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A Business Case for Modernizing Your Payroll Process

by Justin Felton on Mar 31, 2022 8:00:00 AM

Whether you’ve been running payroll manually or using software, there have been a lot of advancements in recent years that can make your current approach even more accurate, efficient, and compliant. Is it time to upgrade your payroll process? Let’s find out by reviewing some of the top reasons behind the business case for modernizing your payroll.

What is payroll?

Payroll refers to the process by which employees receive their salary. Whether you run payroll manually or use a software solution, there are several key steps involved in the process, including:

  • Calculating wages and overtime
  • Managing deductions and exemptions
  • Paying employees
  • Providing paystubs
  • Filing and reporting tax withholdings
  • Maintaining records

Top 7 Reasons to Update your Payroll Process

Many companies choose to run payroll on their own using either manual, paper-based methods or software. But since there is a lot involved in processing payroll, 38% of companies choose to modernize their function by outsourcing so they can instead focus on more strategic activities that can grow a business. Here are 7 reasons you may want to update your payroll process.

1. Time Savings

If you’ve been running payroll internally, you’ve likely noticed that it takes a lot of time to complete all the required 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!

You may think using an outsourced payroll provider will require too much effort from you. But it’s surprisingly easy, especially if you choose a payroll provider who has a dedicated team that can walk you through setting up your first payroll. And, once you’re set up with a vendor, it should be much less complex to have someone else process your payroll than to do it yourself.

In fact, by modernizing your payroll process through outsourcing to a third-party vendor, you’ll spend as little as 15 minutes to complete your payroll each pay period if you have a smaller company, say 10 employees. That’s because all you’ll need to do is check entries with simplified workflows and sign off on payroll in just a few clicks.

Because an outsourced provider takes care of all the daily, weekly, and monthly tasks involved with paying your employees, they’ll alleviate your burden. And with less administrative time needed for payroll tasks, you and your staff will be able to concentrate more on revenue-generating functions. 

2. Fewer Mistakes

By doing payroll yourself, you risk common errors like incorrect calculations of pay, which can frustrate employees and negatively impact morale and, ultimately, productivity. In addition, it could lead to an employee complaint that could trigger a DOL investigation.

And it’s not just wages you can get wrong. You could also face potential fines for improperly calculating payroll tax obligations and submitting less than what’s required or not making the deposits on time. 

If you choose to modernize your payroll by outsourcing, you’ll increase the accuracy of payroll and tax calculations thanks to automated technology that helps eliminate common math errors, keeping you in compliance with various federal and state requirements. 

In addition, you’ll reduce your exposure to tax fines and penalties because payroll providers are typically responsible for collecting and paying you and your employees’ payroll-related tax liabilities on time and accurately – and for any penalties that you may incur because of their mistakes

3. Lower Cost

Unless you use a free version of payroll software, you’ll incur expenses when you run payroll yourself. The average cost of payroll software is $30 a month for a base fee plus $4-$8 per employee per month. And if you have another employee take over the task, you need to consider their salary as well. The midpoint salary for a payroll coordinator/administrator is $44,020. 

While cost may have been a barrier to modernizing your payroll by outsourcing, using a payroll provider may be more affordable than you think. Generally, you can expect to pay about $200-$250 per employee per year for basic payroll outsourcing. While it may be a little more expensive than calculating payroll manually, using software, or having your bookkeeper handle the tasks, it’s important to keep in mind that payroll mistakes like delays in tax filings can be costly. In fact, almost half of all small businesses get fined an average of $850 every year for late or missed tax payments.

With a payroll provider, you can have confidence payments to employees and payroll-related tax liabilities will be accurate and timely, so you can avoid these penalties.

4. Enhanced Payroll Process Timeliness

When you run payroll yourself using paper-based processes, you could risk delays in paper checks due to weather, shipping, or even failing to take into account holidays.

Paying your employees on time, every time, is essential to remaining in compliance with federal and state wage and hour laws, driving employee satisfaction, and avoiding a hit to overall morale. In fact, just two issues with payroll can cause 49% of employees to start job hunting. And that’s not all. The delays could prompt complaints that could lead to an audit, putting you at risk of fees and penalties.

With outsourcing, you’ll consistently provide timely payment to employees, which can boost satisfaction and retention. That’s because vendors utilize software to automate the entire process, eliminating slow, manual methods. And, most payroll companies offer paperless pay methods such as direct deposit and same-day pay that ensure employees receive their wages on time.

5. Improved Compliance

When you run payroll, you’re also responsible for complying with a number of pay-related legal requirements such as:

  • Accurately calculating wages, including overtime
  • Properly withholding and remitting payroll taxes
  • Correctly classifying employees as exempt or non-exempt workers
  • Ensuring pay equity
  • Following rules regarding pay frequency and pay methods
  • Maintaining records used to calculate pay for compliance with the FLSA
  • Providing W-4s

And if you’re out of compliance? You could face back payments for missing pay, penalties and interest, and legal expenses.

With an outsourced provider, you’ll gain access to a team of experts who will help guarantee you stay on the right side of the law, advising you on the needed steps to abide by tax regulations, wage and hour rules, and other applicable requirements.

6. Greater Security

Sharing sensitive employee data can be scary. And that can make many companies pause when it comes to outsourcing payroll. But it’s important to understand that running payroll in-house has its own set of security risks.

For example, 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. In addition, phishing attacks are common on payroll departments, and small and mid-size businesses can be particularly vulnerable.

Outsourcing can help mitigate these risks. And while sharing payroll data externally may also be concerning, especially in light of a highly-publicized security breach at ADP, you can ease your mind by partnering with a secure vendor who has protections in place to prevent the leak of sensitive information. When evaluating providers, you’ll want to make sure they have policies and procedures to protect your data. Here are some questions to ask:

  • What accreditations are your processes and infrastructure compliant with
  • Where is the data hosted
  • Who can access the data
  • How is the data backed up
  • How is the data stored and transmitted
  • What on-site security is there
  • What firewalls/antivirus protection is used
  • In the unlikely event of a breach, what are your protocols

7. Elevated Employee Satisfaction

Satisfied workers are essential to the success of your business and are more productive and engaged. We’ve already discussed how you can boost satisfaction by modernizing your payroll process to ensure accurate and timely payments to workers, especially when implementing paperless pay options such as same-day pay and direct deposit. But there’s another way outsourced payroll can improve the employee experience: self-service.

If you decide to outsource, your employees will gain access to a payroll portal that will allow them to complete a number of tasks independently at a time when it’s convenient for them instead of having to wait for responses from your HR staff. For example, they can look up pay history, make changes to their personal information, download their W-2 at tax time, request PTO, and more depending on the provider.

By arming employees with this level of empowerment, you’ll help improve morale and, therefore, retention – crucial in today’s labor market.

How to Best Modernize Your Payroll Process

If these 7 reasons all sound like valid considerations for upgrading your payroll process so you don’t get left behind, you may be wondering just what to look for in an automated solution. It’s important to know the scope of services available in the marketplace continues to grow in order to meet the needs of today’s workforce. Before settling into a solution, find out the best functionality to meet the needs of your business by learning more about the top payroll features and trends on the market today.

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