Payroll processing takes 11 hours a week on average. Plus another 1.8 hours to manage employee time off and an extra 4.9 hours to process benefits.
That’s a total of 17 hours each week on payroll. The payroll cost of this could equal close to half a year’s salary for one person.
Read on to discover the pros and cons of outsourced payroll services. Then, you’ll be able to make a more informed decision if it’s the right move for your small business.
Pros and Cons of In-House Payroll
Some small business owners enjoy the multiple responsibilities that come from business ownership. Yet, by taking on payroll, what other tasks might you be giving up? And how much time is it going to take for you to do payroll?
Or if you have an employee that is in charge of payroll, you’ll need to weigh if those payroll tasks are worth the salary that employee is taking home.
As with any business decision, there are pros and cons to both sides. Here are the pros and cons of in-house payroll for you to consider.
Pros of In-House Payroll
One of the main reasons that small business owners want to keep payroll in-house is that they can have better control over the data. Having payroll in-house means that you can ensure accuracy much more easily.
And because you know what employees’ shifts and hours are, you are more likely to catch an error before payroll is processed. Especially if you are checking over payroll as you go.
Another benefit of doing payroll yourself is that you have all this important data at your fingertips. Whenever you need to make business decisions, you can pull your metrics and other data to make an informed decision.
It’s easy to look through your payroll data to determine if a project is feasible or not.
Cons of In-House Payroll
If you decide to do your own payroll, the ownership and responsibility fall on your shoulders. You’re responsible for everything to do with taxes and compliance. And there can be serious repercussions if you get it wrong.
The IRS issued $4.5 billion in penalties to companies who miscalculated their payroll taxes. And that’s just in one year.
Also, you are liable for any errors in payroll. Even though you try your best to be diligent, mistakes can happen. Then you are at risk of being sued by your employees.
Check out these five tax planning tips for small businesses.
You’ll likely use accounting software. If so, there may be a steep learning curve in learning the new software. Or you may have to try several options before you find one that works well for your needs.
All of this leads to increased time and cost spent on payroll that would not exist with outsourcing.
We can’t fail to mention security. Having in-house payroll comes with a risk of security and privacy to confidential employee data.
Finally, setting up payroll could cost you more than outsourcing the work. It’s not necessarily true that it will cost less to do it yourself. Especially if you have to pull resources from elsewhere to get payroll done.
Pros and Cons of Outsourcing Payroll
Outsourcing is becoming increasingly popular in all sectors. In fact, research shows that 57% of American companies increased their use of outsourcing in 2018.
There are many reasons why organizations decide to outsource payroll in particular. Here are some of those reasons.
Pros of Outsourcing Payroll
One of the main benefits of outsourcing payroll is the decreased risk that comes handing payroll over to experts.
Managing salaries, tax deadlines, essential documents, and compliance issues is complex. It is easier to let a firm that specializes in this do what they do best. That way you mitigate your risk of an IRS penalty.
These penalties are costly and avoidable. As a small business owner, you don’t want to spend one dollar on un-necessary fees. That is why outsourcing makes sense.
Along the same lines, by outsourcing payroll, you will get peace of mind about this critical function.
By moving payroll off your plate, you’ll free yourself up to spend more time on your core business. Then you can spend time on activities that impact growth. This can often be a better use of your time to scaling and growing your business.
Using a payroll outsourcing company means that your employees will have access to the latest technology. They’ll have access to a self-service payroll service that will show their bonuses, tax deductions, contributions and more.
Direct deposit and online time tracking are services that employees expect in this day and age. By using an outsourced payroll provider, you’ll give your employees a professional and up-to-date payroll system that will make your company look good.
Cons of Outsourcing Payroll
A drawback to outsourcing payroll is that you may not easily have access to your employees’ wage and employment data. Of course, that depends on the agreement you have with your service provider. But outsourcing does remove the information from your fingertips.
The cost of outsourcing payroll could be a disadvantage too. Especially if you the price you pay isn’t tailored to your business size and services you need. You may be paying more than you should.
Last, it can also take longer to correct errors than if you were managing the payroll yourself in-house.
Conduct a Cost Analysis for Outsourcing Payroll
Now that you understand the pros and cons of small business outsourcing, you should conduct a cost analysis to see if this is a financial investment that is worthwhile.
Weigh the time and money you spend processing payroll in-house. Be sure to factor in the cost of errors as well as any fines or penalties.
Consider the learning curve and efficiency of payroll processing in-house.
Then, think about what other core business areas you and your staff could focus on if payroll is not being processed in-house.
Then you’ll be able to understand the true payroll cost for your business. If you decide to outsource your payroll, you need to make sure you find the right payroll provider to meet your needs.
How To Find the Right Outsourced Payroll Provider
For any type of outsourcing provider, you should consider several factors.
Customization
The first thing you want to know is if the company can tailor their services to give you just what you need. You don’t want to pay a package price that is good for up to 50 employees if you only have eight.
Be sure you clearly understand what services are included in the price. And if a provider’s packages are too broad to give you a tailored price, move on.
Specialization
Look for a provider that has a proven track record of your industry. That way this provider will have a good sense of the specific challenges that payroll in your industry faces.
Security
Outsourced payroll requires you to hand over sensitive information about your company and your employees to a third party.
You even give them power of attorney to complete filings on your behalf. You’ll want to research the company and choose one with a solid reputation.
Find out how sensitive data is encrypted. Ask who will have access to that information.
The IRS has tips for employers who outsource payroll. But it is recommended for a small business to choose a payroll provider who has an established reputation.
Other Service Offerings
Right now, you may only need to outsource payroll, but your needs may change as your business grows.
Instead of switching providers later, it’s best if you choose a provider that offers a broad range of services such as human resources and benefits too.
Technology
Look for a payroll company that is mobile ready. Ask about what technology investments the company has recently made or is planning to make.
You want a provider that will be able to keep up with the latest updates in technology. This way you offer better service to your employees.
Quality Service
You will have constant interactions with your payroll provider. Excellent customer service is vital.
Look for a provider that offers support every day, not just on payroll processing days. There will be times where you need immediate attention. Be sure the provider you choose will provide it.
Final Thoughts on the Costs of Outsourced Payroll
We hope this list of pros and cons of outsourcing payroll has given you a better sense of how to measure in-house and outsourced payroll costs.
You probably didn’t start your own small business so you could spend time doing payroll. Outsourcing payroll is a great way to get back to doing what you’re good at.
Next, check out these 20 quick tips to manage company cash flow.