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Tax Filing Tips for Independent Contractors

Posted: 20 Feb 2020 07:30 AM PST

In recent years, the rise of the gig economy has given way to a growing number of independent contractors in the American workforce. As more people add side gigs to their main sources of income or seek to become their own bosses, they create a tax situation that requires more consideration than filing a simple tax return.

As the federal deadline to file taxes with the Internal Revenue Service on April 15 draws closer, it's paramount that you properly report your earnings as an independent contractor. Failing to do so could bring serious repercussions to your personal and professional life that could take months or years to dig out of.

To help you avoid the pitfalls that lead to problems with the IRS, we've created a primer to help you properly handle your small business taxes as an independent contractor. By the end of this guide, you will hopefully be armed with the knowledge needed to navigate this year's tax season.

According to the IRS, an independent contractor is a self-employed individual. Generally, people who work in an independent trade or business, such as doctors, lawyers, accountants and subcontractors fall under this category since they "offer their services to the general public." Whether that basic rule of thumb applies varies on a case-by-case basis.

The general litmus test that can be applied to whether or not your profession falls under the government's definition of an independent contractor is whether or not "the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." If that's the case, the person doing the work is an independent contractor and required to pay self-employment tax.

How to determine if you're an independent contractor

If you're still unsure whether you're an independent contractor or not, the IRS says there are a handful of questions you can ask yourself to determine your status.

  1. Does an outside company have any say over your work and how you conduct your business?
  2. Do you have a say in how you're compensated for your work and how your business expenses are reimbursed?
  3. Have you signed any contracts, or are you receiving any benefits such as healthcare or vacation time?
  4. Will your relationship with the payer continue, and is your work a key aspect of the payer's business?

Whether answering "yes" to any of those questions means you're an independent contractor relies on extenuating circumstances that may be unique to your position. According to the IRS, there is "no 'magic' or set number of factors that 'makes' the worker an employee or an independent contractor."

The key, the IRS says, is to "look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination."

For those still wrestling with whether they're an independent contractor or not, the IRS has a form you or your payer can fill out to have the IRS determine your status. Form SS-8 is available on the IRS' website, though the government agency estimates that it will take six months to get a determination. If you live in California, you may want to double-check your status as well, since the state legislature passed Assembly Bill 5 last year.

Handling your small business taxes as an independent contractor

If you fall under the independent contractor category, remember one thing: The IRS considers you a self-employed individual, and as such, you may be responsible for more federal taxes than if you were a normal employee receiving a W-2.

"As an independent contractor, you are treated the same as any other business where you have to pay the employer and employee share of federal payroll taxes," said Luke Sotir, a financial advisor at Equitable Advisors and founder of Highland Financial Group.

To do that, you'll need to file an annual return and pay estimated quarterly taxes. As a self-employed individual as defined by the IRS, you'll likely be responsible for paying the self-employment tax (SE tax) in addition to your income tax. The SE tax covers Social Security and Medicare costs at a current tax rate of 15.3%, with 12.4% going to the former and 2.9% going to the latter.

To determine whether you'll be on the hook for the SE tax or not, you must first determine your business's net earnings. You do that by subtracting your business's expenses from its income. If your net earnings as an independent contractor are $400 or more, you must file an income tax return. If your earnings are less than $400, you still have to file a return "if you meet any other filing requirement listed" on the Form 1040 and 1040-SR instruction sheet.

If you're operating at a net loss, you can usually deduct those losses from your gross income, though those business tax deductions are limited in some cases according to the IRS.

Regardless, you will have to pay the SE tax and your income tax directly to the IRS by filing an IRS Schedule C or C-EZ in addition to your tax return. When it comes time to pay your self-employed tax, you'll typically do so in quarterly estimated tax payments throughout the year. You may also receive a Form 1099-MISC from companies you've done business with.

"It's kind of like a mini-tax return that you would attach to your regular return because there's no other business entity," Sotir said. "It does make your tax return a little more involved because you basically have to demonstrate all of your income and all your expenses from that business in order to calculate the tax."

To report your Social Security and Medicare taxes, the IRS requires that you file a Schedule SE, which uses your income and loss figures found on the Schedule C form to calculate how much you owe for those taxes.

