As you deal with the current economic recession, running a payroll bureau might feel riskier and more complicated than your comfort level allows. You may even be wondering whether you want to continue on this professional path or consider selling your business to move ahead to other opportunities or perhaps even retirement.
Before you hang a ‘for sale’ sign on your payroll business, let’s explore three pain points challenging the industry this year. We’ll provide some thoughts about questions and business strategies you could consider in order to preserve your legacy.
We asked Summer Poletti, VP of Sales, Tax and Compliance, to share insights she’s gained in 20+ years in the payroll industry. Serving in many different operational and executive roles over the decades, Summer has seen it all in terms of economic cycles and their impact on payroll resellers.
Pain Point #1: Stock market sell-off impacted float revenue
In March, US stock markets suffered their worst month since the Great Depression. In short order, the Dow fell 23 percent and the S&P dropped 20 percent. The Federal Reserve responded to the unfolding economic crisis by lowering interest rates, and this automatically impacted the amount of revenue it’s possible to earn due to the float.
If your business impounds payroll taxes, you probably derived between one-quarter to one-half of your earnings from float in the past. When the Fed cuts rates, float revenue declines considerably. But you still have the same legal liability for any payroll tax funds that you hold on behalf of clients.
Although the IRS states maintains “the employer is ultimately responsible for the deposit and payment of federal tax liabilities,” the payroll reseller can also be held responsible for errors, even if they are honest and unintentional. If your clients had non-sufficient funds, or a lack of payroll tax reconciliation, or late payments and those things caused errors in your payroll processing, over time you could end up with tens or hundreds of thousands of dollars in liabilities. As for IRS penalties, honest mistakes have similar costs to intentional errors.
“I talked to a business owner who sold his payroll reseller bureau in 2011, after the last downturn, and he told me once the liability risk started outweighing the revenue rewards, that’s when it wasn’t worth it to him anymore. That’s a common concern during recessions,” acknowledges Poletti.
Your Question: Ok, it’s time to take a quick gut check: How risk averse have you become about your business and this industry? Test yourself on a scale of 1 to 10, then ask yourself if fear of risk is what’s driving you to consider selling the business.
The Pivot: When you’re earning less float but have the same amount of liability, it’s natural to start wondering ‘is this still worth it?’ If risk adversity is changing your equation, it might not be time to sell at all. Instead, examine alternative strategies and options for reducing your risk. How can you set up your business to better navigate this time while putting a cap on your risk?
Pain Point #2: Shutdown of the economy reduced number of payrolls processed
The COVID-19 economic shutdowns caused payrolls to lose tens of millions of employees collectively, as small business cash flow suffered and led to rapid layoffs, in hard hit industries such as restaurants, entertainment, hospitality, and transportation. As small business closures and layoffs increased, payroll processors faced declines in fee-based due to lower check counts.
COVID is an HR crisis for employers rather than a payroll crisis. As they’ve directed more attention to HR matters, clients have needed your help and guidance on payroll more than ever. The net result is your team is fielding more client questions than ever before, but overall revenues have declined.
“There’s revenue in retention. It’s much easier to keep a client satisfied than to hunt for a new one—especially in a tough economy that’s causing business closures. Payroll resellers should know how much it costs to acquire a new client versus retaining an existing one,” Poletti advises.
Your Question: Right now, you have a mismatch of manpower and resources against client needs and revenue. You could hire more employees to reduce the overload. Or you could allow another company to buy your payroll bureau for pennies on the dollar. But are those the only two choices?
The Pivot: Reduce the man hours needed to process payrolls so you can maintain focus on the service aspect of your business. Strong client relationships remain the key to future growth and revenue.
It’s time to research what it would cost to automate your business in ways that allow you to produce the same amount of work with fewer man hours. Why not find an expert to assist with getting more out of your resources and to take up some of the load? Software packages can automate much of your workload. When is the last time you evaluated what’s available in the marketplace?
Pain Point #3: Crisis response created new complexities in payroll tax management
The Federal government responded with trillions of dollars of relief measures to support the economy, including the CARES Act, FFCRA and the Paycheck Protection Program (PPP), designed to help businesses retain their employees.
But these provisions introduced significant new payroll and tax compliance responsibilities, including tracking and reporting requirements that will stretch out until at least 2022!
The FUTA credits given by the federal government to employers will get reduced as hard-hit states borrow money from the federal unemployment agency to cover the spike in unemployment claims in 2020. That will mean a fourth quarter determination and catch up tax due with the last payroll run of the year. But the economy was hit so hard this year, it is likely to take years to fully resolve FUTA credits.
“During past recessions, the IRS invested extra resources to enforce payroll tax compliance and collect penalties. Small and midsized businesses were scrutinized hardest and impacted the most in those stepped-up enforcement efforts,” recalls Poletti.
The bottom line is that payroll businesses will face significantly greater workloads and tax compliance challenges for the next two to five years. This increases the likelihood for making mistakes and errors which result in penalties.
Your Question: Ask yourself whether you have made any adjustments to the way you process payroll in the last several years. To move forward in the current economy, you probably can’t continue utilizing the same business model, tools, and processes.
The Pivot: Do you have the time and energy to make the necessary adjustments to your business in order to guarantee compliance while redu
cing your liability? If your answer is no, it may be time to get creative with your business model. Fortunately, you don’t have to figure it out alone. Seek out experts and resources to get ideas and guidance. You’ll easily find a PLETHORA of free resources such as webinars and eBooks online.
Here are a few resources we recommend to get your research started:
COVID-19 webinar series by MyHRConcierge
COVID-19 Crisis Response Center by ThinkHR
If you sell, your clients will experience the ultimate pain
Your clients depend on you to keep their businesses running smoothly and maintain their compliance in the complicated process of payroll processing and payroll tax management. You’ve built a reputation through hard work and stepping up to provide additional services your clients needed. This is the true hour of need for your loyal clients—can you stomach selling them to a big business with impersonal customer service and no one to advise them?
To borrow an analogy from Little Orphan Annie, will you be the service provider that leaves your clients to a Hard Knock Life with the uncaring Miss Hannigan? Or the trusted advisor who steps up and saves the day like Daddy Warbucks? Like every other business cycle, the sun will come out tomorrow. You can bet your bottom dollar on it!
Optimize your payroll business to weather the storm
What you’re going through now is normal, and maybe more common than you think. There’s no question it’s been a rough year, but there is every reason for optimism. As the unemployment rate falls and workers get rehired back by employers, the total employees on payroll will increase. Every change you can make now to increase efficiency and reduce risk in your payroll business will enable you to grow faster as the economy comes back.
In spite of the current conditions, hanging a ‘for sale’ sign is definitely NOT your only option. We’ve seen this type of economic situation before, and we know from experience it will get better. We’d like to be a partner to help you get through this challenging time. We may know of some ways to help—and we’re not just talking about Payroll Tax Management software and comprehensive services for payroll resellers. Now that PTM is part of Asure Software, we have access to even more resources and partners who can help you. Our payroll compliance experts have worked with businesses like yours in similar situations. If, after thinking through some of the questions and solutions presented here, you would like to know more, give us a call. Let’s talk through it.