For a small business, payroll may seem like an onerous task, but it does not have to be that way. Small businesses have several options for handling payroll to make life easier for the small business.
The traditional method is to calculate your payroll and pay employees yourself. Payroll software makes this easier than ever before, but there's still significant time involved, not to mention cost and effort required for payroll tax reporting and deposits.
Using a payroll service relieves the business owner of the work involved. You still need to calculate regular and overtime hours by employee, but they do the rest. Payroll services charge you for their work, which can often be a small percentage of your payroll expense.
An increasingly popular option for many companies, large and small, is to outsource employees and lease them back. Technically, they're employees of another company, which is liable for their pay and all associated payroll taxes. You would still need to report their hours, but do not have to pay workers compensation insurance – because you do not have any employees. The convenience of this option also carries an additional cost too. The payroll leasing company needs to make some money, right? One major advantage to this option is that, if you want to offer full benefits to your employees the employment firm has a larger pool of employees and can get much better rates on health insurance and other benefits than you can.
Depending on the nature of your business, your employees might be able to qualify as independent subcontractors. The rules are rather stringent about this, however, so make sure they meet the tests for independent subs and not employees. Misclassifying W-2 employees as 1099 independent subcontractors can result in significant penalies later. While the small business may benefit very much from calling their employees independent subs (saving payroll taxes, workers compensation insurance, etc.), it requires your employees to pay self-employment tax, makes them ineligible for unemployment compensation, and has other consequences that are not in their favor. On the other hand, they are now small businesses themselves, and can deduct mileage and other expenses that they could not otherwise.