Payroll: A Tie That Binds
Offer payroll services to position your firm as an all-service provider.
| EXECUTIVE SUMMARY | |
EVERY BUSINESS HAS TO PAY ITS STAFF and its taxes. Many CPAs are addressing those twin needs by offering to help their small-business clients, not just with taxes but also with the many chores that go into payroll processing, from after-the-fact tax filings to benefits administration.
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| SARAH E. PHELAN, JD, is a New York-based attorney and writer. Ms. Phelan was formerly a senior manager with Deloitte & Touche and a technical manager in personal financial planning at the AICPA. Her e-mail address is sep1127@yahoo.com . MICHAEL HAYES is a senior editor on the JofA . Ms. Hayes is an employee of the AICPA and her views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation. |
very business has to pay its staff and its taxes. Many CPAs are addressing those twin needs by offering to help their small business clients not just with taxes but also with the many chores that go into payroll processing, from after-the-fact tax filings to benefits administration. Payroll services is not a huge niche—most of the CPAs with whom we spoke for this article say it accounts for less than 5% of their total billings. But its value is larger than that figure implies. Having it on the menu, they say, positions a firm as an all-service provider and helps cement client relationships.
Horovitz, Rudoy & Roteman (HR&R), Pittsburgh, has provided a complete proprietary in-house payroll service (FlexPay) for about 10 years, says Gordon Scherer, CPA and managing principal of the six-partner firm. It represents about 3.5% of the firm’s income, and the partners have earmarked that money for funding the cost of their retirement (see “ CASE “> A Payroll Services Retirement Fund ”). Here’s information to help you decide whether payroll could be a good business for your firm, whether you’re a sole practitioner or a managing partner.
| Plenty to Do The U.S. civilian labor force will reach 162.3 million by 2012, an increase of 17.4 million (11%) from 2002. Source: Department of Labor Bureau of Labor Statistics, www.bls.gov/news.release/ecopro.nr0.htm , 2004. |
A GOOD WAY TO GROW?
“Payroll services are about 3% of my practice, but offering them is part of being a full-service accounting firm,” says Daniel M. Ukestad, CPA, a Carmel, California, sole practitioner who does after-the-fact payroll for about a dozen small business clients. He provides those clients with tax and consulting services, not audits (see “ Independence and Service Issues ”). He also does domestic-staff payroll for older individuals with household help.
At Faulk & Winkler LLC of Baton Rouge, Louisiana, principal Monica Waller is responsible for client accounting services (CAS). “Payroll services is a small part of our business, but it works hand in hand with CAS, including general ledger, financial statements, accounts payable and accounts receivable, tax and pension work,” she says. When tax partner Denise Carvalho, CPA, sees a client who might benefit from payroll services, she brings Waller in to discuss how to help. The firm has handled payroll since 1984 but says improved technology has made it easier in the past five years. It’s a good fit with services such as pension work that must be in a prescribed electronic format. “It has become a real selling point for pension administration clients to transfer their payroll to us,” she says.
Principal Joseph Maloney, CPA, of four-partner firm Maloney, Reed, Scarpitti & Co. of Erie, Pennsylvania, says, “Payroll has provided about 10% of our business for 25 or 30 years.” The firm handles the entire process for most payroll clients—prepares their checks, arranges for the deposits, and makes sure the clients’ payroll taxes are paid on a timely basis and their quarterly and annual returns are correctly prepared and filed. Using a CPA firm offers them confidentiality and personalized service. “Clients like to deal with only one provider,” he says. “They know the individual who answers the phone, and they can let us deal with changing tax rates and payroll laws.”
| Independence and Service Issues Because payroll services are a nonattest service, providing them to a client can mar a CPA’s independence. For engagements entered into after 2003 (with exceptions for some completed before 2005), practitioners must pay careful attention to a revision to Ethics Interpretation 101-3, “Performance of Nonattest Services.” Make sure the client fully understands the services it is to receive. In an engagement letter, describe what your firm will and will not do, the limits to the service, the information the firm will need to properly prepare the client’s payroll and the time constraints involved. Document in writing your understanding with the client regarding
Firms need to be alert to independence issues, says Joseph Maloney, CPA, of four-partner firm Maloney, Reed, Scarpitti & Co., Erie, Pennsylvania: “Our involvement in our clients’ payroll process is great. But when we have signature authorization over the client’s checking account or are involved in the management of employee payroll information, we have had to disclose the fact we are not independent in some cases.” |
A PAYROLL-PROCESS OVERVIEW
Clients can benefit from help with this highly detailed human resources function at many points. First employers collect and record employee data (Social Security number, address and dependents), job location, whether salaried or nonexempt, and medical and other benefits deductions. Then they record employees’ hours worked by hand, time clock or computer. On short-term projects where workers belong to different unions (a movie set or construction site, for instance), those records likely will be handwritten. A payroll specialist knowledgeable about union rules checks the information (which a supervisor may verify) to summarize the wages due. Using tax tables or an automated system, he or she calculates tax deductions and creates a payroll register. The paymaster checks wage and tax amounts for anything out of line, then prints and distributes paychecks, or receipts if direct deposit is used. The data are entered in the company’s general ledger, and the employer follows through by making bank deposits for the tax amounts withheld and filing periodic reports to the federal, state and local governments.
