Payroll is a notoriously difficult part of successfully running your business. Laden with complex tax codes and deadlines, it also has a direct communication with your employees, making it a uniquely challenging aspect of your operation. To further complicate matters, there are seemingly endless ways to approach it — taking on the responsibilities in-house, outsourcing them, or blending the two as best fits your organization.

There is no one-size-fits-all solution and there are advantages and disadvantages to doing payroll either way.  The aim of this article is to provide objective advice on these topics to help you decide which approach is right for you.

Differentiating In-House Payroll from Outsourcing

In-House payroll can take many forms. In a payroll survey by QuickBooks, they report that over one third of small business owners complete payroll in-house through manual paper-based approaches, spreadsheets, or by leveraging programs like QuickBooks, Excel, and other industry specific software. Processing payroll yourself involves more than just paying your employees. It also includes collecting and storing employee information, calculating overtime and wages, withholding appropriate taxes, depositing them on time, managing benefit contribution deductions, and more. 

Beyond that, payroll and human resource legislation is constantly changing, which further complicates matters if you don’t have a firm grip on what is changing and when. This is where outsourcing can be valuable.

By partnering with a payroll service provider, you can define their level of involvement with your administrative tasks – from simply processing payroll and tax filings, to more specific compliance responsibilities. Turning over this process to an external party can minimize the time you spend on payroll, freeing you and your staff to pursue revenue-generating action.

In-House Payroll, Pros and Cons

Managing payroll internally involves a lot of work and a solid understanding of the process. Here are some of the greatest disadvantages of this approach:

  • It is time consuming. According to the QuickBooks study, business owners spend an average of nearly five hours per pay period calculating, filing, and paying payroll—Roughly 253 hours per year.
  • If you don’t run payroll personally, you’ll need to hire a competent employee to do so. The median salary for such an administrator is about $45,000 per year, not including necessary software or maintenance fees.
  • Errors arise in payroll, regardless of who works on it. These errors, if uncorrected, can lead to frustration in employees and have a negative impact on morale.
  • Missed deadlines for federal and state tax obligations can lead to significant fines.
  • Even with adequate precautions taken, handing off payroll responsibilities to someone within your organization could lead to employee privacy violations, and even fraud.

However, if you are one who values control of all aspects of your business’ operations, these hurdles may be well known and don’t pose any real challenges. In that case, these are the benefits of doing it yourself:

  • Control. By keeping all your information in-house, you have sole control and responsibility of your information, reducing the potential of a third-party breach.
  • Vendor services for payroll can run between $150-$200 per employee per year. This money instead stays in your pocket to be distributed as you see fit.
  • Some owners may find themselves using project management systems with payroll already integrated. In this case, it can be unnecessarily difficult to bring in an outside entity.
  • Flexibility. 65% of business owners have had to move money around to make payroll. By doing it in house, you are freed up to pay people as best suits you—cash wages are sometimes preferred, as are paying current pay periods versus arrears payments.

Outsourcing Payroll, Pros and Cons

When considering the various approaches, you’ll want to consider the good, bad, and ugly sides of outsourcing as well. Some of the main disadvantages are:

  • The cost of an outside vendor is usually between $150-200 per employee per year.
  • Hidden fees. If not carefully inspected, you might not notice courier or delivery fees, tax filing charges, or other unnecessary ancillary services until they appear on your bill.
  • When dealing with larger entities, it is possible to get lost in the shuffle between representatives. This is potentially problematic when attempting to correct mistakes or retrieve employee data.
  • Payroll is a target for data breaches and many large payroll companies have been slow to update data protection measures. Startups, largely, are more focused on data security, but it can still be unnerving to trust an auxiliary entity with such sensitive information.
  • There is the potential that your payroll partner may go out of business or, worse, divert funds.

As with anything, it is important to consider the wide array of outsourced payroll options, and the benefits they offer as well:

  • Reduced exposure to fines and penalties. Outside services are usually responsible for collecting payroll-related tax and ensuring they are paid accurately and on time.
  • Increased accuracy through technology. From hourly wage calculations to tax liabilities, the accuracy of  technology available through a outsourced payroll organization can be tremendously valuable. 
  • Increased timeliness of employee payment, fostering a boost in morale and satisfaction, along with an assurance of compliance with state and federal regulations.
  • Expertise. When outsourcing payroll, you access the expertise of your vendor, allowing you to leverage their professional knowledge should issues arise.

Which is the Best Approach for You?

39% of businesses globally say that at least 30% of their expenses go to payroll. It is a significant aspect of your business, so choosing the path best suited for you is essential.

In-house payroll offers increased control to those who can perform it effectively. It offers flexibility and can save money on vendor fees.

Outsourcing is beneficial for companies who are concerned with the complexities of payroll compliance and value the expertise of a provider completing it correctly and consistently.