Reduce Your Payroll Processing Costs With These Strategies

Whether you outsource or do it yourself, here's how to save on payroll processing.

Cost reduction, Payroll processing, Strategy

On the surface, payroll seems so simple, especially with payroll processing software that does the math for you. But paying your workforce — and even yourself — is much more complicated than writing checks. It takes time. And for small business owners, time is money.

Here are some tips for how to save on payroll processing, whether your company does it in-house or has it outsourced:

Verify the Key Data

"Not verifying employee demographic data can be one of the costliest mistakes business owners make, and it is also one of the easiest to avoid," says Tony Ventre, product marketing director, hospitality solutions, for Heartland Payment Systems in Princeton, NJ. "Ensure all W-2 or 1099 data is accurate and completely filled in before filing with state and federal tax agencies, and ensure information is updated each year."

Utilize Direct Deposit

Encouraging employees to use direct deposit is another money-saver, and it's not usually a hard sell.

The big win for business owners? "Direct deposit reduces check fraud and lost checks," says Mark Strippy, senior vice president of operations for BenefitMall, a payroll, benefits and compliance company in Dallas, TX. "Not having to place stop payments or reprinting checks is a significant cost savings to employers."

Avoid All Penalties

Processing payroll has so many components — tax payments, employee garnishments, withholding Social Security deductions, contractor vs. employee designations, etc. — that can trip up small business owners and result in hefty fines. The IRS estimates that 40 percent of small businesses pay an average penalty of $845 for late or improperly filed payroll taxes.

Many employers, like Arik Anderson of Elk Grove, CA, choose to outsource to payroll processing services. "It's helpful that they handle the whole package and pay all the taxes," says Anderson, president, North, Central & South America, for Executive Travel Center.

Processors' expertise is particularly valuable for enterprises with multiple office locations, notes Mark Putnam, a senior vice president with Atlanta, GA based First Data. "A payroll provider can help navigate, review and monitor state-specific legal requirements, especially for small businesses that may operate in more than one state."

Remember That Your Time Is Worth Something

It's tempting to think the best way to save money on payroll processing is to do it yourself. To find out, work with your accountant to determine exactly what services you'll need to properly process payroll (see checklist below), and how much time it will cost you to run the payroll. Then factor in the stress of doing it while trying to build and run your own business.

"It doesn't matter whether you employ one or thousands, a business owner has to ensure payroll is administered accurately and on time," says Scott Brandt, vice president of marketing for SurePayroll in Glenview, IL. "There are many rules and regulations, and variations to the rules, to learn about and keep on top of. As a small business owner, this means just one more thing you need to do amid an already long list of responsibilities."

Investigate Outsourcing Opportunities

A number of regional and national companies specialize in processing payrolls, and many banks offer payroll support to commercial account holders. You may even find small bookkeepers and payroll companies in your community. Ask owners of businesses like yours how they handle payroll. Vet all potential vendors with local bankers and CPAs to ensure the processors have a solid track record, as well as liability and other protections in place.

When Anderson was growing his travel and meeting planning business, he handled payroll with his financial institution in part because it was more affordable. "If you're a little guy, it might be best to do it on your own and/or with your local bank," Anderson says.

Understand the Costs

If you think you might want to outsource, use the inventory of payroll tasks to compare costs of each vendor.

"Select a processor that will agree to lock in your basic per-payroll and per-employee processing costs for at least a year or more," Ventre says. This helps project expenses and negotiate rates. "Also, make sure all potential costs are fully disclosed up front so you're not caught off guard when you request a new report or service that wasn't part of your original service package. These two steps will help you keep your payroll costs level over time so you can better plan and budget to stay profitable."

Saving money on payroll processing requires a little up-front effort on your part, but the return on that investment can be significant.

Inventory Your Payroll Needs

Before you figure out how to save money on processing payroll, outline your specific needs using the following checklist. Your accountant can help you make sure you haven't forgotten anything.

Basic payroll activities

- Issue paychecks, preferably via direct deposit

- Provide online pay stubs

- Calculate and pay payroll taxes on schedule

- File payroll tax forms on schedule

- Generate W-2 and 1099 forms

- Prepare data for state and federal taxes

- Track sick leave and vacation time


- Online time tracking for to-the-second accuracy

- Online functionality to ensure data is correctly entered and processed

- Special requirements for tips, union dues, etc.

- Compliance with regulations and requirements in multiple states

- Handling 401(k) and other contributions/deductions

- Human resources support