Thanks to the Tax Cut and Jobs Act, some new small business tax deductions have cropped up, while other tax cuts have seen changes. If you qualify for it, there's a pass-through deduction where you can deduct up to 20% of your "qualified business income." There are other business tax deductions for expenses like interest, rent, legal and professional fees, travel and meals, and the use of your home for business purposes. What you can deduct varies greatly based on their limitations and what you qualify for.

Tax deductions and expenses to keep up on

When preparing your tax return, consider which potential tax deductions and expenses you may want to include in your filing. Properly filing these deductions lowers your overall tax burden and saves you money in the long run.

If your work requires you to travel regularly, remember that many related expenses can be deducted. For example, if you drive a car to travel between work sites, you can deduct your mileage at a specific rate. Last year, the rate was 59 cents per mile, according to the IRS. Other deductible travel expenses include parking and tolls, as well as the cost of public transportation.

Outside of travel, independent contractors can deduct the following items:

  • Self-employment taxes
  • Health insurance taxes
  • Cell phone costs
  • Construction industry taxes and licenses
  • Meal and entertainment deductions, with some exceptions
  • Occupational operating expenses like web hosting fees and phone lines
  • Supplies and materials

What you can and cannot deduct depends on your individual business. Since that's the case, you may want to hire a tax professional to ensure you get the most out of your tax return.

Making quarterly payments

Unlike most small business owners and individuals who likely file their taxes once a year, self-employed individuals usually have to file their small business taxes on a quarterly basis, just as you would if your income came from a rental property, pass-through entity or sole proprietorship. Since there's no overarching employer to withhold your taxes for you, you're on your own in this regard.

"If all your income comes from your independent contracting, then it's kind of easy to figure out how your revenues are going to look like for the year and whatever deductions you have in order to figure out – roughly – what your federal and state income tax liability is," said Sotir. "That way, you can set aside money to pay for that and avoid dealing with a huge tax bill at the end of the year."

According to the IRS, you should plan to pay taxes on a quarterly basis if you expect you'll owe $1,000 or more in federal taxes when you file your return. Using Form 1040-ES, you can use the included worksheet to calculate what your estimated tax liability will be. How much you'll owe the federal government will depend on your anticipated gross income, taxable income, taxes, each deduction and tax credit for the year, according to Credit Karma.

If 2020 is the first tax year you'll be self-employed, you need to estimate your taxes based on your expected amount of income for the year. If you over- or underestimate that figure, you can use the 1040-ES form to recalculate your estimated taxes for the next quarter.

You can pay your quarterly payments on the IRS website, by phone or mail. The due dates for each quarterly payment this tax year are April 15, June 15, Sept. 15 and Jan. 15, 2021.

Best practices for independent contractor taxes

As you get your financial house in order as an independent contractor, there are general rules of thumb and best practices that you should consider. According to Sotir, one of the most overlooked things that can make your life easier when it comes to tax preparation is good record-keeping. If you properly document your business's earnings and losses, he says, you can more easily estimate your quarterly tax liability without having to second guess yourself.

"You have to substantiate all of your business expenses, and if you don't, you're going to have problems," he said. "It's not a requirement, but starting a secondary checking account for your business is a great way to track what's a business expense and what isn't."

Such an account can be created in the business's name or as a DBA. With proper record-keeping, it becomes much easier for independent contractors to handle their taxes on their own. "Just being organized is a good starting point with your business records," he said.

Tax management options for independent contractors

Depending on how comfortable you are with finances in general, filing your taxes through the use of online tax software can be reasonably done. That being said, there's no shame in getting help from a professional.

"Generally speaking, the IRS' publications and documents are written in a language that most people find confusing," Sotir said. "It doesn't mean you can't [file your own taxes], but the more involved it is, the more likely it is that you will do something wrong."

Something you should avoid at all costs, Sotir said, is waiting until the last minute to handle your tax requirements.

"If you handle your taxes over the course of the year, you will be able to do things at the end of the year, like taking advantage of deductions to mitigate income tax," he said.

One way some taxpayers mitigate their income tax requirements is by purchasing equipment at the end of the year. Since the equipment they'd purchase is likely to be written off, those spent funds can come out of your tax burden. And while that can be a legitimate way of lowering your tax requirement, it can also be a liability – especially if the equipment wasn't needed in the first place.

