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Do I Need a Payroll Service Company or an Employer of Record?

Posted on May 30th, 2019 Read time: 3 minutes

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Businesses move quickly these days, adding contingent workers on an as-needed basis when work and jobs ramp up in order to meet company objectives. Many search the web looking for help and hoping to find a quick solution. There are two types of services they can lean on: payroll service companies or payrolling companies that serve as an employer of record.

It can be challenging to pick the one that will work for your workforce. One handles payroll functions for a client’s workforce. The other is a full-service provider that acts as the legal employer of the worker and handles tasks associated with hiring, employing, and paying workers.

Each service is different and can affect not only how efficiently your company pays workers, but also how it complies with state and federal requirements.

Let’s take a look at both services to compare the two.

Payroll service companies

Payroll service companies gather information from employers about the number of hours each worker has earned for the pay period. This is typically done using a software platform in which the employer enters the information. The service company determines wages and withholding taxes, such as Federal Insurance Contributions Act, Federal Unemployment Tax Act, State Unemployment Insurance, and more. The service then pays workers and prepares employment tax filings. These companies also issue workers’ W-2 and 1099 forms on behalf of the employer and can handle IRS questions if any arise.

Some payroll service companies also handle benefits and retirement accounts. They can file state forms for new employees and can help ensure compliance with court-ordered wage garnishments.

It’s up to the employer to ensure there are zero errors, omissions, or misclassifications, and the employer’s tax identification number goes on every report. Also, payroll service companies do not handle any contingent worker onboarding or offboarding when the contract is over. This can take up an enormous amount of staff time for the companies employing these workers.

Payrolling company, also known as employer of record

A full-service payrolling company partners with clients by acting as the legal employer for their contractors and out-of-state workers. They handle all of the employment responsibilities such as hiring, onboarding, payroll, benefits administration, and more.

This begins with efficiently and accurately onboarding new workers so they can get to work quickly. A recent survey by CareerBuilder of more than 2,300 hiring managers and HR professionals found that about 32% of companies have an onboarding process of one month or more. IES can onboard within three to five business days, saving your company more than three weeks. A payrolling company handles employment contracts and related paperwork, processes I-9s, and e-verifies them. The company also maintains all local, state, and federal payroll-related taxes and filings and maintains insurance such as professional and general liability.

Additionally, a full-service company provides and manages workers’ compensation and administers health and other benefits like FSA, 401(k), and life insurance. And it processes unemployment claims and can assist with terminations.

Using a payrolling company that also offers independent contractor compliance services can also reduce the risk of co-employment liabilities and worker misclassification By vetting and invoicing qualified 1099 and statement-of-work contractors, payrolling providers can greatly cut misclassification concerns by owning the contractual and payment relationship with the contractor.

And partnering with an employer of record can save companies money compared to the cost of handling the services in-house. Companies that manage payroll, workforce administration, and benefits in-house spend an average of 18% more than companies that outsource them, according to PwC’s “The Hidden Reality of Payroll and HR Administration Costs.” And there’s the staff time to consider as well. One IES client said that the company saved 1,000 internal staff hours by using IES’ services.

Which is the right service for your company? If you are in need of a company to cut your checks and file taxes for your internal staff, then perhaps a payroll processing service is the right fit for you. If you are looking to outsource the employment relationship, including hiring, payroll, benefit administration, liability, etc., for your temp or contract workforce, then an employer of record solution will be right up your alley.

Learn more about how partnering with IES as your employer of record can help help your company save time, save money, and meet compliance regulations.

 

By: Sara Jensen, Vice President of Business Development

Sara Jensen is the Vice President of Business Development at Innovative Employee Solutions (IES), a leading nationwide employer of record that specializes in payrolling and contractor management services for today’s contingent workforce. Founded in 1974 in San Diego, IES has grown into one of the city’s largest women-owned businesses and been named one of its “Best Places to Work” for 10 years in a row.

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