Profitable Payroll: Best Practices from the Field

By Thomas G. Stephens, Jr., CPA, CITP

Providing payroll services to clients is something accountants have been doing seemingly since the beginning of time – and with good reason.  The myriad of federal, state, and local payroll taxes and regulations makes it difficult for small-business owners to remain in compliance and to avoid penalties for late filing and payment of taxes. 

Accountants are in a unique position to serve their clients by applying their deep knowledge and understanding of payroll and payroll taxes to solving clients’ payroll problems.  However, many accountants view payroll services as low-margin, time-consuming, clerical work and, therefore, avoid offering these services.  Below we discuss three “best practice” solutions designed to make payroll services a profitable service offering for accountants.

As listed below, many small businesses should completely outsource payroll for a variety of reasons; accountants can and should assist business owners in recognizing these benefits and easing the transition to an outsourced environment.  Among the benefits associated with outsourced payroll include:

·There is no investment in software and no related maintenance of payroll tax tables;

·The need to maintain a separate checking account is reduced with outsourced payroll;

·Payroll tax returns and forms are usually prepared by the service provider; and

·The risk of incurring penalties for late filing and/or late payment of payroll taxes is minimized or even transferred to the service provider.

Of the benefits listed above, the last may be the most significant.  Numerous studies have been performed in this area and many point to the fact that approximately one-third of all small businesses will be assessed a payroll tax penalty each year and that the average amount of that penalty is $800.  In a study by Empagio, Inc., 72% of the respondents reported that outsourcing payroll reduced the amount of payroll tax penalties paid to various governmental agencies.  In short, the collective benefits of outsourcing payroll make this a compelling first option for most small businesses.

From the standpoint of the accountant, the focus must shift from providing after-the-fact compliance services to encouraging clients to participate in outsourced solutions.  Many accountants today provide after-the-fact compliance services in which payroll checks prepared by the client are summarized into payroll journals and registers and payroll tax returns are prepared on behalf of the client.  This level of service is labor-intensive and subject to fee pressures from clients, rendering it unprofitable or only marginally profitable for the accountant.  Encouraging clients to move to completely outsourced solutions – including those offered by accountants – allows the firm to focus on more profitable work.     

No matter the environment in which payroll is processed, there are technology solutions available to enhance, streamline, and improve payroll processing and efficiency.  From time tracking to data file exchange to tax form processing, technology solutions exist to address almost every conceivable gap or issue faced either by the accountant or by the client.  As an example, consider the issue of time tracking and reporting. 

Companies use time tracking data to generate paychecks for hourly employees; it is also often used for billing customers and clients for time expended on specific jobs or projects.  Yet when employees are working from remote locations – home, satellite offices, or client sites – getting this data into the payroll and billing processes represents a logistical challenge. In many companies, this is accomplished by manually completing a timesheet, faxing the timesheet to the home office, and having someone in the home office input the data.  Such a process is cumbersome, inefficient, and prone to error.  How can technology improve this process?  Many accounting applications have add-on products available for remote time sheet entry.  One such add-on for Office Accounting is Web Time Tracker from BQE Software.  With this application, employees are able to enter time and expense data directly into the accounting application via the Internet, thereby eliminating manual and redundant data entry.

For accountants in public practice, technology innovations continue to offer opportunities to make payroll practices more profitable.  An example is in the area of payroll processing applications and services.  Many of these applications and services are now Internet-based, including PayCycle’s Accounting Professional Program.  Utilizing this service, accountants and clients can work together with the same data file, without having to worry about who has the most recent version of the data.  As such, the accountant can easily monitor the client’s payroll activities by merely logging in the service.  Likewise, ADP’s add-on payroll service, which integrates with Office Accounting, utilizes the Internet as a means of exchanging data between the client and payroll provider, eliminating redundant and error-prone keying and re-keying of data.

A third key strategy for improving the profitability of a payroll practice is to avoid becoming buried in paper.  The phrase “paperless office” was coined many years ago to denote that utopian environment in which all paper in an office is eliminated and replaced by electronic images. Whether we ever get to that stage is a subject for debate at another time.  In the here-and-now, we can certainly reduce our dependency on paper and in the process, enhance the profitability of our payroll services. 

For instance, one of the first things that a firm must do when formulating plans for a payroll practice is to develop a retention plan for the documents that will be related to that segment of the practice. Examples of these would include Forms W-4 and I-9, state withholding forms, time sheets, and payroll tax returns.  It may be necessary to retain some of these documents permanently and some of these documents for only a fixed period of time.  Each firm should develop their own retention policy for these documents, in consultation with their clients and with advice from legal counsel.  Once a document has exceeded its established life cycle, it should be removed from the files and destroyed.

Regardless of the length of time a document is to be retained, it will usually be more efficient to store documents electronically as images, rather than in paper format.  These images could take the shape of PDF, TIF or GIF files, or even Microsoft’s new XPS file format.  They will typically be stored in some type of document management application, the purpose of which is to help manage the documents through their life cycles. 

By taking this approach to managing the documents associated with a payroll practice, accountants can ensure that they have quick and ready access to the information they need to serve their clients without becoming overwhelmed with additional reams of paper stored in file cabinets.

Computing payroll, generating paychecks, and complying with the seemingly endless volume of payroll tax laws and regulations has been and will continue to be a constant struggle in almost every business.  Accountants possess a set of skills, knowledge, and access to technology that allows them to be uniquely positioned to provide payroll services to their clients.  The challenge is providing these services in a profitable fashion.  By implementing the three “best practice” solutions described above – encouraging clients to fully outsource payroll, taking full advantage of all of the technology available, and managing documents electronically rather than on paper – accountants can increase the overall profitability of their payroll practices while simultaneously increasing client satisfaction.

 

The views and opinions expressed in this column are those of the author and do not necessarily reflect the opinions of Microsoft.