"Oftentimes, you see people lose their business at the end of the year because of tax season. They buy equipment to reduce their income tax, but maybe they didn't need all that equipment," he said. "You still spent the money. You may have saved 30 cents to the dollar in taxes ... but the other 70 cents are still gone. If you didn't really need that equipment, then the tax deductions may not have been worth it."

How to Start Budget Planning for Your Business

Posted: 20 Feb 2020 06:55 AM PST

  • Budget planning is simply the process of creating a plan to spend your money. It allows you to determine in advance whether you will have enough money to do the things you need or would like to do.
  • To create a budget, small business owners should look at revenue and expenses for the entire calendar and fiscal year. It's important to look at what you spent the previous year, and then project if you will spend the same, less or more in expenses.
  • Budgeting helps you save money for the long term and when your business needs it most. A budget calculator can teach you how to establish a budget, create a savings plan and pay down debt. 

Preparing for the future, especially from a financial standpoint, is critical for all businesses. That's why all businesses need to forecast their revenue and expenses to ensure they remain profitable. The best way for many small business owners to do this is through budget planning. 

With a monthly snapshot of your expected business expenses, you can manage your money and track your spending habits. This allows you to forecast for things like take-home pay, wages, bills, and payments for loans or other debts. It can even help you set up an emergency fund. 

By creating a workable budget, you can track cash on hand, expenses, and the revenue you need to keep your business growing (or at least going), according to Nick Kolbenschlag, managing partner and co-founder of Crown Wealth Group. 

"When you take the time to put the numbers to paper, you increase your chances of tracking them to ensure your business succeeds, helping you anticipate future needs, spending habits, profits and cash flow," Kolbenschlag told business.com. "Proper budgeting also allows you to identify problems before they become major issues, giving you the ability to course-correct in real time." 

Your budget process should include updating your expenses monthly, allowing you to verify regularly that your business is on target to maintain profitability. 

 

Editor's note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs. 

 

What is budget planning?

Budget planning is simply the process of creating a plan to spend your money. It allows you to determine in advance whether you will have enough money to do the things you need or would like to do. 

Budgeting helps you save money for the long term or when your business needs it most. If your accounting software doesn't have budgeting features, it's a great idea to use a budget calculator – a tool meant to help you establish a budget, create a savings plan and pay down debt. 

"Budget planning involves looking at external (economy, regulations and laws, etc.) and internal factors (staff, revenue, expenses, etc.) and then estimating needs, incorporating unexpected things, developing future goals, and looking at historical information and trends," said JeFreda Brown, CEO of Provision Financial Education. 

How do you create a budget for a business?

Budgets indicate how much money is spent toward things like payroll, advertising, supplies and other necessities. To create a budget for a business, small business owners should look at revenue and expenses for the entire calendar and fiscal year. It's important to look at what you spent the previous year, and then project if you will spend the same, less or more moving forward. 

In budget planning, the goal is to lay out all necessary components and brainstorm your goals, according to Shahid Hanif, founder of Shufti Pro. Hanif named some steps the budgeting process should include: 

  1. Examine your revenue. The first step in any budgeting process is to look backward at your existing business and find all your revenue (income) sources.

  2. Subtract fixed costs. The second step in creating a business budget is to add up all your fixed costs (like rent). 

  3. Determine variable costs. As you search for the data you need to list your fixed costs, you might notice some variable costs within your business as well, such as costs for labor or raw materials.

  4. Set aside a contingency fund for unexpected costs. Whether you've run a business before or not, we all know that these expenses don't come when it's convenient.

  5. Create your profit and loss statement. Once you've collected all the above information, it's time to put it all together to create your profit and loss statement, or P&L.

  6. Outline your forward-looking business budget. Whether you're a new business or you've been doing this a while, projecting what will happen to your business in the future is educated guesswork. 

It's best to categorize your budget by fixed expenses, variable expenses and non-necessities. Fixed expenses stay constant, regardless of the number of sales, according to Axel DeAngelis, founder of NameBounce. 

"Generally, fixed costs are contractual," DeAngelis said. "An example of a fixed cost is rent. Unless your business pays percentage rent based on sales, the rent is generally contractual, with fixed increases throughout the life of the lease." 

