Let’s review some quick history…
In the good ole days (1980-1995), companies hired an IT staff, bought computers, built a data center and hired programmers to write the code to process data in to information (remember VMS, Cobol, fortran, etc?).

Later (1995-2010) the industry evolved to the use of purchased software applications. Rather than building the software themselves companies purchased and configured the software, yet it ran on the company’s own dedicated computer hardware. Think software like Oracle Financials, SAP CRM, etc. For smaller businesses the use of dBase III, Lotus 123 transitioned to software like MS Access, Intuit- Quickbooks and Microsoft Exchange. That transition removed lots of the overhead costs associated with technical staffing and software maintenance.

Next (2010-now), came the transition to internet based “hosted” solutions. Now, companies no longer need to maintain their own data centers or hire staff to handle it. All you need is an internet connection, some software configuration and you are ready to go. This has been an efficiency boon to business large and small across the world. No data center to maintain and not so much worry about data security and backups. The data is now somewhere in the “cloud”. But now the question becomes… who can use that data and for what purposes?

Consumer Data Analytics – That’s Done

In the consumer space, anyone with half a brain knows that the reason Google and Facebook are worth billions is because they have provided irresistible tools that suck up personal data like a vacuum. That data is a virtual gold mine of information to marketers, company strategists, political operatives, government, police, etc. They day is coming when they will hand out phones for free (Obamaphones!), because the revenue to be gained from data collection makes it worth it. Heck they may even pay you to carry one. Most people have decided the value and convenience of those tools outweighs their discomfort about the privacy intrusion.

Business Data Analytics – That’s Coming

But what about a company’s proprietary data? Vendors of cloud based business software solutions have recognized that they have a commitment to their customer’s data privacy and security. Those customer concerns have been recognized and cloud vendors have worked hard to use encryption and other techniques to ensure that their client’s data is not stolen or tampered with. Okay so far, but the big question no one is asking is…. What rights do the cloud vendors themselves have to use your company and HR based employee data? Here is where the cloud solution vendors get very quiet. Think about the insights possible by aggregating thousands of company’s business data and the value of that information.

The Value of Aggregated HR/Payroll Information

For example, let’s just pick ADP and or Paychex. They process payroll for thousands of small businesses. They have very current information on payroll values, average wages, location of workers, etc. The ADP employment report is a widely recognized tool that Wall Street and economics analysts use to get an early indicator for the next move of the economy. That information is published by ADP and the public only perceives it as aggregated “national” information. But there is a whole lot more detailed information they actually have available. In fact it may be that a third party information aggregator has struck deals to get information from all the biggest payroll service providers and would be the ultimate information seller.

How is Payroll Data Valuable?

So now, say you are a national restaurant chain and are trying to identify the best location for your next restaurant. It would be insightful to identify the top zip codes for average wage and average wage growth. A location where wages are growing would be a preferred area to place a new store and the converse would be true as well. Areas with a shrinking wage base might be location to target for closure. Or say you are a national health care provider. Payroll providers know who makes payroll deductions for health insurance, for how much and how that is trending… all by location. For a health care provider, that information would be very valuable for deciding new markets to enter and ones to avoid. Payroll information has a lot of value.

Competitive Intelligence Value

Even more valuable is gross wage information for a company. Gross wage information for a company is a solid indicator of the trending health of a company. Growing company wages indicate a marketplace opportunity and conversely stagnant or shrinking wages indicate a business opportunity to avoid. To a potential new entrant to a market, that is valuable information. So the real question is, has your company’s payroll information (and trending) been sold to another party that one day becomes a market competitor? Things that make you go, hummm. Our discussion so far has only explored the data ownership situation for payroll data. Similar or even more serious concerns may exist in other functional areas that have “cloud” based services. For example company financial accounting software (Oracle, Intuit) or legal software (Legalzoom) or sales force management software (Salesforce.com). What rights do the cloud providers have to use that company proprietary data and how? I have not reviewed their service agreements but I bet it is a question they would prefer you didn’t ask.

Do You Even Care?

You may say that it doesn’t matter to you what they do with your company’s information. You might think… “If they can make money off of it, so be it”. Maybe one day the value of the provided business information will be enough to make it so that payroll services will be available for “free”, just like Facebook is for consumers. But, unlike the consumer space, business is war. It only makes sense to make sure those “free” cloud service aren’t actually a Trojan horse.

What about company data that contains employee’s personal information?

