a firm does not have an accountant that handles tax issues, this is often a serious problem for the owner. There are now many good business software programs available to assist in the preparation of payroll and the calculation of payroll taxes.

Common problems with Employment Taxes include poor record keeping and failure to handle deposits and reports in a timely manner. The IRS and the State taxation departments are not very lenient with employers who fail to report employment taxes when they are due and penalties can be levied against the employer for failure to do so. Although employees typically bemoan the large chunk taken from their take home pay, they usually do not realize the expense and the hassle of the employer in dealing with Employment taxes.


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Payroll administration is a specialized section of accounting. Payroll software lightens the burden on many employers significantly. If used properly, a payroll system can add value to the business.

The biggest source of revenues for tax authorities is employee tax. Tax regimes are mindful of this, so regular audits and inspections are conducted on the payrolls of businesses.

A common discrepancy is the variance in total salaries for a year, in the income statement of the business, and the actual salaries paid. When business tax returns are furnished, the salaries amount may differ from payroll salaries declared for tax.
The relevant tax office could identify this anomaly, and demand an audit. Stiff penalties could be levied.

Since software makes life easy, many users may be unfamiliar with the double entry that should integrate with the accounting system, which in turn is relevant for tax returns. A manual process of double-checking payroll totals and how it relates to the accounting system should be performed.

Please note that cash or bank payments to employees do not constitute total salaries.
This is a common mistake and leads to numerous problems later on. I will expound by way of this example below,

Salaries and wages DR

Taxes and other deductions CR

Bank/cash (difference between the two above) CR

Taxes and deductions DR

Bank/cash CR

Analyze payroll schedules carefully, and determine if it conforms to the above sequence. If it does not, than that explains why your payroll does not balance with your ledgers and/or salaries expense.

For a large payroll, the help of a payroll accountant will be needed. The software supplier should ensure that the payroll software interfaces with the accounting software, or alternatively, produces accurate reports that enables bookkeeper to post the transactions to the accounting books.

A majority of audits on small to medium sized businesses targets tax, salaries and special perk discrepancies. Annual reviews of payroll figures will go a long way in addressing the above-mentioned shortcomings.



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