Variable expenses can include some bills or software, as business owners tend to have more control over these expenses and they fluctuate based on sales. DeAngelis gave sales team commissions as an example: If your business were to sell 10,000 products, you would pay your sales team more in commissions than if you sold 100 products. 

Non-necessities are expenses such as travel, entertainment or office perks like a flavored water cooler. This category usually does not include monthly expenses your business needs. 

What information do you need to create a budget for a business?

Budgeting for business should include any and everything you will spend money on during the fiscal year. Failure to use a budget for your business can be a missed opportunity to meet your financial goals. 

According to Ken "Mr. Biz" Wentworth, founder and "on-demand CFO" of Mr. Biz Solutions, it's crucial for business owners to analyze and include these four key pieces of information when creating a business budget: 

  1. Revenue: For revenue, you must first establish your annual goal, then use your historical actuals to determine how to accurately distribute your annual amount across the 12 months. 
  1. Cost of goods sold (COGS): Once you've established your monthly revenue budget, you use those numbers to drive your COGS budget. Again, use your recent historical percentages to determine each COGS line. You simply determine the average percentage for each line based on monthly revenue projections. 
  1. Overhead costs: For this step, review your most recent year and adjust as needed. For example, you can start with a baseline of last year's actuals. From there, adjust reflected activity for the budget year – eliminate nonrecurring expenses from the baseline year, make additions for known one-time expenses in the budget year, make reductions for known savings, etc. 
  1. Margin review: To ensure your new budget will help you accomplish your goals, you need to review your margins. Review your gross margin percentage and net margin percentage. What are your goals for those two measures? Whatever they are, you need to ensure the new budget you just created reflects those goals. For example, if you want to improve your gross margin from 52% to 55%, ensure your budget equates to a 55% gross margin. If not, tweak your COGS numbers to get there. This will set the budget baseline that you will use to measure your business's performance. 

What are the three basic budget categories?

A business budget should include all your business's current revenue and expenses. This budget should also include estimated or projected revenue and expenses. Brown listed three basic budget categories: 

  1. Operating budget: This is the annual budget that the company will follow to meet its financial goals. 
  1. Capital budget: This is a budget developed when the company plans to invest in fixed assets, like new machinery.  
  1. Cash budget: This is a budget developed to help company leaders estimate future cash needs and to plan for emergencies and future investment opportunities.  

How is planning different from budgeting?

Business planning and creating a budget for business are closely related but established with different goals in mind. Hanif says that planning is usually the first step in setting up a small business and continues to be used as a workflow progresses. 

"Planning could be something simple, like building your daily agenda, or long-range enough to envision where you want to see your business in five or 10 years, whereas budgeting determines how existing financial resources are allocated," he said. "Budgets are usually set by how previous money was spent and expected income." 

Preparing a budget can be a difficult task, but once you do it, you'll have a much better understanding of your business and be able to plan for the profitability you're looking for. If you stick to updating your monthly budget, your annual budget will become easier to create and more accurate. When you know where your company stands financially, you can make better decisions to help your business be profitable and successful.

PEO Software: How to Choose the Best One for Your Business

Posted: 20 Feb 2020 06:45 AM PST

  • Businesses that use PEOs grow faster, have lower turnover and are less likely to go out of business than those that don't, according to data from the National Association of Professional Employer Organizations.
  • Implementing a PEO's software allows you to dedicate your time to other areas of your business that need attention.
  • PEO software can become vulnerable to security breaches because it hosts your employees' data in one centralized location. 

From handling payroll and employee recruiting to managing paid time off and benefits, taking care of your company's human resources responsibilities can be a daunting and time-consuming task for small business owners. An increasing number of organizations are turning to professional employer organizations (PEOs) for help. 

Businesses that partner with PEOs are able to outsource payroll and all of their other HR tasks to a company that specializes in these undertakings. However, if you plan to outsource such critical responsibilities, it is important to find a PEO partner that can handle all of your needs. 

When you become a client of a PEO, many of these companies have software platforms through which you conduct many HR functions, such as tracking employee time, processing payroll, accessing healthcare benefits and more. 

