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Why Architecture and Engineering Firms Should Outsource Payroll
July 27, 2021
Most architecture and engineering (A/E) firms don’t have much in the way of financial management controls in place. And interestingly, given their lack of payroll expertise, most nevertheless feel they need to handle it internally.
Why do firms resist leveraging the capabilities of an outside payroll provider? What can they do to position themselves to make the move to third-party payroll processing? And what are the risks if they continue to insist on handling payroll internally?
Lack of Payroll Consistency Makes Outsourcing Difficult
One of the reasons that some firms avoid using an outside payroll service is that they don’t have everyone set up with a consistent cost per week or month, and a consistent payroll.
The first step for preventing payroll-related problems and positioning your firm to use an outside payroll service is to get everyone set up to receive an amount of pay that’s the same from one period to the next and that’s carefully tracked so you know what to expect. There may be some variability with hourly employees, but that should be the only thing that affects the information sent to an outside payroll service.
Another step is to clean up the untidy time tracking and budget keeping that’s common in the industry. Often, firms need the extra days that doing payroll internally affords them just to get the necessary timesheets and other financial information submitted so that people can be paid on time. It’s shocking (and a little concerning) how many firms are submitting timesheets Thursday night so that they can cut checks on Friday morning!
Of course, an outside provider won’t turn checks around with that kind of near-zero lead time. They don’t need a week, but three or four days is a common expectation. And the great thing about that timeline is that it forces A/E firms to be more disciplined. There’s no reason why a firm should be doing basic accounting on jobs and collecting timesheets at the last minute.
One Good Reason for Outsourcing Payroll: The IRS
A/E firms can get themselves into serious trouble with the IRS and other taxing authorities if they aren’t doing their payroll exactly right. Payroll companies have this process down to a science. Consequently, the IRS knows that a high degree of payroll precision is possible, so there’s very little tolerance or forgiveness for firms that screw it up.
As taxing entities look at it, there’s no reason to be making payroll mistakes when, for very little expense, you can have a payroll company take care of that function for you. They ensure that withholding is done correctly, that deposits are made correctly, that quarterly reports are produced correctly, and that W-2s are accurate and delivered to employees on time.
All of those requirements are a heavy burden for an internal process that might already be a little shaky. And if a firm isn’t withholding taxes properly, etc., and if there’s a pattern of that behavior, the firm owner can get jail time. Honest mistakes don’t lead to that kind of outcome, but a series of uncorrected errors is a red flag that will draw attention to a firm.
"The risk of completing payroll internally is often much higher than the reward."
Outsourcing Payroll May Be Less Expensive Than You Think
Many firms defend their decision to do payroll internally by saying that using a third party is an expense they don’t want to take on. However, it may be the case that the firm hasn’t priced this service recently. Yes, the largest payroll processing companies may have substantial fees, but there are many smaller, regional service providers that are very affordable.
And, frankly, the professionalism, risk mitigation, and reduced headaches a payroll processing company can provide are very much worth the investment. Plus, most payroll services today use web-based platforms, so there’s no more “calling in payroll.” You simply upload the necessary information, like what can be found in Factor A/E’s payroll report, and the service provider takes it from there.
Having the Provider Behind You if Mistakes Are Made
Another benefit of using a third-party payroll service provider is that if you take their full-service offering, they typically indemnify you for tax mistakes. That means they take on fiduciary responsibility with the IRS to get money transferred correctly, timely, and in the right amounts.
If you get a letter from the IRS indicating that a form was filed incorrectly, you call your payroll processor and say, “We were contacted by the IRS. Please resolve this issue.” and they’re contractually obligated to do so.
If you’re doing your payroll internally and you get that letter, that’s an entirely different scenario and one that no firm wants to go through. Not only does it result in somebody in the firm being very nervous and upset, it also costs the firm the time and effort of everyone who has to get involved to research and resolve the problem.
Payroll Outsourcing for the Smallest of A/E Firms
For firms with fewer than 10 employees, the per-person cost of outsourcing payroll might be slightly higher than doing it internally, provided you’ve got a fine-tuned process. However, the value of the risk mitigation aspect is often much higher for a very small firm, because the organization doesn’t have anyone who’s familiar with the specialized accounting that goes into payroll processing.
And it’s important to note that refusing to outsource payroll can inhibit firm growth. The thinking goes, “Doing payroll internally is hard already, and if we get any bigger, it’s going to be a nightmare.” On the flip side, if you outsource payroll, your provider likes it when you grow. In fact, they tend to charge less per person the more employees you have. Using a payroll service is an investment in growth when a firm is small, and an absolute necessity when a firm has 20 or more employees.
Owners who use QuickBooks should also keep in mind that while it has a payroll module, the company doesn’t provide a great deal of support in getting the system up and running. So, it’s a payroll solution of sorts, but not an ideal one. And maybe more problematic is the fact that using QuickBooks for payroll can give a firm a false sense of security. Just because the module exists doesn’t mean there’s any guarantee that the system will ensure you use it properly.
The Moral of the Story
Don’t be your own worst enemy by insisting on doing payroll internally, because the cost of failing in your responsibilities is much higher than the cost of paying an outside provider to shoulder the burden for you.
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