A LITTLE OR A LOT
Ukestad’s small business clients prepare their own paychecks—some by hand—and use his services to make sure their tax records are correct and deposits are on time. “I educate them on how to prepare payroll and how and when to make the deposits,” he says. He prefers that larger clients use a national provider such as Paychex or ADP (see “ Resources ”). James Hayden, CPA, a Montvale, New Jersey, sole practitioner with six staff members, says payroll represents about 10% of his firm’s revenues. He refers clients with more than four employees to Paychex, which he has used for 25 years. “We can rely on its work and access reports on line. If Paychex makes a mistake, it rectifies it.” Ilene Eisen, CPA, of ie Solutions in Monterey, California, also recommends national payroll providers to her clients for their broad capabilities. To help clients meet filing and deposit guidelines she suggests that QuickBooks clients use Intuit payroll services, “since they can download the information into their accounting records easily,” she says. “Peachtree users can use similar Best Software payroll services.”
What you recommend to clients depends on their sophistication and what you perceive they need. Big payroll companies, such as Paychex or ADP, offer a large number of Internet-based payroll-processing services and products, and employ experts to track accounting intricacies and ensure clients are in compliance with local and federal tax laws.
Many payroll providers offer such simple user interfaces that “CPAs may have a hard time convincing clients to use their help,” says Steven Bragg, CPA and CFO of Premier Data, Englewood, Colorado. He cites ADP’s PayExpert system as an example. At its most basic, it can process just payroll through a Web browser interface. The system also permits complete integration with a centralized 401(k) investment module, which automatically makes 401(k) deductions from employee paychecks and eliminates the need for separate tax filings, administration reports and payments, he says.
Managing flexible spending accounts (FSAs) is another possibility with ADP. Services include integrating FSA deductions with payroll and offering employees the use of debit cards from which to pay down their FSA balances. “Employees can access and update their 401(k) and FSA account information through the ADP site, so clients no longer have to spend time dealing with employee account-maintenance issues,” Bragg says.
Some CPA firms provide payroll compliance auditing services, including retirement plans, cafeteria benefit plans and health plans, to trustees of employee benefit plans. These services are valuable to benefits trustees—who have a fiduciary duty to ensure employee contributions to the plans are correct and timely—because the rules are complex and overlapping. Engagements focus on checking an employer’s payroll records for compliance with IRS and state withholding and Department of Labor rules.
TECHNOLOGY MAKES IT WORK
CPAs who want to offer more payroll services will find there’s an abundance of software and Web-based providers to choose from. Start-up costs for software and training start at $1,500 but can go much higher. Firms can control staff costs by hiring $15- to $20-per-hour people to do data entry.
At Faulk & Winkler, the first step in handling a client’s payroll is to generate and post an import file to the Internet prior to the client’s pay date. That automatically sends an e-mail that reminds the client when payroll data must be received. Clients log onto the firm’s Web site and access their payroll file through a secure Web portal, then enter hour and wage information, make changes to employee master-file information and/or leave notes. When they click “Done,” the firm gets an e-mail stating the client’s payroll information is ready. Then the firm imports the data, verifies the totals and makes changes according to any notes and process.
Maloney, Reed, Scarpitti uses ACCPAC and QuickBooks to prepare the payroll checks and information for the electronic transfers. To prepare W-2s and quarterly and annual payroll tax returns it uses 1099-Etc from Advanced Micro Solutions; it outsources the direct-deposit segment to another provider, National Payment Corp. “In most cases the payroll information automatically updates the clients’ general ledgers,” Maloney says. “If we don’t maintain their general ledger, we provide them with the entry to input the payroll information to their GL.”
Most clients have paychecks deposited electronically into employees’ accounts. Faulk & Winkler generates a NACHA (National Automated Clearing House account) formatted file and sends it either directly to the employer’s bank or to a third-party vendor, which distributes the funds to employees on payday. Employees of clients that use EZ-Stub direct deposit receive e-mail notification that payroll is ready; a link brings them to a secure Web portal. To view their current and all previous check stubs, employees enter their unique log-in name and password. They can view and print out information or stubs for documentation at any time. In some cases the firm generates printed check stubs for employees’ records and delivers them to the client for distribution or mails them directly to employees.
| RESOURCES | ||
| Note: Information about technology products changes quickly, so when researching any product or service, talk to vendors and users to determine what is suitable for both your firm and your client. | ||
| AICPA partner program The AICPA has an exclusive partnership program with Paychex, which offers built-in benefits for CPAs and their clients. Paychex Web-based payroll offerings include Paychex Online Internet Report Service and General Ledger Reporting Service. For more information go to www.cpa2biz.com/BusinessSolutions or call the Institute at 888-777-7077. Software Payroll processing products include
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Paymate Acclaim; Paymate Simple; Paymate Standard Paymate Software www.akmicro.com
Web-based payroll applications
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PayChoice Payroll Associates www.payrollassociates.com
Publications
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WHAT TO WATCH OUT FOR
Reliability is the paramount concern of every payroll customer and every one of its employees. These are the hot-button issues:
Pay the government correctly and on time. The penalties for failure to pay the client’s taxes are severe, and you will lose the client if you don’t deliver.
