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Helping Curb the High Cost of Payroll

America 's 156 million wage earners and the payroll professionals who pay them together, through the payroll withholding system, contribute, collect, report, and deposit approximately $1.4 trillion, or 71%, of the annual revenue of the U.S. Treasury, reports the American Payroll Association. That's a substantial impact on the U.S. economy. Ensuring that the correct taxes, withholdings and salaries are calculated each pay period can be an overwhelming and often costly task for a small business owner.

Are your employees hourly or salary? Do you know how to properly calculate the unemployment tax rate in your state? Do you have employees living in Border States? Would a switch from weekly payroll to bi-weekly or bi-monthly have your payroll manager contemplating a jump from the top of the nearest building?

There are several ways a revamped or outsourced payroll process can streamline your business and glean additional savings in a tight economy. Payroll costs reportedly rose 3.5% from 2003 to 2004 in a recent study by the American Payroll Association. That can translate into thousands or even tens of thousands of dollars needlessly being spent to manage paying a company's workforce. Even in a small company of one to 10 employees, the time and money spent calculating, processing, producing and distributing payroll could be reallocated to more worthy and cost-effective duties.

Reaping big savings

'We can save an estimated 10% to 15% of a company's payroll total expenses,' says Kelly Leese, assistant director of Fiducial's Payroll Processing Center. 'There are so many areas within a payroll where mistakes can be made. Our clients report that using our payroll processing system has saved them considerable man-hours and costs related to incorrectly calculated withholdings and tax payments each year.'

The more ways pay is calculated leaves a company at risk for incorrect calculations. By streamlining the payroll process with fewer ways to achieve a pay rate (overtime, shift differentials, etc.) a business can see the advantages in year-end tax payments. Employees also report increased satisfaction because there are fewer surprises and complicated calculations to determine their pay.

If the business sits in a border town with another state, add another bundle of tax issues for those employees living out of state. Considerations need to be made for paying taxes to more than one state and remaining in compliance with each state's constantly changing tax code.

Many states have a State Unemployment Employee Withholding Tax. This is where the state's department of labor rates a business' unemployment experience. This rating plays a crucial role in the total amount of taxes owed at the end of each year. Calculate these taxes incorrectly and the business may be faced with a higher than predicted tax bill. The state also leaves the collection of these taxes up to the employer who collects and is responsible for final payment for both the employee and the company's portions. Collect the wrong amount from employees and the business is liable to cover any under taxed amount plus its own taxes due.

Let's use Bob's Wholesale as an example. Bob's 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 will also have a bearing on the final tax due. The issue arises from the bounce back from unemployment taxes that Bob's Wholesale won't see reflected in their immediate tax payments. This increase will be reported in a later tax bill (sometimes as much as two or three years after the fact). Bob's Wholesale may be blindsided by a tax bill that charges two or three times the amount he originally collected in withholding taxes ! from his employees and Bob's will be liable for the entire payment due.

Managing Labor Costs, Expenses

'Many small businesses don't run any type of payroll reports and are missing business-critical data,' continues Leese. 'Reports such as cash flow summaries, employee general data reports, employee wage detail summaries, check reports and earnings statements can help a business to better manage their labor costs and employee expenses. Information gleaned from these reports can also be used to make future plans for hiring, marketing, and anticipate any shifts in their workforce.'

Besides the fact that only 5% of Americans are actively saving each month, direct deposit offers many cost benefits to both the business and the employee. By creating a paperless paycheck (online electronic pay stubs can be made available to employees), the money is transferred directly into the employee's checking and/or savings account on or before the scheduled pay date making personal bill paying, saving, and budgeting easier. Other benefits include enhanced employee convenience, a reduction in exposure to check fraud and ease of use (i.e. no more rushing to the bank on pay day to wait in long lines to cash or deposit pay).

Contribution rates are changing all the time. There are many web sites to get the most current information but if you don't know what to do with that information once you get it, you'll find that the business will end up paying considerably more in year-end tax payments or even two or three years later, where penalties and interest are compounding and accruing exponentially until the issues are resolved.

Payroll can be one of the most complicated and costly areas of a small business' operation. A move to a more streamlined payroll processing can reduce labor costs, ensure tax compliance, and increase employee satisfaction. To learn more about payroll compliance issues and how they can effect your business' bottom line, contact a Fiducial representative today at 1 866 FIDUCIAL or visit the web site at www.fiducial.com.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transactions or matter addresses therein.

Fiducial Investment Advisors, Inc. is a member of the NASD and SIPC. Some investments may not be suitable for all investors. Please consult with one of our professionals. Fiducial Investment Advisors, Inc. is licensed to transact business in all states and the District of Columbia as a broker/dealer.

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This page last modified: 15 Mar 2008