At the intersection of human resources and finance, payroll is a critical and sensitive matter to both employees and employers. Payroll is also a business operation that routinely brings small business into contact with tax authorities, and the failure to deposit payroll-related taxes in a timely fashion is a frequent cause of tax penalties. Payroll’s efficient and timely administration, therefore, is a crucial, if mundane, task. Computerization has undoubtedly eased the process and reduced errors. Many small-business owners have engaged outside vendors to prepare payroll for them, changing the nature of the process for small-business owners as a group. Still, doing payroll, hopefully in the most efficient and mistake-free manner possible, is a basic responsibility for all employers, even the smallest. For that reason, the current issue of the National Small Business Poll addresses Payroll.
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Seventy-two (72) percent of those working in small businesses work full-time with 51 percent of small enterprises having nothing but full-time people (Q#1). The smallest businesses are the most likely to be composed either entirely of full-time or entirely of part-time employees, but the average is similar across all three size classes of businesses examined. The respondent defines full-time work for current purposes by any criteria he chooses rather than a particular number of hours worked. Part-time employees are the residual of those who do not work full-time.
Pay day occurs frequently in small businesses. Forty-five (45) percent pay their fulltime employees weekly (Q#2). Another 26 percent pay every other week (26 pay periods in a year) and 13 percent pay twice a month (24 pay periods in a year). Only 6 percent pay once a month and most of those are among the smallest. Seven percent pay different full-time employees at different intervals. The data do not address the reason. However, the practice appears in virtually all industries, though it appears most common in construction.
Those employing people part-time are very likely (90%) to pay them over the same interval that they pay their full-time employees (Q#3). Businesses employing 10 or more are even more likely to do so. There is a 96 percent chance that they will pay full- and part-time employees at the same time. But when small employers do pay at different intervals, it appears part-time employees get paid somewhat less frequently (Q#3a).
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Sixty-four (64) percent of small employers prepare their payroll in-house (Q#4). Fourteen (14) percent send theirs out to an accountant or bookkeeper of some type to do payroll for them. Lastly, 19 percent send theirs to a payroll services company. The size of a business is highly related to the way its owner(s) prepares payroll. Owners of the smallest businesses are substantially more likely to keep their payroll in-house (68%) while owners of the largest are much less likely to do so (49%). The opposite is true with payroll services. Owners of the largest are substantially more likely to use them (38%) than owners of the smallest (15%). Yet, even among the largest, preparing payroll in-house is the most common way to perform the task.
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The owner/manager does payroll in 55 percent of the enterprises where it is done in-house or in one-third of all cases (Q#4a). An employee does it 29 percent of the time while an unpaid spouse or other family member does in 14 percent of cases. Owner/managers have the duty most frequently in the smallest while an employee(s) has it most frequently in the largest.
The typical small business spends about an hour or less every payroll period completing the process (48%) (Q#4a1). The process includes everything from reviewing time cards or similar information to preparing checks and associated tasks. That figure varies substantially by firm size. Those employing 20 or more people typically look at more than one-half day per pay period.
Computerization has made payroll preparation a much easier task than it once was. However, only 62 percent of those doing payroll in-house use some type of electronic spreadsheet to calculate payroll, deductions, net pay and the like (Q#4a2A). Use is highly associated with firm size. Most (92%) of the largest, small businesses employ an electronic spreadsheet while comparatively few (57%) of the smallest, small businesses do. Similarly, while 33 percent of all those doing payroll in-house have their payroll system tied to a larger accounting system, the figure rises to 66 percent among the largest and falls to 28 percent among the smallest (Q#4a2B).
Another view of the sophistication of an in-house payroll operation is the means used to prepare employee paychecks. Half print them and half make them out manually (Q#4a2C). Again, a very strong association with firm size appears. Some may object to the question on the grounds that many businesses directly deposit employee paychecks. Yet, even when businesses provide employee-direct deposit, all employees usually do not take advantage of it. When examining only those with direct deposit, 47 percent print checks while 52 percent make them out manually. Any effect caused by direct deposit, therefore, appears modest.
Preparing payroll in-house may seem antiquated, but small employers offer a variety of rational reasons for doing so. Thirty-seven (37) percent claim it is cheaper (Q#4a3). Owners of the smallest are most likely to mention that reason. Certainly, the in-house cost is minimal when only a handful of employees must be paid. Another 3 percent specifically mention firm size. The second most frequently cited reason (32%) for keeping payroll in-house is that the owner has greater control or better oversight of the process. Another 9 percent note that once all the records and information are pulled together, the hard part is done. Seven percent simply view the process as easier when maintained in-house.
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b. Sending Payroll Out
Payroll can also be prepared by an outside vendor. The two most common types are individually hired people, typically accountants or bookkeepers, and payroll services firms. Small-business owners use both.