As you consider whether you should hire a PEO,  though, it's crucial to distinguish the software a PEO offers from online HR management software. Some PEOs offer HR software online, while some HR software providers market their product as a PEO.

 

Editor's note: Looking for the right PEO for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs. 

 

How can PEO software help your business?

PEOs offer numerous services for businesses, such as recruiting, employee training, onboarding and offboarding, payroll, and health and welfare management. When choosing a PEO, it's important to understand your business's strengths, weaknesses and needs to identify the specific services (and software programs) that will best support your staff and workplace. 

PEO software solutions can simplify your business's HR tasks by providing a low-cost alternative to hiring an entire HR department. Additionally, PEO software doesn't take sick days, ask for vacation time, and your business isn't liable for the work that's performed. You simply tailor a software's services to match your business needs. 

The way a PEO works is that the PEO enters a co-employment agreement with your business and becomes an employer of your employees, according to Brian Cairns, CEO of ProStrategix Consulting. "As co-employer, they take over certain responsibilities from you," Cairns told business.com. "It varies depending on the agreement, but the most important distinction is that they pay your employees under their Employer Identification Number." 

This co-employer arrangement helps you save money on benefits. Because it represents many companies, the PEO can negotiate better rates and benefits for insurance and retirement plans than what your business could offer on its own. 

The National Association of Professional Employer Organizations (NAPEO) found that businesses in a PEO arrangement grow between 7% and 9% faster, have more than 10% lower turnover, and are 50% less likely to go out of business. With more than 900 PEOs in the U.S., this type of HR resource delivers services to roughly 175,000 small businesses, providing co-employment for more than 3 million people. 

What are some of the top PEOs?

Here are three of the best PEO service providers. 

ADP: Best PEO for customer service

ADP TotalSource can help your business with HR administration, talent management, employee benefits, payroll and regulatory compliance. As an IRS-certified PEO, ADP TotalSource meets the high standards set by the IRS and offers software which includes data-driven insights, according to Brian Michaud, senior vice president of ADP TotalSource. 

"Additionally, ADP TotalSource provides added support with HR specialists who provide customized HR strategies and programs for clients, as well as access to Fortune 500-caliber benefits," Michaud said. 

ADP TotalSource offers comprehensive 401(k) plans; employee wellness programs; and vison, dental, and health plans. TotalSource also offers regulatory compliance for all major safety, health and employment laws. ADP has a minimum payroll requirement which varies, depending on which state your business is incorporated in. (This requirement may be waived if your business employs a certain number of workers.) 

Insperity: Best PEO for small businesses

Even though Insperity works with businesses of all sizes, it's particularly well-suited for small businesses. Its offerings include onboarding resources, recruitment tools, standard benefits packages, time and attendance tracking, payroll processing, employee training, and risk management services. 

Insperity's pricing is based on a per-employee structure which allows you to predict costs as your business changes. This is ideal for small businesses looking to outsource HR and administrative tasks at an affordable rate. 

Paychex: Best PEO for midsize businesses

Paychex is a full-featured PEO service that's ideal for midsize businesses looking for larger-scale coverage. With extensive HR support, Paychex provides onboarding and recruiting resources, handbook and policy development, termination and dispute assistance, and employee screening and training. Paychex offers great health, retirement, vision and dental packages. 

Paychex's HR services are charged on a per-employee basis, which allows you to predict and budget for costs as your business grows. Also, instead of selling its services in preconfigured bundles, you can choose the specific services you need so you only pay for what you use. 

What are the pros and cons of PEO software?

Before you decide if working with a PEO is the right move for your business, it's important to consider the pros and cons. 

PEO pros

  • If you can't afford to hire a human resources department, a PEO can be a cost-effective way to outsource HR duties. Or, if you have an HR specialist or a small HR staff that needs additional support or resources, a PEO can provide what they need. 
  • A PEO can take on your HR and administrative tasks. There's little room for human error in HR, and the service assumes liability for any complications or issues that may arise. 
  • Implementing the PEO service's software allows you to dedicate your time to other areas of your business that need your attention in order for your business to grow. 

