Hi,
Have you ever wonder how payroll service providers make their money? The truth is they don’t make money charging you the service fees, the revenue is generated when you process a payroll and make the tax payments through their service. Whenever you make a tax payment, the payroll service provider will keep those funds in their account until the actual due date. They get the interest from their bank using other people’s money (OPM) and it’s a common approach in this industry. Some of these taxes such as the Social Security (FICA) and Medicare are not due until the 15th of the following month if you’re a monthly depositor. Other taxes such as State Unemployment Insurance (SUI) are not even due until one month after the quarter ends, so the payroll service provider would have your funds in their bank account for a month to several months before they actually pay it to the appropriate federal or state agency.
I guess this method is great if you want the payroll service provider to pay your taxes on time and as long as you paid it, it’s a done deal. The truth is most of you are probably small business owners and need the extra cash flow to keep your business running. If you are like me and would like to keep all your cash until the due date; my suggestion is to find a service provider that will not debit your taxes until the actual day or couple of days before. I’m pretty sure you can use that extra hundred or thousand dollars for other bills.
February 20, 2009 at 5:15 pm
This is a great idea to follow not only to assure that the payroll service provider pays your taxes on time but you have to look at all the other aspects of the payroll service. (Your 10 things you need to know before switching payroll services is a great tool). The employer would need to decide if it’s worth using a payroll provider with no live customer service at the cost of not getting tax money debited until the due date. Also, the employer needs to make sure the total amount due is in bank account at the time of due date.
May 30, 2009 at 4:49 pm
I think this is pretty dangerous advice for small business owners. If you are so tight on cash flow that you need to keep payroll taxes for an extra 15 days, then are you really going to have the funds in your bank account to pay the taxes when they are due? I’d worry about not meeting your obligations to various state & local agencies. And how much time are you spending managing that cash flow to ensure that the correct amount of funds are available monthly or quarterly as needed? Finally, the penalties for not making required remittances would probably far exceed the tiny amount of interest (if your bank account even earns interest which is unlikely) that you’ll get from keeping the cash.
June 22, 2009 at 3:25 pm
Depending on the business you are in and the person in charge of processing payroll, this just an advice on how to handle cashflow within your company. If your company wants to pay the taxes 3 months or sometimes one year in advance, it’s in your discretion. Thanks for commenting.