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How do you Choose Between Payroll Processing and Payrolling?

Posted on June 16th, 2016 Read time: 2 minutes

Peter Limone, CPA, CGMA – President and CFO

Payroll processing companies simply provide a software platform, either by licensing the software or by providing software as a service to enable your company to process your own payroll. The platform is updated by the payroll processing company with the latest rates for all payroll related taxes such as Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), State Unemployment Insurance (SUI), Worker’s Compensation and so on. With a payroll processing service, your company is responsible for all related filings. There’s very little protection with errors, omissions, misclassification, etcetera unless there’s negligence on the part of the payroll processing company. Also, all filings are done using your company’s Federal Tax Identification number.

By contrast, a payrolling company (also known as Employer of Record services) serves as the employer for tax purposes. The employer of record issues the W2s to the employees under their own Federal Tax ID Number and is responsible for following all the Federal, State, and Local laws regarding collecting and remitting payroll taxes. In essence, the Employer of Record takes on most responsibilities for employment related taxes and other employment laws.

Some of the benefits of payrolling include:

  • Reduced risk of co-employment liabilities or worker misclassification
  • Considerable savings versus processing payroll in house
  • Payroll processing service and funding of payroll
  • All related tax deposits and filings are the responsibility of the payrolling company
  • Efficient on boarding
  • Increased compliance labor laws

In addition the payrolling company provides benefits such as:

  • Employment contracts and related paperwork
  • Maintains insurance such as professional liability, general liability, etc.
  • Processes I-9’s and E-Verifys all new employees
  • Processes unemployment claims
  • Provides and manages workers’ compensation insurance
  • Obtains and administers benefits (health, dental, vision, life, 401k)
  • Assists with employee terminations

The choice between payroll processing and payrolling comes down to the risk and focus for your company. If you choose payroll processing, you are willing to take the many risks and pitfalls that come with labor and wage and hour laws. Also, with the advent of the Affordable Care Act, there’s a significant risk of severe penalties if a mistake is made. On the focus side of the equation, if your company does not provide payroll processing and benefits to its clients, than this is an administrative function that could be outsourced.

On the other hand, choosing a payrolling service lowers the many risks that come with employment. The burden is mostly shifted to the payrolling company, enabling your company to focus on the products and services that you provide to your clients. After all, more focus is good, right?

With either choice it is imperative to ensure the vendor is viewed as a partner for your business. As such, proper vetting is absolutely a must and should include a comprehensive review of the vendor’s, financial history, experience, processes, culture, etc.

An experienced employer of record can help you avoid expensive issues that may arise with your contract or contingent workers. Reach out to the friendly experts at Innovative Employee Solutions for further assistance. – See more at: Innovative Employee Solutions.

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