The payroll portion of your business is an essential function which must be accurate, timely and compliant with changing laws and regulations.

You might be thinking whether or not to manage payroll in- house or outsource it to a professional employer organization. Making this choice will have a dramatic impact on how your business runs, its finances and efficiency.

Unlike most companies, The Payroll Company specializes in helping businesses navigate the complexities of payroll. Having worked in the Payroll and Human Capital Management industry for over 20 years, we have assisted many companies with their payroll.

Interestingly, even being in this industry, we do recognize that for some businesses managing payroll in house could be the best solution. Whether in-house or from a payroll service provider, such as The Payroll Company, we can help you discover what is best for you.

Although we do customize payroll services, we are dedicated to providing transparent, unbiased guidance and support that acts in the interest of our clients. Here we provide a neutral analysis of both so that you can choose what you feel is best for your business.

Understanding In-House Payroll as an Option

In-house payroll means processing payroll within your own organization. This option often necessitates having a payroll office or staff to handle taxes and law compliance.

Pros of In-House Payroll

More Flexibility

The payroll system can be simply modified to meet the needs of the growing business, such as changes to tax, pay structure or benefits. So, the payroll system can be adapted according to the company’s needs without having to wait for outsourced changes to be made.

Building in-house Knowledge and Expertise

Having payroll in-house develops in-house knowledge and expertise that can be useful with complex payroll issues. An experienced and educated payroll team in house can help the organization manage unique payroll conundrums and compliance.

Cost Efficiency

There are no hidden fees for things like extra services; the only costs are salaries, technology and upkeep. It provides cost transparency for businesses in that there are no “surprises” or hidden costs in payroll.

Complete Customization

Payroll processes can be customized to the business’ specifications, including unique pay structures, customized reports, and particular deductions or benefits. So, it allows the payroll software to be catered to the policies and needs of the company.

Immediate Corrections

If there is an error in payroll, internal staff can immediately address any issues rather than waiting for an outside company to resolve it. This responsiveness also contributes to employee satisfaction as these adjustments are made accurately and in a timely manner.

Cons of In-House Payroll

Cost

The fact is, even if you are in-housing it; someone on your team should have definitive physical control of payroll. And having a full-time payroll specialist or team is costly.

In fact, the bulk of estimates indicate that in-house payroll expenses are eighteen percent higher than those of outsourcing when software, training, and employee salaries are taken into account.

On average, this salary is about $75,000 USD/year which outside of an obvious salary cost, can also include benefits and training expenses. These amounts are too expensive for small and medium sized companies as they would represent a cost taken from other very important areas of the business.

Labor Intensive Payroll Tasks

Payroll processing generally requires a lot of data entry, tax calculations and compliance checking, all of which can be labor intensive. Payroll processing takes time away dedicated to other business activities and can affect productivity.

In-house payroll: payroll staff in-house would require more HR time in hiring, orienting, training and supervising staff. This places an administrative strain on the HR unit that can cause inefficiency and burnout.

Risk of (Human) Errors

A higher likelihood of payroll errors that could result in compliance violations and penalties due to lack of expertise. Data entry by hand can lead to payroll miscalculations, like erroneous tax withholdings or employee hour calculations.

Mistakes can result in unhappy employees, legal fines, and extra expenses to fix mistakes. According to the IRS, approximately 40% of small to medium-sized businesses pay more than $5.0 billion dollars each year in late filing or false filing penalties.

Limited Expertise

In-house payroll employees may not have the expertise needed to deal with complex payroll situations, such as multi-state taxes or international payroll. This can reduce compliance and also system efficiency, particularly for businesses that operate with varied or complex payroll requirements.

Understanding Outsourced Payroll as an Option

Outsourced payroll means utilizing the services of a third-party payroll company to process payroll.

These companies focus on payroll services and can include services such as processing payroll, offering direct deposit, calculating and filing payroll taxes, providing payroll reports, some provide help with labor law compliance and regulations.

Pros of Outsourced Payroll

Cost Efficiency

Most are charged based on total number of employees and how often payroll is done. Costs for small businesses can be anywhere from $200-500 a month. Many of the providers also include HR or compliance updates or employee benefits as a package deal, which can be useful.

A small business, say one with 20 employees, could pay $300/month for full-service outsourced payroll services which equals $3,600 a year.

Compliance Management

The need to keep current on federal, state and local tax laws is cumbersome and extremely time consuming. Most outsourced service providers also provide a compliance guarantee, which means they assume liability for mistakes or penalties in payroll processing.

For instance, if a company operates out of several states it can use outsourcing advantageously as the provider will handle multiple state laws and will handle the regulations efficiently. Paychex claims that outsourcing payroll can reduce payroll penalties and errors by as much as 75%.

Expertise

Payroll companies are experts at what they do. They help them be compliant with tax laws and regulations and lower the risk of expensive mistakes. As per Deloitte’s 2020 Global Outsourcing Survey, 59% of companies outsource as a means of concentrating on core business.

Time Savings

Outsourced Payroll allows businesses to dedicate more time and resources to their own business operations and growth. SCORE finds that small business owners dedicate 8 hours a month, or 12 days a year, managing their payroll. Payroll outsourcing can reduce payroll time by an average of 5 hours for businesses.

Data Security

Third party payroll companies have stronger security practices and compliance, and can protect sensitive employee data better than most companies can in house.

Outsourced companies also have a great deal of security protections in place, including encryption, secure data centers, and regular security audits.

The financial impact of data breaches can be significant; for instance, IBM estimates the average expense to be $3.92 million. By outsourcing to a provider that follows industry standards like SOC 2, a business can avoid exposure to data breaches.

Cons of Outsourced Payroll

Less Control Over Processes

May feel less control over payroll processes since an external provider is handling them. Significantly, a company might find it is not intimately involved with payroll at all, as the provider will do all of the data handling as well as calculations and compliance.

As a result, sensitive payroll information is not directly supervised or controlled. For instance, should there be an error with payroll, the company would not be able to resolve this issue as immediate as it would be able to if an internal team were doing this work and could risk delays in correcting the error.

Privacy Concerns

Sensitive employee data is shared with a third party to outsource payroll. Such as salaries, social security’s numbers, and bank information. Confidentiality is vital because if the provider is not careful, data may leak or information may be used improperly, which can create a problem for their business in the form of a negative reputation or legal problems.

Service Issues

Technical problems or system downtime experienced by the payroll provider can cause delays in payroll processing. For example, if the provider’s servers crash on payroll day, employees will not receive their paychecks.

Lack of Customization

Businesses with particular payroll requirements – for example, particular reports or benefits processing, may find that an outsourced service doesn’t fully cater to their needs. Thus, they must be willing to sacrifice some aspects of the payroll process or pay extra to have the outsourced service customize it.

Unanticipated or Unseen Costs

Additional services or support offered by some payroll providers, like tax filing, direct deposits, or payroll corrections might come with an added cost. These hidden costs can accumulate and turn outsourcing into a more expensive process than first projected. Businesses should thoroughly examine contracts and service agreements for all applicable fees.