Processing payroll is one such task. Although considered a relatively straightforward and simple task, payrolling can be a huge strain for your business, especially when an effective strategy for handling this is not in place. 

Your employees likewise expect that they are provided with their wages, benefits, and other forms of support as punctually and smoothly as possible. These reasons are primarily why there are a huge number of logistical hurdles and pieces of paperwork that come along with payroll processing. 

One question a business owner asks himself during the onset of the business is whether or not he should outsource payroll or have this in-house. Outsourcing payroll takes a huge load off of your back but also increases your expenses. So, what do you need to consider before deciding on outsourcing payroll? 

What is payroll? 

Before we draw the line between in-house payroll and outsourced payroll, and analyze which option works best for you, we first need to understand what payroll is in detail. 

Payroll is simply a list of employees to who a business owes salaries, wages, or bonuses. Payrolling may be done weekly, bimonthly, or monthly depending on what the company deems most effective for their operations. The salaries owed are often calculated by the company’s payroll department.

It is important that a small business owner understands payroll because payroll is subject to federal, state, and local regulations. Compliance with payroll laws is a non-negotiable for any business. Next, payroll and payroll taxes can also significantly impact a company’s net income. A company may lose a great amount of money when payroll is done recklessly. Finally, employees also expect their employers to pay them the right amount at the right time. Errors in deductions or withholdings, as well as concerns with punctuality, can have a substantial impact on employee morale.

There is simply so much at stake in payroll operations. Companies should therefore tread carefully when deciding what payroll system to use. 

What is outsourced payroll? 

Outsourcing payroll is essentially hiring people outside of your organization to perform your payroll responsibilities. When you outsource payroll, you are paying professionally trained experts to handle your company’s payroll process from start to finish. Ideally, the hired payroll department will take over all administrative and compliance tasks associated with employee pay. 

However, the comprehensive duties and responsibilities of the department should be indicated in the service contract. This may also include filing payroll taxes and payments on your behalf. 

What is in-house payroll?  

Unlike outsourced payroll, in-house payrolling does not seek the help of third-party organizations outside of the company. The department that handles payroll processing for the organization is internal. In other words, the staff that has the responsibility to perform payroll operations are categorized as employees. In-house payroll clerks often fall within either the human resources department or the finances department of the company. 

What are the benefits and drawbacks of outsourced payroll? 

Benefits

Before we delve into the pros and cons of payroll outsourcing, it is first important to understand that any or all of these listed reasons do not necessarily apply to absolutely every small business. Rivermate still recommends that a careful analysis of the perfect payroll system for your company be performed. 

More accurate

As previously mentioned, employers are given the duty to ensure that payroll is provided properly and punctually, that is, on schedule. For the majority of American employees, this is an imperative not just for employee morale but for their bills as well. 

In a survey conducted by the American Payroll Association, 69 percent of employees in the United States say that if their paychecks are delayed by only one week, they would not be able to pay their bills. If this problem persists, not delivering wages on time may have a bad influence on employee relations and may drive to attrition.

Payroll outsourcing can help you maintain accuracy and automate essential operations to produce paychecks on time, every time. 

Guaranteed compliance

One of the most major advantages of outsourcing payroll is that it reduces time spent on compliance and risk management. Your national revenue service regulator imposes millions of dollars in employment tax penalties each year, and it is important that every compliance law and regulation on payroll is complied with. When you decide to outsource payroll, it is critical to hire a supplier who works as your payroll tax compliance partner while also vowing to mitigate the risk of incurring tax penalties.

Tax filing and payments can be handled by a professional payroll and HR company. A corporation that does this type of compliance will also be aware of changes in tax regulations.

Time savings

HR and payroll departments devote around 36 hours per week to compliance-related operations such as following regulatory proposals and developing and conveying new rules In addition, 26 percent of small businesses spend three to five hours per month processing payroll manually. 

Most, if not all, third-party payroll service providers, offer a centralized database for payroll and attendance information. Not only does this automate and streamline payroll processes, but it also mitigates time constraints and allows your supposed payroll department to work on strategy and other internal concerns. 

Payroll outsourcing helps you to reclaim critical time in your workday. You'll be more productive and have more time to devote to more significant activities for your company. That big to-do list won't appear quite so daunting.

Drawbacks

Like the benefits mentioned above, the drawbacks may or may not apply to your small business. It is still important to consult with your management team. 

Expensive costs 

The standard approach for most third-party payroll providers is to charge per paycheck, or in other words, per employee. For the bigger businesses with thousands of employees, this may seem like an expensive option. Smaller businesses, however, usually have less than 100 employees. This means that they are more likely to see better cost savings by simply outsourcing payroll. 

However, the idea of paying and hiring a third-party organization to do tasks that your company could have done for free stands. You still incur a significant amount of expenses when outsourcing payroll. 

Payroll providers often charge a per-check fee, which ranges between $1 and $5 for every paycheck handled.

Less security

To handle payroll, both in-house teams and outsourced payroll providers require access to sensitive information such as employee bank account data, schedules, and so on. Sending these data to a third-party provider may raise your chances of a security breach.

If you decide to use an outsourced payroll service, make sure to research their security standards and only engage with reliable providers.

Accountability is answered by your organization

If a provider fails to pay the organization's taxes on time and appropriately, the organization is still liable for those taxes. If you do not pay them, your organization may face compliance fines or penalties.

Fortunately, many labor-management companies provide payroll processing together with tax compliance. As the reporting agent, the provider will calculate, submit, and pay your taxes on your behalf.

Is it smart to outsource payroll? 

As much as Rivermate wants to give a definite answer, it really just depends on your company. 

It is smarter if you first conduct a comprehensive examination of the risks and benefits of outsourcing payroll before deciding on a verdict. It is critical to assess the dangers and rewards, as well as how they may affect your organization's procedures.

Some HR professionals, for example, may be hesitant to grant third-party access to proprietary corporate data for payroll processing and tax filing purposes. As a result, it is critical to conduct due diligence and inquire about the sorts of security methods used by a payroll outsourcing service.

However, many payroll and HR outsourcing providers understand how critical data security is for businesses. They utilize industry-standard security protocols and undergo rigorous testing and certification, like SOC 1 Type 2 audits, regularly to ensure customer data is always protected.

Many payroll and HR outsourcing companies, on the other hand, appreciate the importance of data security for organizations. They use industry-standard security methods and go through rigorous testing and certification, such as SOC 1 Type 2 audits, on a regular basis to ensure consumer data is always secure.

Understanding the expertise and experience that a payroll and HR provider offers to the collaboration is another example. Many payroll management outsourcing firms need their support workers to be American Payroll Association certified (APA).

This certification evaluates and certifies a person's payroll knowledge. Some payroll service companies additionally have a specialized tax compliance department on staff. These payroll tax professionals manage all of your company's payroll tax payments and filings. They help with federal, state, and local taxes to guarantee your company stays in compliance.

Rivermate recommends that you first answer these five questions before reaching a decision on the payroll system you will be employing: 

  1. If we do manual payroll processing, does it take away time we could have invested in strategic initiatives? 
  2. Is our payroll system effective? 
  3. Are we giving our employees’ paychecks on schedule? 
  4. Are we having problems with payroll compliance? 
  5. Do the risks of hiring a third-party payroll provider outweigh its benefits?

Finding the blog useful? Check out our free guide to learn how you can streamline HR and payroll processes to ease your workload and spend less time on administrative operations.