PEO cons

  • While using the PEO's software, your business risks losing its interpersonal management of employees. There's nothing more important than face-to-face interaction and communication. Software can't pick up on anything beyond logic and data. 
  • Your PEO's software solution hosts all your employee data in one centralized location and can be a gold mine of data for hackers. If the PEO's network is hacked, your business could face severe consequences. 

PEO software FAQs

Still unsure about how to choose the best PEO software? Here are some frequently asked questions about the processes and operations of a PEO. 

What are the best services offered by a PEO for a startup?

The best services offered by a PEO for startups include risk and compliance management, health, vision and dental benefits, comprehensive HR software tools, time and attendance tracking, and payroll support. 

At what point should a small business look for HR help?

A small business should look for HR help immediately. If your business already has a human resources specialist on staff, additional HR support could be beneficial. Alternatively, if your business has no HR team, using a PEO's software could be the definitive factor in your business's growth. 

What does it mean if a PEO is accredited?

You'll want to work with an accredited PEO because it indicates that the PEO is financially stable, ethical and meets regulatory requirements. This is important because it ensures that sensitive HR processes are handled correctly so you don't run afoul of the Department of Labor or the IRS. 

What other options do I have besides a PEO?

The alternative to using a PEO is to hire your own team in house to manage HR support and benefits. 

Why might a business not use a PEO?

Hiring a PEO may not be the right solution for some businesses. Here are three reasons why some businesses opt not to use PEO software: 

  1. Some business owners prefer not to give up control. As a small business owner, it can be difficult to hand over a significant set of responsibilities and tasks to an outside company. It may also be challenging to comply with some of the policies; PEOs have strict policies regarding hiring, training and disciplining that you must follow in order to protect yourself from liability. 
  1. PEO fees can be too expensive for small businesses. PEO software is ideal for startups and small businesses because it's less expensive than hiring HR staff. The average cost of a PEO is $1,000 per employee annually – but this may still be too expensive for small businesses with tight budgets. Also, as your business grows, the cost of maintaining employees can decrease while PEO fees remain the same. 
  1. It's not the right fit for your business. If a PEO does not understand and address the needs of your business, then your company might not function the way you want. There must be a direct line of communication with the PEO and a precise understanding of where you want your business to be within the next several years. This concern can be removed by choosing PEO software that allows for customization. 

What are the risks of using PEO software?

When you work with a PEO, you give it access to your business's sensitive financial and employee data, so it's important to thoroughly vet the company to ensure it's a legitimate company that operates ethically and complies with HR regulations. 

Checking to make sure it's accredited, checking with the Better Business Bureau to see what complaints companies have registered against it, reviewing legal liabilities and understanding your business's requirements within the co-employer agreement are a few ways to do this. 

Tax fraud

PEOs have been used to reduce workers' compensation fees to their business clients, costing legitimate employers, employees and healthcare providers millions per year. Some cases of PEO fraud that have involved filing taxes improperly, exaggerating workplace injuries and incorrectly classifying employees have raised concern about PEOs. 

One example of a PEO misusing services to commit tax fraud was the case of Larry W. Kimes, former manager of AccounTex Financial Services LLC, and Charles Pircher, a manager of multiple PEOs based in San Antonio, Texas. Kimes and Pircher were each sentenced to more than 10 years in federal prison and ordered to pay $132 million in restitution for stealing client money instead of using it to pay payroll taxes and insurance premiums. 

Misclassification audit

As the PEO's co-employment partner, you share responsibility in ensuring that your business operates within the laws of its respective state. One common error is worker misclassification. Here are three steps you can take to avoid this error.

  1.  Verify each employee's classification. To avoid being audited for employee misclassification, understand the legal distinction between employees and independent contractors. This includes reviewing all federal, state and local classification laws. 

  2. Provide appropriate treatment. It's important to not treat contractors like employees. While the services of an independent contractor may be great and you may work with them on a regular basis, it's recommended that you establish an independent contractor engagement program.

  3. Enforce employer tax obligations. Tax evasion may occur when workers are misclassified. Employers pay taxes on employees, not independent contractors. If a worker is an independent contractor, they are responsible for paying their own self-employment and income taxes. 

Security breaches

The largest risk of using a PEO is that you are entrusting your employees' private information to another company, according to Will Ellis, IT security consultant and founder of Privacy Australia. Before you choose a PEO, ask the company how it protects clients' data. 