This is a sticky one. It is one thing when an individual elects to voluntarily turn over their personal data in exchange for the convenience provided by “free” tools like Facebook. It is a different situation when an individual’s personal data is entered in to a Human Resources information system used by their employer. That is not voluntary and the individual has no control over that data or where it goes. As a business owner, charged with safeguarding your employee’s information, you have a responsibility to ensure that the vendors you select to use that information are not putting your workers at risk for identity theft.

Getting things in Writing

Any time your company makes the decision to outsource your payroll or other information systems processing or IT infrastructure you are exposing yourself to the risk that the vendor you selected uses your company’s information in ways that you may not have intended. If your company uses a PEO or is considering joining one, you need to ask them to provide agreement language that spells out what the terms are for the use of your company’s proprietary information. Things to consider may include:

• Who are all the named parties that will have access to your company’s information?
• What rights and prohibitions does the vendor (and their vendors) have with your company information?
• What is the outsourcing vendor’s liability in the event of a data breach or hacking incident?

This is by no means an exhaustive list of concerns to address, but should provide a starting point for a conversation with current or potential outsourcing vendors. Welcome to the cloud computing era.

image courtesy of Ervins Strauhmanis at Flickr.

I did some searching and found that Sams’ Club has partnered with a San Antonio Texas company called Execupay to offer club members access to the payroll software at a “discounted price”. At the Execupay website a PR article notes that they are pursuing banks to offer private labeling of their software to make more money for the banks…” “Financial institutions that offer payroll in an integrated model to their clients receive not only a substantial residual revenue stream, but also have the means to improve customer retention”. So much for the “discounted price” but hey everyone is entitled to make a profit, that’s okay.

Payroll Software or Payroll Service?

Execupay may actually offer some great software. I managed financial systems and wrote payroll software for the Boeing Company. I managed the software implementation of the Oracle HRIS system for the nation’s largest Professional Employer Organization (at that time, over 120,000 employees). I understand how challenging coding, maintaining and operating payroll software can be. No matter how elegant and comprehensive the software may be, ultimately there is still a lot of work involved to establish, configure and run the payroll processes…. a lot of work. There are lots of things that happen in the real world of payroll that they don’t tell you about in the sales brochures.

• Are all your tax withholding accounts established amounts calculated correctly and deposited with government on time?
• How will you handle workers compensation insurance, premium remittance and work comp claims?
• What about overtime and DOL compliance…. Better know the rules there
• Got I9 forms for all your hires? W4s? W2s at the end of the year?
• Got your 941s ready for the quarter?
• What about minimum wage, tipped tax credits, paid leave laws (vary by states)

Check this out for more about what you need to consider

But wait there’s more!

• What about inadvertent overpays or underpays?
• What happens when an employee withholding gets jacked up next period because you underpayed last period?
• What about pretax treatment for health insurance premiums or 410Ks. How are those handled?
• What happens if you get a wage garnishment IRS levy or child support order for one your employees? What is the max amount you can take out their check and where to you remit the monies?

Truly this list goes on and on…. And the reality is that while a slick software package may handle all these real world circumstances, there is only person that has to figure it all out, make sure it happens on time, every time and will be responsible when mistakes are made: You. If you think that Sam’s club will be manning a help desk to assist with your payroll problems you may want to check out some customer comments on how they are doing with their regular retail business.

Focusing on your Core Business

For business owners who have lots of free time on their hands (or have staff members with nothing to do) learning and maintaining their own payroll system might seem like a way to save some money. Unfortunately there is a lot more to it than appears on the surface and by the time you find out you have gotten in over your head, it can be painful to repair the problems. There is a reason business owners use a payroll service rather than just get some software from Sam’s Club. Payroll software is just a tool, like a set of socket wrenches. If you have the time and are competent mechanic, you could change the engine in your own car. But hey, if you insist on doing everything yourself, you might even consider performing your own appendectomy.

Here is the user’s guide for the PlatinumPay Payroll Software. Take a look at what you are getting into if you decide to do it yourself and take on your company’s payroll.

Payroll Software, Payroll Service or Professional Employer Organization?

PEOs offer a full payroll service as part of their comprehensive suite of workers compensation insurance and Human Resources services. While a payroll services like ADP or Paychex offer more than just access to a payroll software package, even they are recognizing the demand from business owners for a more comprehensive suite of services. Hiring a PEO will cost more than simple payroll services from Sam’s Club but for most business owners, it is money well spent. Let StaffMarket help you find the best PEO for your company.

