Curbing High Payroll Costs

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DECEMBER 2005 - America’s 156 million wage earners, and the payroll professionals that pay them, contribute, collect, report, and deposit approximately $1.4 trillion through the payroll withholding system, or 71% of the annual revenue of the U.S. Treasury. Ensuring that the correct taxes, withholdings, and salaries are calculated each pay period can be costly for a small business owner.

A revamped or outsourced payroll process can streamline a business and create savings equal to 10% to 15% of its payroll expenses. Payroll costs rose 3.5% from 2003 to 2004, according to a recent study by the American Payroll Association. That can translate into thousands of dollars needlessly being spent. Even in a company with less than 10 employees, the time and money spent calculating, processing, producing, and distributing payroll can be reallocated to more cost-effective duties.

The more different ways pay rates are calculated, the more a company is left at risk for incorrect calculations. Streamlining the payroll process, with fewer ways to achieve a pay rate (e.g., overtime, shift differentials), helps a business see the advantages in year-end tax payments. Employees also report increased satisfaction because there are fewer surprises and fewer complicated calculations.

Business located in towns near state borders have additional tax issues for employees that live out of state. Considerations must be made for paying taxes to more than one state and for remaining in compliance with each state’s tax code.

Many states have an unemployment employee withholding tax. The state’s department of labor rates a business’ unemployment experience, and this rating plays a crucial role in the total amount of taxes owed at the end of each year. Calculating these taxes incorrectly can result in a higher-than-expected tax bill. The state also leaves the collection of these taxes up to the employer, which is responsible for the final payment of both the employee and the company portions of the tax.

For example, Bob’s Wholesale has an employer tax (X%) wage base for each state in which his employees reside ($XX,000). For the first year, Bob’s will pay 1% (unemployment rate) of the wage base in taxes. This tax is paid for every employee hired within that year. If Bob’s lays off an employee and that employee collects unemployment, the unemployment rate can increase to 2% or 3%, up to the maximum wage base amount. The changes from year to year are based on the total number of employees that were terminated or laid off, and affect the final tax due. The issue arises from the bounce-back from unemployment taxes that Bob’s Wholesale won’t see reflected in its immediate tax payments. This increase will be reported in a later tax bill, sometimes as much as two or three years later. Bob’s Wholesale may be blindsided by a tax bill that charges two or three times the amount originally collected in withholding taxes from its employees, and the company will be liable for the entire amount due.

Managing Labor Costs and Expenses

Reports such as cash flow summaries, employee general data reports, employee wage detail summaries, check reports, and earnings statements can help a business manage its labor costs and employee expenses. A business can also use information from these reports to make future plans for hiring, marketing, and anticipating shifts in its workforce.

Direct-deposit payrolls offer cost benefits to both the business and the employee. By creating a paperless paycheck (online electronic paystubs can be made available to employees), the money is transferred directly into the employee’s checking or savings account on or before the scheduled pay date, making personal bill-paying, saving, and budgeting easier. Other benefits include a reduction in exposure to check fraud, and enhanced employee convenience (i.e., no more waiting on line at the bank on payday).

Contribution rates are changing all the time. Many websites post current information, but without knowing what to do with that information, a business might pay considerably more in year-end tax payments, or even two or three years later, when penalties and interest are compounding and accruing continuously until the issues are resolved.

For more information about payroll compliance issues and how they affect a business’ bottom line, contact Fiducial at 866-FIDUCIAL, or




















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