Year End Payroll Planning Tip #2: Options For Processing Payroll

There are many ways to process payroll, from doing it yourself at the one extreme, to utilizing a PEO at the other.

Here are some pros and cons of each option:

     Options For Processing payroll

Now that your company is ready to start paying either yourself or an employee(s), you have many responsibilities with which to comply.    A great summary document from the IRS about payroll responsibilities is Circular E, also known as Publication 15: Employers Tax Guide.

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.

Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

In addition to withholding taxes and paying them, you must also remit appropriate tax forms at the required frequencies.

Here are the primary options at your disposal to get this done.  Each one has unique benefits and risks. 


This option may be the most cost efficient in hard dollar costs.  Doing it yourself requires you to typically purchase, license or subscribe to some type of program to calculate the gross-to-net amounts and calculate the taxes owed.

You could do it by hand by getting tax tables and figuring out what amount to deduct for FICA (which is the combination of Medicare and Social Security taxes).  You then have to go to the federal (EFTPS) web site to make your tax and unemployment payments.  Then you have to go to your states tax and unemployment sites, to make those payments.

Along with many of these payments are also federal and state tax forms which need to be filed at specific intervals along with the payments made.

You then would have to create the W-2’s for each person paid each year.

This option is the most labor intensive for the business.


Generally, with an outsourced payroll company, such as ConnectPay, you simply report hours for each employee, and occasional other required information, and they then: pay your employees; pay all appropriate taxes on your behalf; file all required tax forms; create and mails W-2’s; assists in tax problem resolution when necessary.

This is a very time efficient option and modest in the price point.


Many accountants and bookkeepers still do payroll for some of their clients.  If you have an accountant or bookkeeper who does payroll processing, they are a good option to do payroll for you.  They already know a lot about your business and can perform all of the functions needed to properly process payroll.  Due to the complexities and amount of time it takes do it properly, most accountants and/or bookkeepers no longer do payroll.

This is a very time efficient option and modest in the price point.

 Professional Employer Organization (PEO)

A PEO is typically defined as an organization that provides an integrated approach to the management and administration of the human resources and employer risk of its clients by contractually assuming substantial employer responsibilities and risk, through the establishment and maintenance of a co-employer relationship with the client’s employees.

This is the least time intensive option for the business and will likely result in the highest direct costs.

Additional Resources:

IRS Publication 15, Circular E

Click to access p15.pdf

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