"Ensuring that a private network is used rather than a public network, and inquiring about encryption are two important things to consider so that you can further increase security and privacy for your employees," Ellis said. "Security of your data and employees' information should always be a priority." 

Co-employment payroll

Co-employment agreements can reduce HR and administrative issues, but the insurance, payroll processing and HR packages that PEOs offer come with additional fees for administrative services. In many cases, PEOs separate HR and administrative services and may price each differently, according to the size of your business. 

So, how does a PEO bill you? 

Generally, PEOs calculate their costs, add an administrative fee, profit margin, and they tally that as a percentage of your PEO payroll software costs. Once your timesheets are filled in and submitted, the PEO will notify you of the required wire transaction so they can begin processing payroll. The administrative fee is a percentage of the actual cost. 

What are the advantages and disadvantages of HR software?

PEO software often includes online HR management or services that make hiring and retaining top talent easier; it also establishes benefits packages and enhances performance management for your small business. 

Michaud says that as small businesses evolve, it's important for business owners to implement HR software that addresses their changing needs. 

"For today's entrepreneurs, going at it alone is simply no longer an option, and scaling up their business requires new tools that allow them to focus running their businesses," said Michaud. 

Michaud believes that small business owners should dedicate their time to growing their business rather than devoting hours to HR management, financial and administrative tasks. 

Here are the advantages and disadvantages of online HR software. 

Advantages of HR software

Instant access is the No. 1 advantage of using online HR management software. You don't need to have HR staff to use the software, and employees have portals that make it easy for them to complete some HR tasks themselves. 

Using web-based software allows your managers and employees to connect to your HR software platform from anywhere. Many applications offer a mobile app, and managers and employees alike can complete many tasks using the app. 

Cloud computing is another advantage, because it generally backs up all of your employee data stored in its platform; if a computer stops functioning properly, your HR data is not lost. 

Automatic updates are another benefit of using cloud-based HR software. By offering automatic software updates, your business is up to date with new policies, terms and conditions, and new labor regulations. 

HR software can eliminate many tasks that small business owners must handle. For example, software apps alert your staff of individual tasks that need to be completed, such as training, 401(k) enrollment and updating one's timesheet. 

When it comes to recruiting, HR software apps offer tools so you can post new jobs on job sites for your open positions. In addition, they help you stay on top of candidate selection and onboarding. 

Disadvantages of HR software

The biggest disadvantage of online HR software is that you are dependent on the internet. If a power or Wi-Fi outage occurs, your business loses access to data and can't perform regular HR tasks.

Integration may be an issue, too, when syncing your payroll with the HR software. Check with the PEO you're considering and notify them of every program you use so you can avoid a compatibility issue with all of your software programs. [Read related article: The 3 Most Common Complaints About HR Software] 

Features to look for in a PEO Solution

Here are a few must-have HR services your PEO provider should include. 

Payroll

The PEO's software solution should include payroll services, or at least integrates with your existing service. When a business uses a PEO for payroll, the PEO becomes a co-employer and assumes the responsibility of managing your business's payroll administration. This can help small business owners who may not have enough time to manage all payroll-related tasks, such as paying wages, depositing employment taxes and issuing employee W-2s. [Read related article: Are PEO Payroll Services Worth It?] 

Employee Benefits

Employee benefit packages can help your business attract and retain top talent. The most popular employee benefits include health insurance coverage, paid time off and flexible sick time. One of the primary reasons many small business owners use PEO software is to provide high-quality benefits to their employees at a lower cost. Your PEO software options will vary depending on your business's size and goals. [Read related article: Are the Benefits of Using a PEO Really Worth It?] 

Affordability

A low-cost PEO generally charges a per-employee fee or a percentage of your total payroll. In many cases, there isn't a free trial where you can evaluate the service. The contract length of a PEO depends on your business's size and needs, as some PEOs offer long-term contracts and others don't require any contract at all. 

Usually, a 30- to 60-day notice is required before canceling service. Some companies let you leave at any time and for any reason, while others charge you a fee for leaving. Search for PEO that offers a money-back guarantee, especially if you're a small business owner using a PEO for the first time. [Read our review: The Best PEO Service Providers of 2020]
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