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](https://quickbooks.intuit.com/r/payroll/in-house-vs-outsourcing-
payroll/#in-house-vs-outsourcing-payroll-definition) 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:
- If we do manual payroll processing, does it take away time we could have invested in strategic initiatives?
- Is our payroll system effective?
- Are we giving our employees’ paychecks on schedule?
- Are we having problems with payroll compliance?
- Do the risks of hiring a third-party payroll provider outweigh its benefits?
