First, realize there are some things that simply must be done if you are to build a business in today's over-regulated world. "Your payroll records must be kept for three years from the date of the last entry you made on them," says Business Owner's Toolkit. This includes "supplementary records, including basic employment and earnings records; wage rate tables; order, shipping, and billing records; and records of additions to or deductions from wages paid." Some states require that certain records be kept for more than three years. Check to be sure.
With so much required, many small businesses simply prefer paying a payroll service to worry about all that hassle for them. This is the "Outsourcing vs. Doing-it-yourself" choice, and makes sense for many small businesses.
Opting to do it yourself, you can process payroll either manually or with a payroll software program. Any system you choose or design yourself must be able to calculate all employee payroll obligations, payroll deductions and payroll tax obligations, as well as record and update all payroll information in a general ledger. You would file taxes yourself in such a case, usually with the help of an accountant who specializes in payroll. Some small businesses hire accountants just to calculate or file payroll taxes, although that can get expensive fast.
The growing complexity of American tax law, however, has greatly increased the popularity of independent payroll services. While companies offer differing services, almost all have a basic package of calculating employee payroll and tax obligations, producing checks and preparing management reports. High-end offerings include filing payroll taxes and preparing W-2 returns.
Payroll services aren't everyone's best option, however. It makes sense to keep doing it yourself if you:
1) have a relatively simple payroll;
2) can get good help understanding the thicket of rules and regulations for your state and federal obligations; and
3) aren't spending too much time on pay administration matters.
To get a good idea how much it's actually costing you to do payroll yourself, figure the total time you spend on pay tasks, including gathering payroll-related information, wage and hour calculations, federal and state tax calculations, tracking payroll tax deposit due dates, researching changes in federal and state payroll tax rules and legislation, and calculating ongoing tax liabilities. If you use software, figure in the cost of the software and the cost of training your people to use it.
If you use a payroll agency, you pay a premium for being able to focus on your own business and, depending on the quality of the service, for gaining better accuracy and compliance with tax laws and changes in the regulations. Some employers find more peace in not having confidential payroll information lying around their small office, and enjoy the more flexible services payroll firms can offer, such as help with insurance, retirement plans and direct deposit schemes.