Independent Contractors-How do you handle payroll

[Hawkeye225]

Part of my work is S corp IC and I use a payroll company.  However, they have made so many mistakes that I'm thinking of doing it myself or switching companies.

How do you handle all of the reporting yourself and keep it straight?  W2 wages, FICA, Medicare, state, local, workman's comp, 401k, health insurance, etc.?  Seems like that would take a huge amount of time.

There is a case to be made to not work as an S corp but wouldn't the reporting have to be the same?

[jfoxcpacfp]

Hawkeye225 wrote:

Part of my work is S corp IC and I use a payroll company.  However, they have made so many mistakes that I’m thinking of doing it myself or switching companies.

How do you handle all of the reporting yourself and keep it straight?  W2 wages, FICA, Medicare, state, local, workman’s comp, 401k, health insurance, etc.?  Seems like that would take a huge amount of time.

There is a case to be made to not work as an S corp but wouldn’t the reporting have to be the same?

Click to expand...

I'll start from the end:

• No, the reporting would not have to be the same. I've actually just written a blog post about this topic that is coming out with my newsletter on Wednesday. Watch for the link when it posts - I'll notify via WCI forum. With an S-corp, you must file a separate corporate income tax return (cost of about $1,500 - $2,500) and pay yourself via payroll. If you already have other employees, this reason is a non-issue but if you are the only employee, then you have the extra complications and cost of payroll report filing, withholding, W2s, etc.


• Many CPA firms provide payroll services. We do, and I'm sure you won't have any trouble finding one. Have you asked your CPA?


• Payroll service firms tend to make more mistakes with more complication. One year, we decided to outsource our clients' payroll and just pass the savings along to them. It was one of the national firms, but they made mistakes, too, and we quickly brought the business back in-house.


• It is complicated and takes time, you're right. A late state return or 941 deposit can easily cost penalties that would equal a year of payroll service. Unless you are an ardent DIY-er, I suggest leaving this to the experts.

Good luck finding a better solution.

 

 

[Hawkeye225]

Looking forward to the article Johanna and thx for the reply.  Maybe I'm getting close to IC work in a few months and will put an end to this all.

[spiritrider]

The key thing that many payroll service companies seem to screw up for S-Corp owners are health insurance and HSA contributions.

Some have finally after decades managed to get the W-2 correct for health insurance, but many still can't seem to get HSA contributions correct.

Many S-Corp owners and CPAs using offending companies simply use them for payroll services and do the W-2 forms themselves.

[DMFA]

I beg your pardon, and I do not mean to be condescending in the least, but may I ask why it's so difficult? How could a tax code be so complicated so as to have tax professionals with experience in it screw up so often? Or is it just a ridiculously written tax code?

[spiritrider]

The problem with S-Corp health insurance/HSA contributions is that the W-2 reporting is different for > 2% shareholder-employees than it is for ordinary employees. It is not extra-ordinarily complex, just different. The payroll companies just haven't made the effort to support this seemlessly, because it is not their bread and butter.

Proper timing for tax withholding, FICA withholding, etc... can be confusing. I remember many years ago there was an effort in Congress to streamline and simplify the process to reduce the amount of penalties small businesses paid. Then the CBO "scored" the fix. It turns out that the government gets significant revenue from penalties. So no fixes at that time. I don't know if this is still true.