In house payroll vs outsourced? Helping SMEs weigh the options up

May 27, 2020

The pros and cons of outsourcing payroll services

Many companies look to outsource their payroll function 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 the options of outsourcing or handling payroll in house.


Pros and Cons

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

1. You can let the experts handle it

When you choose a reputable payroll outsourcing company, you are trusting the experts to handle what they do best.

These professionals are skilled at processing payroll and the many intricacies than come along with it. As a result, you’ll have fewer errors when it comes to

  • Pay and deductions in each country you operate in
  • State and local payroll taxes
  • 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 violations and fines

Tax codes vary between countries, states and localities. A payroll outsourcing company is experienced in handling these differences and can help mitigate the risk of a company getting audited and having to pay civil penalties for payroll violations.

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

3. Cost savings and reducing time-consuming processes

Outsourcing payroll can help companies realize 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.

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

4. Keep your data secure

Reputable payroll firms will have advanced systems and encryption software that keep your employees’ data secure.

As you’ll be transmitting large quantities of personal and sensitive information, this is of the utmost importance.

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

Just because you outsource payroll does not mean that liability is completely eliminated.

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

When they do, the payroll company could be issued a fine, but so could the employer. Therefore, it is important that you select a partner with a track record of regulatory compliance and payrolling 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 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 of 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, it is important that you do your homework on 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 outsourced?

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 by conducting thorough research and carefully weighing the pros and cons of doing business with each.

The context of your current and future business goals plays a key factor. Do you prefer to keep your human resources in-house or operate nimbly and quickly enter new markets?

If you would like further advice on choosing the best approach for your business, contact one of our global payroll experts.

This post was written by: Liz Fiumara, Content Development Manager at Airswift