The payroll payoff position your firm as an all-service provider.

Every business has to pay its staff and its taxes. Many CPAs are addressing those twin needs by offering to help their small business clients not just with taxes but also with the many chores that go into payroll processing, from after-the-fact tax filings to benefits administration.

A smart way to grow

"Payroll services are about three percent of my practice, but offering them is part of being a full-service accounting firm," says Daniel M. Ukestad, CPA, a Carmel, California, sole practitioner who does after-the-fact payroll for about a dozen small business clients. He provides those clients with tax and consulting services, not audits. He also does domestic-staff payroll for older individuals with household help.

At Faulk & Winkler LLC of Baton Rouge, Louisiana, principal Monica Waller is responsible for client accounting services (CAS). "Payroll services is a small part of our business, but it works hand in hand with CAS, including general ledger, financial statements, accounts payable and accounts receivable, tax and pension work," she says. When tax partner Denise Carvalho, CPA, sees a client who might benefit from payroll services, she brings Waller in to discuss how to help. The firm has handled payroll since 1984 but says improved technology has made it easier in the past five years. It's a good fit with services such as pension work that must be in a prescribed electronic format. "It has become a real selling point for pension administration clients to transfer their payroll to us," she says.

Principal Joseph Maloney, CPA, of four-partner firm Maloney, Reed, Scarpitti & Co. of Erie, Pennsylvania, says, "Payroll has provided about 10 percent of our business for 25 or 30 years." The firm handles the entire process for most payroll clients--prepares their checks, arranges for the deposits, and makes sure the clients' payroll taxes are paid on a timely basis and their quarterly and annual returns are correctly prepared and filed. Using a CPA firm offers them confidentiality and personalized service. "Clients like to deal with only one provider," he says. "They know the individual who answers the phone, and they can let us deal with changing tax rates and payroll laws."

Ukestad's small business clients prepare their own paychecks--some by hand--and use his services to make sure their tax records are correct and deposits are on time. "I educate them on how to prepare payroll and how and when to make the deposits," he says. He prefers that larger clients use a national provider. James Hayden, CPA, a Montvale, New Jersey sole practitioner with six staff members, says payroll represents about 10 percent of his firm's revenues. He refers clients with more than four employees to the same national payroll provider he has used for 25 years. "We can rely on their work and access reports online. If they make a mistake, they rectify it." Ilene Eisen, CPA, of ie Solutions in Monterey, California, also recommends national payroll providers to her clients for their broad capabilities. To help clients meet filing and deposit guidelines she suggests a national payroll provider "since they can download the information into their accounting records easily," she says.

Which type of payroll provider is best for your client?

What you recommend to clients depends on their sophistication and what you perceive they need. Big payroll companies offer a large number of Internet-based payroll-processing services and products, and employ experts to track accounting intricacies and ensure clients are in compliance with local and federal tax laws.

Many payroll providers offer such simple user interfaces that "CPAs may have a hard time convincing clients to use their help," says Steven Bragg, CPA and CFO of Premier Data, in Englewood, Colorado. His payroll provider can process payroll through a Web browser interface and also permits complete integration with a centralized 401(k) investment module, which automatically makes 401(k) deductions from employee paychecks and eliminates the need for separate tax filings, administration reports and payments, he says.

Managing flexible spending accounts (FSAs) is another possibility with national payroll providers. Services include integrating FSA deductions with payroll and offering employees the use of debit cards from which to pay down their FSA balances.

Some CPA firms provide payroll compliance auditing services, including retirement plans, cafeteria benefit plans and health plans, to trustees of employee benefit plans. These services are valuable to benefits trustees--who have a fiduciary duty to ensure employee contributions to the plans are correct and timely--because the rules are complex and overlapping. Engagements focus on checking an employer's payroll records for compliance with IRS and state withholding and Department of Labor rules.

CPAs who want to offer more payroll services will find there's an abundance of software and Web-based providers to choose from. Start-up costs for software and training start at $1,500 but can go much higher. Firms can control staff costs by hiring $15- to $20-per-hour people to do data entry.

Engaging an outside payroll provider.

[] Assess your firm's capacity for additional recurring payroll services.

[] Determine which clients are free of independence conflicts for payroll engagements.

[] To gauge the market, ask your clients what parts of handling payroll they find burdensome.

[] Research payroll products' capabilities carefully to find a good match for clients' requirements and your work systems.

[] Let clients know they'll incur additional charges if they make late changes.

[] Stay current on the law.

[] Cross-train your staff to ensure the firm has at least two people who know how to do a client's payroll.

[] Perform background checks on potential hires in the payroll operation to minimize the potential for fraud.

Payroll Services: Independence and Service Issues for CPAs

Because payroll services are a non-attest service, providing them to a client can mar a CPA's independence. For engagements entered into after 2003 (with exceptions for some completed before 2005), practitioners must pay careful attention to a revision to Ethics Interpretation 101-3, "Performance of Nonattest Services."

Make sure clients fully understand the services they are to receive. In your engagement letter, describe what your firm will and will not do, the limits to the service, the information the firm will need to prepare the client's payroll properly and the time constraints involved. Document in writing your understanding with the client regarding:

Objectives of the engagement. Services to be performed. Client's acceptance of its responsibilities. The firm's responsibilities. Any limitations on the engagement.

Firms need to be alert to independence issues, says Joseph Maloney, CPA, of four-partner firm Maloney, Reed, Scarpitti & Co., Erie, Pennsylvania: "Our involvement in our clients' payroll process is great. But when we have signature authorization over the client's checking account or are involved in the management of employee payroll information, we have had to disclose the fact we are not independent in some cases."

Edited by Hank Berkowitz, Director AICPA Custom Publishing Projects Coming in December 2005: "Small Office Home Office and the CPA" Coming in January 2006:"Financial Advisory Opportunities for CPAs" For reprints or sponsorship information contact [e-mail] 201-938-3538 Designed by Sima Miladinov

SARAH E. PHELAN, JD, is a New York-based attorney and writer. Ms. Phelan was formerly a senior manager with Deloitte & Touche and a technical manager in personal financial planning at the AICPA. MICHAEL HAYES is a senior editor on the JofA. Ms. Hayes is an employee of the AICPA and her views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation.