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Payroll is an essential component of business operations—well, as long as you want to keep your employees. Effective payroll systems will allow you to pay your employees, manage payroll taxes, and minimize the hours you’re sinking into weekly payroll processing. So, should you be managing payroll yourself or outsourcing payroll? 

Today we’re breaking down this common business dilemma: to outsource or keep in-house? Depending on your size, industry, budget, and mathematical acumen, outsourcing payroll might be an excellent option for your small business.

Pros and cons of outsourcing

Maybe your accounting team is sick of managing payroll, or maybe you’re paranoid about payroll errors that could bring the IRS to your door. Before you choose a payroll solution add-on or make the switch to outsourcing payroll you should take the time to consider the pros and cons of each. 

Pros Cons
Time saved Decreased control
Decreased paper use Decreased flexibility
Uniform reporting Cost
Easier payroll tax filing Unnecessary features
Enhanced security
Compliance with government regulation
HR integrations & benefits
Employee self-service

Why do companies choose to outsource payroll?

Paychex surveyed small-to-medium businesses throughout 2020 and found that one in five were concerned with the amount of time it takes to manually run payroll.

Payroll takes a significant amount of time—time that small businesses and startups simply don’t have. And as your business grows, so will the number of employees and the depth of benefits that can affect payroll, such as 401(k) contributions, so your payroll processing will only grow more complex as you scale. 

Additionally, many small business owners feel unequal to the mathematical tasks associated with payroll calculation, and the governmental regulations with which they need to comply. In short, for many business owners it’s well worth the cost and hassle of setting up outsourced payroll in order to secure the peace of mind, minimized payroll error, and work hours returned.

Need help managing your payroll taxes? Check out our 2021 guide to payroll taxes.

What are the disadvantages of outsourcing payroll? 

One of the biggest learning curves for small businesses making the switch to outsourced payroll providers is the lack of flexibility in control. In the past, business owners could simply catch their accountant or payroll administrator to quickly adjust details of an employee’s paycheck or payroll taxes. With an outsourced payroll provider there is less flexibility and more turnaround time on any change to payroll data. 

For many small businesses, the cost and hefty packages of payroll outsourcing services can be deterrents. Running payroll in-house or with your accounting software add-ons can be more affordable, especially if you have the manpower to manage payroll yourself. Payroll service providers may also package their payroll functions with other HR outsourcing or additional features that you don’t necessarily need. It’s important to find a payroll service provider that will give you what you need without charging you for extra features.

How much does outsourcing payroll cost?

Outsourced payroll will generally run about $200 per employee per year.

Outsourcing your payroll has many factors beyond just costs, but it’s still important to consider the actual price tag of outsourced payroll. Most payroll providers will create a package with a base monthly price, a fee for each employee, and then add-on fees for features such as paper checks, payroll tax filing, and HR functions. 

Depending on your company size and the number of payroll features you use, your payroll company might create a package or custom price for your business. But beyond the actual price of outsourced payroll is the price you can assign to the time spent running payroll and managing payroll taxes. Managing in-house payroll might be less expensive to run with your payroll software or HR solutions (ex. QuickBooks and their payroll options), but you’re likely still paying a monthly fee and then sinking hours of time that could be spent running your small business. It’s important to calculate these costs, too.

What percentage of companies outsource payroll?

According to Statista, nearly 40% of American businesses outsourced some portion of their payroll in 2019. Partial payroll outsourcing is available through some accounting software programs, but is still technically managed in-house, and made up 26% of these businesses. About 12% of businesses have fully outsourced payroll. This number is expected to increase as payroll providers grow more competitive in their offerings and price.

What size companies should consider outsourcing payroll?

If you only have a handful of employees, it might not yet be worth outsourcing payroll. As you grow, if you’re able to hire an employee with dedicated payroll duties or if you enjoy the aspects of payroll processing, you’re probably fine to keep your payroll in-house. But once you are unable to maintain a dedicated payroll function role or your payroll duties grow more complicated (usually around 10-15 employees) it is likely time to outsource payroll.

What types of industries should outsource payroll?

The following industries may have the highest need for (and greatest satisfaction in) outsourcing  payroll: 

  • Industries with many hourly employees, such as retail and restaurants
  • Industries which rely on contract employees, such as construction
  • Creative agencies with multiple clients and employees 
  • Industries which offer competitive benefits such as 401(k) matching or covered health premiums

Any business in any industry can benefit from payroll outsourcing if it returns hours of working opportunity and decreased payroll mistakes, so don’t let your industry stop you from considering outsourced payroll.

How do you choose a third party payroll service?

Your payroll needs are unique to your business and your employees. It can be tempting to opt into payroll software that is offered through your accounting software or to use a popular payroll provider in your region or industry, but you need to do your due diligence to choose a third party payroll service that will meet your needs. 

When you’re choosing a third party payroll service, you need to consider the following: 

  • Salaried vs. hourly employees
  • Payroll tax withholdings
  • Direct deposit capabilities
  • Software integrations
  • Prices & fees
  • Mobile access
  • Security
  • Free trials
  • Customer support 

We’ve broken down these nine things to consider when choosing payroll software, which can help you determine if a payroll processing service is right for you, or if outsourcing payroll would be more effective for your business. If you decide that payroll software won’t meet your needs, you’ll be armed with each and every requirement as you evaluate outsourced payroll providers.

Manage payroll with confidence

Don’t waste hours every week crunching numbers and cutting checks if you can afford the $200/employee price tag—especially if time carries a far greater premium. Stick to your in-house payroll if you haven’t yet felt the growing pains or stress of payroll calculations. And you can always change it up when your business needs change. 

Whether you choose to manage payroll in-house or outsource payroll to a third party payroll provider, we know you can find the right option for your unique business needs. It’s well worth the effort to determine your needs and research the options to solve them. We hope this helps you take your payday to the next level.

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