The amount paid for payroll services by the 14 percent who engage an outside accountant or bookkeeper is typically small. Thirty-one (31) percent pay less than $100 for each payroll they do (Q#4b). Twenty (20) percent go over the $100 figure. However, 35 percent do not know, suggesting that their cost is relatively modest; they would be aware of a significant expense. Another 13 percent say costs are rolled into a single payment for financial services, most likely accounting fees. Sixty-one (61) percent pay a flat fee for these services, while 24 percent pay an hourly rate, and the remainder do not know (Q#4b1).
About half who use an outside accountant or bookkeeper transmit their records to the vendor electronically (43%) and half (42%) on paper (Q#4b2). The remainder are not certain. While it is possible that some vendors cannot accept electronic records transmission, that seems unlikely for businesses that do payroll. As a result, it appears that about half who send their payroll records to this type of vendor do not have a computerized payroll system. Unfortunately, paper transmission is not confined to the very smallest. That means a number of larger firms also appear to work with a manual payroll system.
Once payroll is sent out, the accountant or bookkeeper can complete the process by finishing the paperwork and managing all financial transactions, such as making payroll tax deposits on behalf of their client. Or, the client can take the process back in-house and complete the financial portion of it. Fifty- five (55) percent have their accountants or bookkeepers conduct all necessary financial transactions; 44 percent bring the financial transactions back in-house (Q#4b3). The latter group appear to engage in a rather awkward process, but individual circumstances may make the facts otherwise.
The profile of the payroll process when the vendor is a payroll services company is different than when the vendor is an accountant/bookkeeper. The 19 percent who use a payroll services company to prepare their payrolls are typically larger and more technologically oriented.
The cost of using a payroll services company is not clear. When asked the charge of their payroll services company per month, 42 percent respond that they do not know (Q#4c). Twenty-three (23) percent charge less than $100 per month while 34 percent charge more than $100. There are several potential reasons for the large non-response. The first is that they are not charged by the month; they are charged by the payroll and few do payroll monthly. The second is that payroll costs are comparatively small; the amount is not enough to draw their attention. Others are also possible. In any event, question results do not prove particularly helpful.
Those who use payroll services companies are considerably more likely to transmit their records electronically to their vendor than those who use an accountant/ bookkeeper. Sixty-one (61) percent do so with the smallest also using computerization rather than paper in the overwhelming majority of cases (Q#4c1). But even then, 25 percent report transmitting their records on paper with another 14 percent uncertain. These data suggest that a notable share of small employers who use payroll services firms do not take full advantage of the administrative efficiencies they bring.
The most frequently cited reason (45%) that 19 percent choose to use payroll services companies is that these providers take care of everything; they offer a comprehensive service (Q#4c2). Other reasons offered are tied to efficiencies that payroll services help create. For example 17 percent say that it is the most effective way to do payroll; another 14 percent say that using payroll service companies allows a smoother work flow for in-house personnel; and 11 percent say that they produce fewer mistakes or errors.
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Payroll Tax Deposits
Employers must withhold federal income and payroll taxes from employee paychecks, add their share of payroll taxes, and remit them to the federal government on a periodic basis. Those with less tax liability remit theirs less frequently than do employers with greater tax liability. Forty-two (42) percent report that they send in theirs quarterly; 27 percent monthly, and 13 percent more frequently (Q#5). One percent takes advantage of a new rule that allows those with de minimis liability to remit their taxes annually.
The IRS would like to institute a rule that forces all businesses to remit employee withholding and payroll taxes electronically. That idea encounters the reality of the market. Thirty-two (32) percent use an Internet banking arrangement that allows them to remit their payroll taxes electronically (Q#5a). While this does not define whether a small business could without considerable difficulty comply with an IRS edict demanding electronic filing, the data strongly suggest that such action would cause widespread disturbances.
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Twenty-six (26) percent offer their employees an option to deposit their payroll checks directly into a checking or savings account of some type (Q#6). Presence of the facility is closely tied to the employee size-of-business. Employee direct-deposit is offered in one of five (21%) businesses employing fewer than 10 people compared with over three in five (62%) in businesses employing 20 or more.
About 57 percent of all employees use direct deposit (Q#6a). In the smallest enterprises, there is a tendency (75%) for all employees to participate or none to participate. The largest show the opposite tendency. Seventy- two (72) percent have some combination of employees participating and not. Just over half (53%) of those with direct deposit allow employees to make deposits into more than one account (Q#6b). Thus, an employee can have his/her paycheck sent to a savings and checking account. The number of accounts does not seem an issue for this group of small employers. While 12 percent say that they allow between two and five accounts per employee, most do not really know (Q#6b1). Eighty-four (84) percent say the issue, that is to say, the number of accounts over which a single employee can split his/her paycheck, has never arisen.
