FREE PAYROLL PROCESSING / COMMODITY PAYROLL: Run away. Run far away.

Small businesses should beware of “free” payroll services that treat payroll as a loss-leader or commodity

As a broker of payroll & HR services, I often get asked by business associates what advice I would give to very small business owners who are considering doing their own payroll to save money. My advice is that these business owners should do what they are comfortable with, which requires them to know what they are comfortable with when it comes to payroll.  Payroll is a serious issue even if for the business owner and sole employee both where they only seek to pay themselves a steady salary.  Payroll errors – no matter how seemingly insignificant – can quickly turn into penalties if not addressed quickly and per the guidelines of the taxing authorities.  And in this new Affordable Care Act (PPACA) landscape where federal and state agencies seek more revenue, a business owner does NOT want to get on the radar of federal, state and local tax agencies. They also want to avoid creating a mess where they’ll require the help of a CPA or tax expert to help them resolve the issue(s) – where this help probably won’t be free.

BEWARE OF CHEAP – ESPECIALLY FREE – PAYROLL SERVICES:

The lower the cost of most payroll options (where Do It Yourself or “DIY” options are usually the cheapest) usually will mean more work for the user / client, in terms of entering data and possibly having to file their own federal, state and local⁺ payroll taxes (⁺where applicable).  As a rule of thumb I would avoid any payroll service that treats or refers to payroll as a commodity (Zenefits CEO Parker Conrad is on record stating payroll is a commodity earlier this year), which in my opinion shows how little this provider values payroll as a service and how little they value the expertise required to keep their clients free from payroll tax liability.  You get what you pay for, thus small business owners should be initially skeptical of cheap – and run far away from free – payroll services. There is just too much that can go wrong. There is liability if the payroll provider makes mistakes in tax filing (amounts and / or filing frequency) or does not pay the employer’s staff the correct amounts.  For a one person S-Corp entity, where the president is the sole employee, any mistakes made mean the president owns this liability where hopefully the payroll provider would help them fix it – and don’t assume all providers will do this, as some won’t.  But for a company with two or more employees, all it takes is one employee to call the U.S. or State Department of Labor, and an investigation could easily begin for that employer. And as stated above, due to this brave new PPACA world we live in an employer should avoid any exposure with federal & state agencies at all costs. These agencies now work closely together, and once an employer is visited by one agency, they should expect to be visited by others.

BEWARE OF “AUTOMATIC” PAYROLL:  Small business owners seeking a payroll solution should also beware of “automatic payroll” like some services have recently started offering.  Any decent payroll service can largely automate the payroll process, where it makes sense. But most payroll data for small companies will change often enough that “automatic” could mean trouble, and could adversely affect cash flow – especially if a previously used ‘higher’ payroll amount is drafted automatically, and the business owner was not expecting it or did not want this to happen. As a small business payroll veteran I will tell you, flexibility in submitting payroll is a beautiful thing. And what if there are last minute payroll changes that need to happen quickly, where one would prefer to actually talk with a person?  If these changes are not addressed in time it can mean a payroll overdraft (NSF) which could end the convenience (tax payment & direct deposit) of a payroll relationship, if not the entire payroll relationship in short order.  NOTE: In the payroll industry when something is marketed as a “convenience” it may well be more of a convenience for the payroll provider than the client – where the provider is seeking to reduce their involvement with the client to an absolute minimum and thus maximize their profit margin.

BEWARE OF BAD ADVICE:  Beware of the “advice” of a captive payroll salesperson or someone in a call center when it comes to picking a payroll option that is 1) cost-effective and 2) convenient.  The salesperson / call center employee will usually make things sound a lot easier and convenient than they really are, due to their conflict of interest. They probably want to finish the meeting / call and move on to the next one. You also may not really know their level of experience in the payroll industry, and if talking with someone in a call center whether or not they are just reading a script with canned answers to (most of) your questions. What is “easy” for them may not be easy at all for the unexperienced business owner, new to payroll – or even make sense at all.

ANOTHER OPTION:  People who feel comfortable doing their own payroll to some degree should not rule out paying a little more for assistance and actual convenience.  Whether an “assisted” payroll option or a truly “outsourced” payroll option (where the provider will handle the client federal, state & local tax filing), the client can find extremely cost effective options these days online, if they are willing to look around.  You could also seek out the services of a payroll broker like myself, where this broker will be able to independently guide you towards a cost-effective option that is the best fit, at no cost for the consult.