In-house or outsourced payroll processing?

In-house or outsourced payroll processing?

Unfortunately, small business payroll tax processing isn’t that simple. It is not simple in Puerto Rico, as well as it is not simple in the United States. The smallest mistake could result in fines and penalties that could derail a business, or at least create serious interruptions.

There are two options for managing payroll at your business. You can either process payroll in-house or delegate payroll accounting and bookkeeping. Since payroll processing has already become a commodity service, our suggestion is to delegate the process from the start, so you can focus on your core business offering. Given that payroll processing seems overly complex (even to financial professionals), it is easier to delegate and avoid those aforementioned penalties and fines. Furthermore, under state and federal law, failing to make payments related to payroll or income tax is sometimes considered a felony.

If you decide to outsource payroll processing, be sure to ask all the questions on how it will actually be processed, how it needs to be processed, how will payments be made and what reports will be made available to you once the processing is performed. Once you have this process clearly defined by your accountant, payroll processing will become an ordinary task.

If you still decide to go ahead and process payroll in-house, make sure you do the following:

Get acquainted with municipal, state, and federal regulations related to payroll. Both from a labor/employment perspective, as well as from a taxation standpoint. Depending on the jurisdiction you’re business is established there are issues related to hiring, termination, schedules, severance, among many others, that must be know to avoid penalties and fines.

Document everything. Make sure you executed labor/employment contracts, company policies, and obtain representations from your employees that they have been informed of the rules and expectations you have and how their performance will be evaluated.

Understand the difference between “independent contractor” and “employee”. While you might believe that paying ‘employees’ by classifying them as ‘independent contractor’ is quite easy, in reality most relationships fall within the ‘employee’ category, as defined by the IRS. This might trigger problems later if the employee seeks unemployment benefits, workmen compensation, etc.

Understand the costs of taxes. When you decide on how much you pay your employees, you need to take into account, not only the taxes and withholdings for the employee, but also the numerous other taxes on top of the established salary. Be sure to get all the information.

Set reminders in your calendar, but most importantly take the time to process payroll without distractions. Payroll calculations need proper reconciliations, in order to file payroll tax returns quarterly and/or annually.

Verify hourly entries from your employees to ensure that overtime is paid accordingly. There are two issues: fines for non-payment are high, and overtime can easily creep up without notice, as it is one of the areas where employees tend to find additional remuneration without asking for explicit permission.

I hope this post helps you understand better how payroll works. If you have a question or comment, feel free to contact me to see how I can help.


Miguel Nicolas Moreda, CPA, CIRA

Miguel Nicolas is the founder of Porto Capital. Prior to working as a financial and restructuring advisor for small and medium-sized businesses, he worked at GFR Media Real Estate Division as Finance Manager. Before that, he worked in the Business Advisory Division at Ernst & Young US, LLP in the United States.

He is holds an undergraduate degree in accounting from the University of Puerto Rico. He also possess graduate degrees from the University of Puerto Rico School of Law and IE Business School in Spain. Miguel is a Certified Public Accountant (CPA) and a Certified Insolvency and Restructuring Advisor (CIRA).

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