In-house vs outsourced payroll services: Helping SMEs weigh the options

What does it mean to outsource payroll services?

Payroll outsourcing happens when a business hires an external provider to help them manage and oversee all payroll functions. This might include employee benefits management, calculating employee wages, withholding tax deductions, organising contractor payment timelines and filing payroll taxes.

Many companies look to outsourced providers for their payroll tasks due to:

• Limited corporate infrastructure
• The desire to save time and money
• To maintain lean and agile operations and scale flexibly

This blog will help managers and business owners weigh outsourcing options vs in-house payroll management.

What are the advantages of outsourcing to a payroll solutions firm?

Source: Pexels/PolinaZimmerman

1. You can let the experts handle it

A dedicated payroll specialist is skilled at accurate payroll processing and the many intricacies that come along with it. As a result, you'll have fewer payroll errors when it comes to:

• Pay and deductions in each country you operate in
• State and local payroll tax filings
• Benefits
• Paid time off and any additional benefits offered by the employer, such as a pre-tax commuter fund

2. You can mitigate the risk of errors and fines 

Navigating potential errors and compliance risks is a significant challenge for in-house payroll due to the varying tax codes across countries, states, and localities. With their expertise in managing these differences, payroll outsourcing companies can help reduce the risk of audits and the associated civil penalties for payroll infractions.

According to the Internal Revenue Service, approximately 1 million US businesses of all sizes are given payroll penalties and fees every year.

3. You'll cut down on costs and reduce time-consuming processes

Outsourcing the entire payroll process payroll can help companies realise substantial cost reductions, both in terms of time-saving and overheads. It is estimated that it takes approximately one full-time person to process payroll for 250 employees.

By eliminating tedious payroll responsibilities, your HR team can also dedicate more time to strategic objectives, such as enhancing the employee experience and fostering staff learning and development.

Depending on the pay rates in your local market and the size of your organisation, in-house payroll processing could be significantly more expensive than outsourcing. Outsourcing is usually done at a flat rate per paycheck. For small and medium-sized businesses that are growing quickly, outsourcing can help you scale efficiently.

4. It means you keep your data secure with advanced payroll software

Reputable payroll providers will have advanced systems and encryption software to secure your employees’ data.

This is of the utmost importance as you’ll be transmitting large quantities of personal and sensitive information.

Outsourcing also mitigates the risk of an internal data breach, identity theft or embezzlement.

What are the potential disadvantages of outsourcing payroll?

1. Method of entry matters

Outsourcing to a company reliant on manual data entry increases the risk of human error.

Ideally, you’d be working with an outsourcing company with an online portal that allows employees to enter their hours directly, which are then transmitted to the company for processing.

Of course, there is still room for error, but less so when people are responsible for entering their own hours versus mass entry by a centralised team.

2. Your business is still responsible

Outsourcing your payroll functions does not eliminate your company's liability.

While the chances of a country, state or local tax code violation are mitigated due to an expert in that field handling it, mistakes can still happen.

When they do, the payroll company could be issued a fine, but so could your business. Therefore, you must select a partner with a track record of regulatory compliance and payroll in your locality.

3. Loss of control 

When outsourcing any function, a company may have concerns about loss of control.

The company is no longer directly managing the team administering payroll and they can no longer resolve issues onsite in real-time.

Instead, they must rely on getting the correct data to the payroll firm in the agreed time frame. Delays and errors could prevent payroll from being processed correctly and on time.

4. Accessing your data

Any time you are reliant on a third party to house sensitive information, there is a concern about being able to access that data at a later point in time.

If the provider happens to go out of business, you want to be certain that the employee data they've collected remains secure and accessible.

Again, you must do thorough background checks on payroll providers and ensure you select one with safeguards and contingency plans in place, should their business situation change.

Should your business keep payroll in-house, or outsource it?

Source: Pexels/ChristinaMorillo 

In summary, there are many advantages to outsourcing your payroll function. As with any business decision, there are some important factors to consider.

Much of this comes down to choosing the right provider after conducting thorough research and carefully weighing the pros and cons of each.

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