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Wednesday, April 19, 2017

Outsourcing: Differences in Extent and Method


Most businesses outsource to one extent or another. You hire a bookkeeping service rather than hiring an in-house bookkeeping staff. You hire a general corporate law firm instead of having a lawyer on staff. Some go as far as outsourcing core functions (e.g., a real estate developer who subcontracts all construction)

Which functions you outsource depend upon your skill sets and the cost of outsourcing versus hiring employees. Suppose your main interest is in staying away from the complexities of having employees. Among other things, those complexities include:
  • Payroll, payroll taxes, W-2s, etc.
  • Health insurance
  • Retirement plan
  • Workers Compensation
You may be able to offload some or all the above list to another firm. Many small-to-medium-sized employers use an outside payroll service. This service relieves the employer of the tasks surrounding payroll but not the responsibility for those tasks. A further step would be to hire a Professional Employer Organization (PEO) to nominally be the employer (for payroll tax purposes) for employees on your worksite. Even though the PEO uses its employer identification number for filing payroll tax returns and W-2s, you are probably ultimately still responsible because you will be the common-law employer of your worksite employees. The main difference between hiring a payroll provider and hiring a PEO is that it may be simpler to obtain health insurance and a retirement plan. However, there is a trade-off: The simplicity for retirement plans and health insurance means your choice of plan designs are limited to what the PEO has established.

An important item to note about PEOs (other than the extra layer of cost) is they are not able to relieve employers of the ultimate responsibility for payroll tax reporting and tax payments. Pursuant to a change in law in late 2014, the IRS has opened a program that may offer a better option.

For more information about outsourcing, or for general inquiries about compensation and benefits planning, contact your local Armanino expert.

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