Payroll Complexity: Yet Another Reason to Outsource

If there’s one thing business owners hate, it’s complex problems that don’t have easy solutions. Complex problems get in the way of serving customers. Perhaps that’s why growing numbers of small businesses or transitioning away from in-house payroll to online payroll solutions.

There is little doubt that the U.S. payroll system is fairly complex. In fact, the 2017 Global Payroll Complexity Index from NGA Human Resources shows that the U.S. remains among the top 40% of surveyed countries for payroll complexity. The report cites a number of different issues HR and payroll management face, making a clear case that complexity is yet another reason to outsource payroll functions.

According to BenefitMall, a Dallas-based payroll and HR outsourcing provider, the three most significant contributors to U.S. payroll complexity are:

  1. federal and state taxes
  2. health insurance benefits
  3. payroll run frequency.

Federal and State Taxes

The far and away leader in U.S. payroll complexity is taxation. Because of the way our system is set up, employers pay taxes at both the state and federal levels. But taxation goes well beyond that. According to NGA, Pennsylvania alone has more than 5,000 local tax jurisdictions. Ohio has more than 1,000.

The fact is that employers are subject to federal, state, county, and even city taxes. It is difficult enough to comply with federal laws regarding payroll taxes, but the bevy of state and local tax regulations can make handling payroll in-house a nightmare. Small business payroll departments just do not have the knowledge or skill to efficiently address payroll taxes.

Health Insurance Benefits

Providing employees with health insurance benefits has always been a complex issue. But that complexity grew exponentially with the establishment of the Affordable Care Act signed into law by former president Barack Obama. With the ACA came both employer and employee mandates that all but eliminated health insurance as an option.

The problem with government mandates is that they always add multiple layers of complexity to what employers are already doing. The ACA mandates are no different. ACA reporting is so complex that the IRS had to forgo enforcement in both 2016 and 2017 because so many companies were behind.

Payroll Run Frequency

All but a handful of states mandate payroll run frequency to some extent. Unfortunately, the days of weekly pay being the standard are long gone. Now employers have to choose between weekly, biweekly, and semi-monthly pay frequencies. Furthermore, they have to consider other options based on more than what is convenient for them.

Along with payroll frequency questions come record-keeping and reporting responsibilities. Overtime pay is a good example. Even if a company decides to pay biweekly, it must calculate and report overtime on a weekly basis. This means keeping two sets of records; one for payroll purposes and the other for record-keeping.

Payroll Becoming Highly Specialized

The long-term result of an increasingly more complex payroll system is that payroll is becoming a highly specialized enterprise. What used to be a simple matter of taking cash out of the till and paying employees along with providing them a written pay slip has become an exercise in compiling data, crunching the numbers, withholding payroll taxes, filing reports, and making sure employees get paid on schedule.

Such a highly specialized environment calls for service providers that are equal to the task. That’s where companies like BenefitMall come in. Their business is payroll and benefits administration, so they invest heavily in making sure they are experts in taxation, health insurance benefits, payroll frequency, and all the other issues that go into payroll processing.