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What Are the Biggest Pitfalls for Some Small Business Owners Who Handle Their Own Payroll?

by
Lee Reams II
on
9/6/2017
What Are the Biggest Pitfalls for Some Small Business Owners Who Handle Their Own Payroll?

In your quest to run the leanest and most efficient small business that you can, it is common to look for opportunities to cut costs wherever possible. This is especially true in those fragile early years of your organization, where a number one priority involves stretching the value of every last dollar as far as it will go.

Many people choose to try to handle some (or even all) of their financials and bookkeeping themselves during this time, particularly when it comes to something like payroll. "How hard can it be?" they ask themselves. "After all, I just need to get checks or direct deposit to employees on time. Beyond that, everything else should take care of itself, right?"

Wrong.

In truth, payroll is a lot like most other areas of running a business: It is involved, it is complicated, and it has a lot of "moving parts" that one must manage in just the right way to stop the small problems of today from becoming much bigger and more expensive ones down the road. If you really want to handle your own payroll (or, better yet, if you're leaning toward hiring a professional to do it for you), there are a few things you'll need to know about the types of pitfalls you now face.

Payroll Challenges: What You Need to Know

One of the biggest challenges that a small business owner who processes his or her own payroll will face has to do with the fact that the rules and regulations governing this process are constantly changing. John Ellis of The John Ellis Company, for example, said that one of the biggest traps most people fall into is "not knowing the most recent changes in payroll tax and labor law. A small business owner will need to spend precious hours away from his or her business to stay on top of law changes," which is not necessarily something everyone can afford.

Making mistakes with something as complicated as your small business financials is common - we are human, after all - but this also represents another one of the most pressing challenges regarding doing your own payroll. Luba Milgram of StarLite Tax Solutions said, "There are a myriad of compliance issues when it comes to payroll taxes and even a small mistake can have major ripple effects," quickly becoming much more costly than what you would have spent had you just hired a professional in the first place.

Along the same lines, payroll is one of those "necessary evils" in the world of business that people don't realize is so complicated until they're already in the thick of it. Bill Parrish of TaxAdvantage said that "payroll does not stop with just getting paychecks to employees. It also involves knowing ALL about the reporting and taxation of unemployment tax, fringe benefits, employee reimbursements and more."

Carey Gay of Treasure Tax, LLC said that "small business owners aren't typically prepared for the multiple deadlines when it comes to payroll. They don't understand which forms need to be filed when, which can cause a lot of frustration - not to mention penalties and interest. And payroll penalties are the most severe of them all."

But perhaps the most pressing issue that people face when they attempt to do their own payroll has to do with what happens when things go wrong. Getting employees paid on time (and getting all necessary documents filed) is something that the Internal Revenue Service takes very, very seriously - and with good reason.

Guillermo Birmingham, CPA, said that "the IRS is laser focused on businesses that either file their quarterly tax reports late or don't pay the withholding at all. Payroll is tied to a high level of compliance requirements at the federal, state and/or municipal levels. With a myriad of regulations, one major pitfall is ensuring that your payroll is set up to meet all of these regulations." He would go on to say that "there are differences between federal, state and local municipal regulations and each of them need to be complied with or else you can face steep penalties from taxing authorities."

Indeed, those deadlines require a decidedly proactive approach to payroll administration - something that many small business owners, in particular, have a hard time finding time for. Guillermo Birmingham also said that "payroll is an interactive process with many timelines. Therefore, falling behind or not prioritizing payroll responsibilities is NOT an option. Missed pay days cause discord with employees. Late or missed tax payments cause problems with the IRS or with state and local taxing authorities. The list goes on and on..."

In the end, it's important to understand that simply acknowledging that payroll is important is not enough to get the job done properly. Payroll is a fluid process, but it is also not one that you can "do once and forget about." Getting things set up properly is only one small part of a much larger story. To make sure that everything is taken care of in the way that you need, you must be as involved with this process as you are in any other area of your business - if not more.

Why Hiring a Professional Is Important

In addition to the aforementioned challenges of handing your own payroll as a small business owner, it should come as no surprise that the biggest piece of advice that most financial professionals have is also a simple one: Don't be afraid to bring in an expert. When you're talking about something as important as payroll to the health and longevity of your business, you don't want to leave anything to chance, and a professional can help streamline this process to make it as simple and as straightforward as possible.

"Payroll is an area where I would recommend using a third party vendor due to the liability issues related to payment of employment taxes," said Peter Flournoy, CPA. "When selecting a third party vendor, make sure that they are a certified payroll provider so that they can be sure the appropriate tax filings and payments are all processed on a timely basis."

Minnesota payroll professional Joshua Standley, added, "The biggest pitfalls I see when a small businesses owner handles their own payroll is incorrect calculations, late filing of tax forms, and penalties. It may seem like an Accountant is more expensive compared to doing it yourself, however, in the long run it will always yield better results."

Taking some stress off your shoulders may yield better results.

 Lee Reams II, writes for TaxBuzz, a tax news and advice website. Reach him at [email protected] or on LinkedIn.

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Lee Reams II

Lee Reams II

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I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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