Employee FICA Tax Reverts to 6.2% starting January 1, 2013

After two years (2011 and 2012) of being reduced from 6.2% to 4.2%, the employee FICA payroll tax on employment wages is set to revert back to 6.2% effective the start of 2013. The current maximum wage base for the calculation is 110,100 for 2012 and is set to rise to 113,700 for 2013.

According to the Wall Street Journal, there does not appear to be any political motivation from either the Republicans or Democrats to extend the FICA reductions in to 2013 so right now it appears that the tax will revert back on January 1, 2013. It is estimated that the reduction has cost the US government $120 billion per year for the last two years and the reduction saves the average family $933 each year.

As of today, with two presidential debates completed and tax policy being a major discussion items between the candidates there has been no mention of this tax increase that will impact all working Americans very shortly. For the average working American earning $50,000 per year this is will mean an additional $1,000 per year tax hike just for social security taxes. The FICA matching tax amounts for employers will remain unchanged since it was never part of the temporary tax cut.

Payroll Taxes Reductions for Employees Unlikely to be Extended

The Unstoppable Rise of the FICA Wage Base

In the last 20 years, the portion of earnings subject to FICA taxes has risen by almost double. Social Security wage base increases are based on a complicated formula that is supposed to index the tax base for wage inflation. Review the
Social Security tax wage base increase history here.

But, just in the last two years the wage amount subject to tax has increased 6.5%. This at the same time that the average working American is earning 1.5% less in 2011 than the prior year and was the second year of median wage shrinkage.

FICA Taxes Paid by Employers Not Available for Employees
Many working people have no idea that their employers are obligated to pay the same FICA tax amount that the employee has withheld (and paid) on each paycheck. Dollar for dollar, the employer must pay a matching amount also. (Except in 2011 and 2012 when the employer paid 48% more than the employee!) So here we have a major cost to employers for every dollar the pay to every employee. Yet many people fail to see the correlation between tax burdens on employers and the wariness of employers to hire addition people or to pay existing people higher wages. In a real sense, money for FICA taxes paid by employers is money that could have been paid to the employee. The FICA tax to employees is actually double the amount shown on their check since the employer had to pay that money to the government instead.

To estimate your costs for the employee and employer obligations for Social Security taxes for 2013, try our Social Security Tax Withholding Calculator.

For an interesting dialog about this, click here and READ THE COMMENTS from Joe The Economist as he schools somebody about it.

Companies Don’t Pay Taxes – Consumers Do

You may find this idea shocking, but ask yourself if any company actually pays taxes. Evidence shows that any time a company must pay higher taxes, it simply raises it prices to cover the obligation. If all businesses in the same industry are taxed the same then their marketplace competitiveness is not impacted (due to increased cost versus their competitors) and they are free to raise the price of their product to cover the tax increase. So at the end of the day, the consumers of those products pay more than necessary and the business being taxed has passed the increased costs to their customers. The cost of any tax increase is ultimately borne by the consumer and the public. The business being taxed is simply an additional tax collector for the government and every consumer is paying a hidden tax bill

A Letter to the editor of the High Point Enterprise (High Point, NC) written by Charles Baker pointed out:
“Taxes are a part of the cost of doing business and as such become a part of the price of products or services being produced. Paul Harvey said it best, “Only people pay taxes.” Charge Exxon a few million dollars in taxes and you simply raise the price of gas and the other products produced by Exxon. All taxes are paid by the final consumer. Politicians, media spokesmen and letter writers all hide this fact in rabble-rousing rhetoric. The pitiful part of the story is that the 45 percent of Americans who pay no direct taxes at all are being scammed by socialists and their spokesmen. They think they escape taxation. The person who actually pays the highest percentage of his or her income in taxes is the poorest among us. They have no product or service to sell except their personal labor and without the ability to pass their taxes to anyone else, they – along with all other consumers – pay everybody’s taxes.”

Only consumers pay taxes.

More is available from finweb.

PEO Clients – Telling Your Employees

PEO Clients should be ready to explain the tax increase to their co-employees that will be effective for the first payroll period in January 2013. Unless the employee got a raise, take home pay will be lower and employers will get the questions. Employers should be ready to explain the reason for the lower net check and be ready to duck.
A history of the rise in wage base for FICA payroll taxes