Get the checks right. “If you want to tick people off, mess with their paychecks,” Waller says. Payroll mistakes also embarrass clients, whose employees may assume the company is having financial problems.
Issue checks and direct-deposit funds on time. “Clients can’t afford problems with their employees’ pay,” Maloney says. A delay can disrupt an entire business.
Train clients to process data reliably. To be profitable, payroll-processing must be automated and standardized. Discourage clients from making late changes by charging for them. “If they know they’ll be fined, it helps them get it right the first time,” Waller says.
Stay current on the law. Keep your staff abreast of changes. Use CPE, the Internet and updates from state CPA societies and local sources to stay on top of changes. Inform your clients, too.
Keep abreast of technology. Use the Internet, join user groups and attend technology conferences. If you feel confident in your tech expertise, consider becoming a reseller, Waller suggests.
Cross-train your staff. To ensure that at least two people have experience with every client, Maloney’s firm insists that every worker learn how to handle another company’s payroll in addition to those that are his or her primary responsibility.
Keep strict internal controls. Perform background checks on potential hires to ensure staff members processing payroll are trustworthy and responsible.
Be patient. Clients not accustomed to outsourcing may need some hand-holding at first, so be prepared to give new accounts some extra time.
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MAKE SOMEONE HAPPY
“Our philosophy always has been to provide an unlimited number of services to a limited number of clients,” says Waller. Clients also are “less likely to shop on price if you can show them you’re providing value.”
Because payroll services can be an adjunct to other recurring CPA work, they can give a firm a high return on investment relative to the amount of time they take. Clients get the full service of the payroll-processing houses, with the convenience of having someone local do the job. “They are happy because if things go wrong, they can get a corrected or bonus check at a moment’s notice,” Waller says. “And we’re happy to keep dollars from walking out the door to other CPA firms.”
CASE “> CASE STUDY
A Payroll Services Retirement Fund
H orovitz, Rudoy & Roteman (HR&R) of Pittsburgh provides clients with complete payroll services through FlexPay, a separate subsidiary it founded in 1995. “We got into it at the urging of clients who wanted to shift the burden of a complex corporate chore to someone they trusted,” says managing partner Gordon Scherer, CPA. “Then we began to offer it to other clients who were frustrated with expensive and inflexible national payroll companies.” About 130 closely held businesses now use the payroll service, which is tailored to each client’s needs. They like its flexibility, and the firm says the increased contact with clients strengthens the firm.
Independence. HR&R follows AICPA and state society guidance with regard to independence and ethics issues and does not offer these services to entities for which it provides audit or review services.
Start-up. Initially, one partner was the champion; he got buy-in from the partner group. Now all partners market FlexPay. “We talk to clients who currently use a payroll service to find out how satisfied they are and what may be missing,” Scherer says. “Then we determine whether our firm is interested in filling the gap. Based on our service in other areas, many existing clients have an interest in our providing payroll services as long as we’re competitive on price.”
The firm expanded the responsibilities of its five-person IT staff to include payroll; it had the service running smoothly within three months. Start-up costs were about $10,000 for hardware and PayChoice software from Payroll Associates.
“Firms considering this absolutely need to identify and acquire quality software and establish a banking relationship for direct deposit,” Scherer says. In general, expect to pay $5,000 to $7,000 for software and computer equipment; what you pay for additional staff will depend on your firm’s available excess capacity.
Fees. HR&R charges a base processing fee, a per-check charge and other fees for requested services. There’s no extra charge for employee changes. Fees vary by company size: The per-check charge is about $4.00 per head for a business with five employees, and about $1.35 for one with 50 employees. “All fees are competitive with major payroll-service providers,” Scherer says.
Process. Clients submit their payroll information (staff hours and any personnel changes) via fax, e-mail or telephone each payroll period. HR&R enters the data and processes the payroll. It sends completed payroll and all relevant reports to the client, and if the client wishes, direct-deposits employees’ wages and the employer’s electronic federal tax payment system payments. The firm prepares all quarterly payroll tax returns and annual W-2 forms and makes all relevant transmittals.
Staying current. To keep up with the technology, supervisors attend the annual conference sponsored by the software vendor. HR&R stays on top of changes in applicable laws through the American Payroll Association (APA), which provides continuous updates. Software vendors and standard services the firm uses also provide updates on changes.
Firm benefits. “Payroll services enhance our clients’ confidence in the firm and provide synergies, such as facilitating 401(k) withholding and transmission to third-party administrators,” Scherer says. “Our clients trust HR&R to oversee their finances and payroll.”
In terms of practice management, Scherer says the unique thing about HR&R’s program is that profits are used to fund partner retirement. “Our senior partners own the payroll-service entity and apply the income it earns to their future unfunded retirement obligation,” he says. “We anticipate that prior to their date of retirement at least 50% of each partner’s obligation will be met by this technique.”
