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In-House Payroll Vs Outsourcing: Which Is Better For Your Business?

by Michael Pettengill on Sep 15, 2020 6:00:00 AM

As a business owner, you can easily be overwhelmed by payroll responsibilities. There are many third-party options out there who can help but you may not know if that’s the best approach for you. As a payroll provider, we often get the question: what are the benefits of outsourcing payroll versus doing it in house?

While you may think Complete Payroll Solutions is a little biased as a payroll company, with over 18 years of experience helping companies find the best solution for their organization, we have firsthand knowledge in the differences in approaches to payroll and their advantages and disadvantages.

And we’ll be the first to admit that outsourcing may not be right for everyone. So here we’ll try to provide as objective advice as possible on:

  • The differences between in-house payroll vs. outsourcing
  • Pros and cons of in-house payroll and outsourcing
  • How you can determine what may be right for your business

After reading this article, you’ll be able to make a decision about what payroll approach is best for you.

Differences Between In-House Payroll vs. Outsourcing

Several approaches to payroll are considered in house. For example, you or your bookkeeper can do it manually using paper-based solutions like time sheets and printed payroll reports. More commonly, you’ll leverage programs you already have, like Excel, which offers pre-formatted templates. Or you can use an app or industry-specific software to help.

It’s important to keep in mind that there’s more to payroll than paying employees. When processing payroll yourself, you’ll need to: 

  • Gather employee information
  • Calculate wages and overtime
  • Manage deductions for things like benefit contributions
  • Withhold and deposit appropriate taxes
  • Print and distribute checks or paystubs
  • Maintain records

Whether you have one employee or many, there are a lot of things to consider. And with ever-changing legislation affecting payroll and related HR functions, things can get increasingly complicated – and go wrong, quickly. In these cases, that’s where outsourcing can be of value.

With outsourcing, you partner with a payroll service provider who will handle as much or as little of the administrative and compliance tasks associated with payroll as you’d like. For example, you may just want a vendor to process payroll and take care of tax filings. Or you may want to offload more responsibility and outsource other functions as well. 

Because outsourcing involves turning over the process to an external party, it can be the right fit if you want to reduce the time that you or your internal staff needs to devote to payroll as well as minimize or eliminate any risks associated with in-house processing.

Advantages and Disadvantages of Doing Payroll In House

As discussed earlier, there’s a lot of work involved in managing payroll internally. And that leads to some of the biggest downsides of this approach:

  1. It can take a lot of time to complete all the tasks, which can detract from other business priorities. According to a QuickBooks study, business owners spend four hours and 52 minutes calculating, filing, and paying payroll taxes each pay period – which adds up to approximately 253 hours per year!
  2. You’ll need to pay an employee to run payroll if you don’t plan to do it yourself. The midpoint salary for a payroll coordinator/administrator is $44,750 plus, you’ll possibly have software, implementation and maintenance fees. 
  3. By doing payroll yourself, you risk delays in paying employees or common errors like incorrect calculations of pay for part periods, which can frustrate employees and negatively impact morale and, ultimately, productivity.
  4. You could face potential fines for improperly calculating tax obligations and submitting less than what’s required or not making the deposits on time. For example, you’ll pay a 10% penalty for deposits made 16 or more days late.
  5. You’ll have to handle filing required quarterly tax reports that show your tax liability and what you’ve paid and annual FUTA reporting to the IRS as well as possible state reports — more tasks that you’ll have to complete on time and correctly.
  6. If you hand off the responsibility to someone else in your organization and there are inadequate controls in place, they could leak salary data or even commit fraud, like creating ghost employees

According to a QuickBooks study, business owners spend four hours and 52 minutes calculating, filing, and paying payroll taxes each pay period – which adds up to approximately 253 hours per year!

If you’re someone who likes to keep control of all your business’ operations, then these cons may not be deal breakers for you. And, in fact, autonomy is one of the main reasons employers choose to keep payroll in house. Here are the benefits to running payroll yourself:

  1. You’re able to maintain more control over sensitive data on your own server like employee names, salaries, Social Security numbers and bank account information rather than putting payroll in someone else’s hands and risking a third-party breach.
  2. You don’t have to pay a vendor for payroll services, which generally cost about $200-$250 per year per employee.
  3. If you work in an industry like construction where you use specific job costing software to estimate projects that’s fully integrated with your payroll system, it may be more seamless to do it in house instead of having to worry about integration issues with a third-party provider.
  4. You want more flexibility for things like paying cash wages or paying employees for the current pay period instead of in arrears — or for the previous pay period — as most payroll services do. 

Advantages and Disadvantages of Outsourcing Payroll

If you’re weighing all your payroll options, you’ll also want to consider the pros and cons of outsourcing as well. Some of the downsides of outsourced services include:

  1. You’ll have to pay the costs of using the provider, which can run about $200-$250 per employee per year.
  2. There can be hidden fees like tax filing or courier and delivery charges, especially if you don’t clarify exactly what’s included in your service or there are a lot of ancillary services tacked on that you’re paying for but don’t need.
  3. If there’s a lot of turnover at your payroll vendor, you may get bounced around between reps, which could impact your service level.
  4. Since you’re relying on an outside agency, it can take longer to resolve mistakes, issues, or even just to access employee data.
  5. You don’t have any control over the security of your data, which can be unnerving to some people. 
  6. There’s a chance the payroll company could go out of business or divert your funds.

You’ll have to pay the costs of using the provider, which can run about $200-$250 per employee per year.

Just like when selecting any service for your business, you’ll want to look at the pros of outsourcing as well. The advantages include:

  1. You’ll reduce your exposure to tax fines and penalties. Payroll providers are typically responsible for collecting and paying your and your employees’ payroll-related tax liabilities on time and accurately. 
  2. You can increase the accuracy of payroll and tax calculations thanks to technology that helps eliminate common math errors associated with calculating hours from time and attendance. 
  3. You’ll spend less administrative time on payroll. This allows you and your staff to concentrate more on revenue-generating functions. 
  4. You’ll consistently provide timely payment to employees, which can boost satisfaction and retention.
  5. By providing timely and accurate pay, you’ll be in compliance with various federal and state requirements regarding payments to employees. 
  6. You can leverage the vendor’s expertise to make sure everything is done right and access support from the company if issues come up.

Is In-House Payroll or Outsourcing Best for Me? 

Both in-house payroll and outsourcing enable you to tackle one of your business’ most important functions.

In general, in-house payroll is good for companies who want to maintain more control over the process, have someone who can handle the work, and don’t want to spend extra money on vendors.

Outsourcing is a good option for companies who are worried about the complexities and compliance involved in doing payroll themselves and want to rely on the expertise of a provider to get it right – and don’t mind paying a little for that help.

If you’re considering outsourcing payroll after learning more about the pros and cons of the different approaches, check out this blog to find out what your cost will be and if you could save by using a third party. 


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