Episode #52 – A Guide to Changing Payroll Providers

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Changing payroll providers is a critical decision that can have a significant impact on your law firm's financial health and operations. Today, let’s talk about why you should switch, when you should switch, and why you should invest money to hire a professional to handle this switch for you.

Why Consider Switching Payroll Providers?

While the prospect of discussing payroll providers might not set your heart racing, it’s essential for law firm owners. Here’s why you should consider switching:

Cost Savings

• Evaluate Costs: Take a close look at your current payroll provider’s fees. Are they competitive? Are there hidden charges? Consider exploring other providers to find cost-effective alternatives.
• Negotiate: If you’re unhappy with your current provider’s pricing, consider negotiating. Sometimes, they might be willing to adjust their rates to retain your business.
• Remember Hidden Costs: Beyond the basic fees, consider the costs associated with errors, late filings, or inefficient processes. These can add up over time.

Improved Services

• Assess Features: Does your current provider offer all the features you need? Look for services that align with your firm’s requirements. For example:
• Direct Deposit: Ensure your new provider supports direct deposit for employee payments.
• Online Employee Portal: Allow your employees 24/7 online access to their paystubs through a secure portal. If the portal provides self-service features to employees too, such as updating tax withholdings and retirement account contributions, it would be even better.
• Tax Compliance: Verify that the new provider’s service includes automatic electronic filing of all payroll-related returns. Some lower priced providers only include the processing of each payroll and direct deposit to employees. Payroll returns may or may not be included.
• Reporting: Look for robust reporting capabilities to track payroll expenses and compliance. Know whether you will have an online dashboard that gives you a current status of your payroll responsibilities or will you receive emailed alerts with status updates. Be aware of where to monitor for your firm’s compliance status.
• User Experience: A clunky interface can slow down your payroll processes. Seek user-friendly software that streamlines tasks.

Fewer Errors

• Fresh Start: Transitioning to a new provider allows you to start with a clean slate. Old errors won’t carry over.
• Accuracy Matters: Payroll errors can lead to legal issues, unhappy employees, and financial losses. Choose a provider that emphasizes accuracy.

Optimal Timing for Transition

Choosing the right time to switch is crucial. Making the switch at the wrong time of year creates a greater potential for errors. Errors that will come back to bite you in the future.

Consider these optimal periods:

Year-End Transition

• Natural Break: Year-end aligns with all payroll filing deadlines. It’s when you close your payroll for one year and prepare for the new year.
• Reconciliation: Transitioning at year-end simplifies reconciling financial records. You can ensure accuracy in your financial statements.
• Tax Reporting: It’s easier to handle tax reporting when you switch at year-end.

Quarter-End Transition

• Smooth Transition: Similar to year-end, quarter-end provides a natural break. It minimizes disruptions to your payroll processes.
• Quarterly Reports: Transitioning here allows you to seamlessly generate quarterly reports for tax purposes.
• Planning Ahead: You can plan for the upcoming quarter with your new provider’s features.

Outside of these timeframes, the transition to a new provider will be very tedious with a significant volume of data to transfer that many times is transferred manually.

The Expert Advantage

While handling the transition internally might seem cost-effective, hiring an expert pays off in the long run:

Navigating Complexity

• Accuracy Matters: A transition to a new payroll system includes the migration of all data on an employee-by-employee basis. This includes data such as names, addresses, tax withholdings, deductions for elected benefits, pay rates, social security numbers, and more. Add to these details of wages paid and all withholdings per employee paid year-to-date. If you make the transition at a quarter-end, most payroll services will only require this data by employee per quarter. At year-end, this data will not be needed since all employees start January 1st at $0. But, if you move during any other point of the year, the new payroll provider will require all data per paycheck in the current year to date by employee be entered so all payroll returns for the current year will be reported correctly.
• Legal Requirements: Payroll involves legal intricacies—tax laws, labor regulations, and compliance requirements. These vary by jurisdiction.
• Expertise: A knowledgeable expert understands these nuances. They ensure your payroll processes adhere to legal standards.
• Risk Mitigation: Avoid costly mistakes by relying on someone who knows the rules.

Consequences of Mishandling the Transition

Avoid these pitfalls by ensuring a smooth transition:

Financial Impact

• Late Payments: Incorrectly transferring payroll data can lead to delayed payments. Employees rely on timely salaries.
• Tax Filing Errors: Mistakes in tax filings result in penalties. These can be substantial and in my 20 years of experience with this, the payroll providers never accept any responsibility for these errors placing the full financial impact on you.
• Legal Liabilities: Mishandling payroll can lead to legal trouble. Protect your firm’s reputation and finances.

Reputation Damage

• Employee Morale: Late payments or inaccuracies can demoralize your team.
•  Inaccurate W2s: Over and over I have seen the following two scenarios with a poorly managed payroll transition.
• Over Reported Wages: This is when BOTH payroll providers, old and new, file W2s for employees based on the information they have. This results in employees receiving 2 W2s that when added together on their Form 1040 will report more wages that they actually were paid. The consequences are additional tax will be owed, they may be pushed to a higher tax-bracket, and possible deductions may be phased-out at the higher income. All of this is wrong based on an incorrect, overstated income for the year.
• Under Reported Wages: Not to be left out, is the possibility that if the year-to-date wage information from the old provider is not reported to the new provider and the old provider does not file W2s, employees will not have accurate W2s reporting their correct full year of wages. This may create a situation where a lower than true wages create tax credits on their Form 1040 that they are not eligible for.
• Inaccurate Year-End Payroll Returns: Both of these situations create havoc and undue stress for the employees at tax time as I just described, but don’t think the firm escapes any issues! The payroll agencies you report to, meaning the IRS and state and local agencies, will take the quarterly returns the firm filed during the year and compare the total of those quarterly returns to the annual return filed. For example, at the IRS, they will take the quarterly 941s, add up the gross wages for the 4 quarters and compare the answer to the gross wages reported on both the Form W3 which is the total of all W2s issued and the 940. If there are any discrepancies, the firm will receive a notice of the error and instructions to correct the issue. This will take time to research and prepare amended returns.  I guarantee it will be frustrating to resolve.

Investing in a Smooth Transition

Here’s how to make the transition seamless:

Expert Assistance

• Consult Professionals: Invest in expert guidance. They’ll navigate the complexities and ensure compliance.
• Peace of Mind: Knowing you’re in capable hands allows you to focus on your core business.

Accuracy First

• Data Migration: Ensure accurate data transfer. Double-check employee details, tax information, and historical records.
• Testing: Test the new system thoroughly before going live.

Growth Focus

• Strategic Move: View this transition as an opportunity. It’s not just about switching software; it’s about optimizing your firm’s operations.
• Confidence: A smooth transition sets the stage for growth. You can focus on serving clients and expanding your practice.

Changing payroll providers isn’t just about switching software—it’s a critical decision that impacts your firm’s financial health. Choose the right timing, seek expert help, and prioritize accuracy. With these steps, you’ll maximize benefits and minimize disruptions.

If you have any questions about today’s episode, feel free to comment if you are watching on YouTube or send me an email to [email protected].

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And before I go – remember - profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year!

Thanks, and have an amazing day!

Today we will talk about the crucial aspects of changing payroll providers, focusing on the reasons for switching, optimal timing, and the importance of hiring a professional for a smooth transition. 

We’ll discuss evaluating costs, negotiating fees, considering improved services and fewer errors, and the benefits of a user-friendly interface. Hear advice on the best times to switch providers to minimize disruptions. 

And we’ll also address the potential financial and legal consequences of mishandling the transition, including issues with tax filings and employee trust. 

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