Thirty-eight (38) percent will send multiple deposits to two or more financial institutions; 37 percent will not and 25 percent do not know (Q#6c). Obviously, if a small employer limits deposits to only one account, multiple institutions are irrelevant.
Small-business owners who use direct deposit like it. Sixty-three (63) percent say that direct deposit has generally been helpful to their businesses while another 32 percent say that it has been inconsequential (Q#6e). Just 1 percent consider it a hassle.
The single most frequently cited (most important) reason for instituting direct deposit (35%) is that it is administratively easier and more reliable than the alternative (Q#6d). However, a series of employee-related reasons are more prevalent. Twenty-nine (29) percent say that they instituted direct deposit because employees asked for it; another 12 percent report they did so because employees did not have a place to cash their checks; still, another 5 percent say it helps employees manage their personal finances. Thirteen (13) percent give other, scattered most important reasons.
Those without direct deposit are more likely to offer lack of employee demand as the most important reason for not having it than any other. Thirty-five (35) percent specifically cite lack of employee demand (Q#6f). However, 16 percent say that they never thought about it which is the lack of employee demand in another form. Administrative issues are also an impediment. One-third (33%), concentrated among owners of firms employing fewer than 10, believe that they are too small. Inadequate computerization (2%) could be a corollary to the size problem. But only 6 percent offer the paperwork and general hassle involved as the primary reason for not having direct deposit.
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Federal Payroll Forms
Employees report the number of exemptions on their W-4 form. W-4 exemptions and projected earnings determine the amount of federal income taxes their employer withholds from their payroll checks. (Most states and sometimes localities also have their withholding requirements.) If employees want a different amount withheld, they must change their W-4 and resubmit the form to the employer. The employer must comply with an employee’s wishes with exceptions for potential abuses.
Small employers report that considering both the frequency of filing (including changes) and associated administrative requirements, the W-4 is one of government’s least burdensome paperwork requirements. Seventy-six (76) percent believe the W-4 is one of the least burdensome, including 50 percent who believe that strongly (Q#7). Only 5 percent believe the W-4 is one of the most burdensome. Twenty (20) percent are undecided. Thus, the W-4 imposes minimal burden on the payroll process.
The W-5 is the form employees eligible for the Earned Income Tax Credit (EITC) must file with employers. It, like the W-4, may or may not be burdensome on the payroll process. However, a determination is not presently possible due to the small number of cases available to analyze. Only 1 percent say that they have any employees who claim eligibility for the EITC, though the figure rises to 5 percent among the largest, small businesses (Q#8).
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Part of the reason to undertake the survey on payroll is a legislative proposal that requires employers without retirement/pension plans to offer employee-direct deposit. Assessment of the issue from a small-business perspective requires data on the presence of a retirement/pension plan.
Twenty-seven (27) percent of small businesses offer an employee retirement plan (Q#9). However, that proportion is almost double the proportion in enterprises employing 10 or more people.
The principal type of retirement plan offered is the 401(k). Forty (40) percent of those offering a plan provide a 401(k) (Q#9a). The 401(k) with its relative complexities is most popular in firms with 20 or more employees where it is the preference of 65 percent of owners. It is also common among smaller firms with the benefit. However, the 401(k) shares its popularity with the SIMPLE plan. About one-third of enterprises employing fewer than 20 have each one. Still, 15 percent of the largest report using a SIMPLE plan. The remaining types of retirement/pension plans have scattered use with SEP favored by 11 percent and Profit-Sharing by 10 percent.
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Payroll would logically seem to be one of the first functions that is computerized in a small business. Yet, a surprisingly large number of owners, and not just owners of the smallest firms, continue to do payroll on paper. The reason for their failure to adopt technology to the task is not obvious from the data. But judging from the reasons given for keeping payroll in-house, it is likely associated with issues of confidence and control. Small employers simply do not want to make mistakes on such a critical matter. They know paper works and are not willing to risk change, given that preparing payroll in most firms, particularly very small ones, requires minimal time. What we do not know is the extent to which owners without computerized payroll also do not handle their other important business functions electronically.
Computer skills and confidence in those skills also appear in the limited number who offer employee-direct deposit. While employee demand for direct deposit appears to be the overriding influence on the actions of both employers who offer and do not offer it, computer facility and the construction of accounting systems are also factors. In fact, comparatively few use the Internet for financial transactions.
Small employers try to keep payroll as simple as possible which explains why they pay full- and part-time employees on the same schedule, often limit the number of accounts and institutions to which direct deposits will be made, and typically prepare payroll in-house (cheap and easy). The anomaly is they pay frequently. Payroll in nearly half of all small businesses is prepared 52 times a year and about as many do so 26 or 24 times a year. Such frequency raises administrative costs and complexity. While the survey did not question the reason for the frequency of payroll, it is likely tied to employee demand and custom. Payroll, therefore, remains a good example where small employers are likely to accede to the explicit or implicit demands of employees.