It wasn't until the last recession had us on the ropes, and, simultaneously, our accounting software provider wanted $12,000 for their new program that replaced the old program that they had decided to abandon that we challenged what we were doing.
The Hidden Cost Of In-house Payroll
Payroll is a perfect example. Those paychecks that were produced in just three hours required another six hours per month for filing reports with tax collecting bodies and moving money or making payments.
So that's 12 hours per month - two payrolls at three hours each and six hours follow up. Plus W-2s at year end.
The minimum that payroll was costing us was 12 hours X $15 = $180 per month. Or $2,160 per year.
Sometimes we even had a billable person performing accounting tasks so the damage was actually much worse.
The cost of a payroll service for our five employees (our average) per month was $90, including W-2s at year-end. In our case, one extra billable hour per month paid for the payroll service. Nobody voted to keep doing payroll ourselves.
Here are the take aways from my experience:
- The killer with doing payroll is the collateral stuff - moving money, paying taxes, local payroll filings, IRA contributions, vacation use and accrual, and the W-2s.
- Another issue I have with doing payroll in house is that payroll is inherently an accounting process requiring two-decimal accuracy. But you are not doing this for you; it's for the IRS.
- This isn't a core function of an architectural firm. Concentrate your resources on what will make you better.
- My final take away is that payroll adds some real complexity to a firm's operations. Take your time getting to that step of having a payroll. Make sure your circumstances are demanding that you shoulder the task.
How Does a Payroll Service Work
When you use a payroll service there is still an hour or so per month for you to prepare and transmit info to the payroll service.
- Compile each employees hours for the pay. A timekeeping app like Harvest does this instantly.
- Depending on the payroll service, how you send the payroll info varies; but usually you will log onto a website and enter the hours.
- You deposit money in an account or make sure the balance is adequate to cover payroll.
- Paychecks arrive by delivery service or are directly deposited into your employees' accounts.
- The service deposits taxes in the appropriate accounts for you.
The only compromise that we had to make was the timing of the receipt of payroll checks. We wanted to keep our pay periods ending on the 15th and the last day of the month. Because of the third party involved, paychecks couldn't be delivered just hours after the close of the pay period. I would recommend making paydays the 7th instead of the 1st, and the 21st instead of the 15th.
After the first month everyone should be able to adjust to the new payday schedule pretty easily.
My final recommendation is that you invest the time that you save by not doing payroll yourself. Invest the time in your marketing effort. An extra day or more per month will show some real dividends over time. See this post for some ideas on what to do with the extra marketing time. Or here's another idea.
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