Is it Cheaper to Outsource Your Business’s Payroll?

For any business, controlling costs is a big part of management responsibilities. But when does outsourcing tasks such as payroll versus doing them in-house make economic sense? A number of factors make this a more complex decision than meets the eye.

Here are cost-savings considerations as well as other benefits that come with outsourcing your business’s payroll.

Dedicated Expertise

Keeping up with the ins and outs of employment tax law is almost a full-time job. With a business to run, you don’t need any other jobs, so tapping into the dedicated expertise of a payroll service may be a huge cost savings in time, money, and energy for you.

They have up-to-the-minute data to ensure your business is in compliance with all employment law. Whenever changes happen, these professionals are on top of it and immediately implement revisions for your particular situation.

In addition to calculating the appropriate tax deductions for each employee and keeping the proper employee forms on file, you must also file federal and state tax forms and pay those taxes on time. Most payroll services offer filing tax forms and even make payments as an option for a slightly higher fee.

Payroll errors can result in penalties, fines, and interest, so avoiding these problems is crucial to the financial health of your business. Depending upon the dedicated expertise of a payroll service usually eliminates these errors that small business owners overlook because they are too busy running their companies.

Even if an error is not intentional, the government does not see it any different from a scam, and you pay the price. Utilizing an outside service can be a huge savings if you ever get hit with the wrath of the Internal Revenue Service!

Time Savings

Outsourcing your business’s payroll can also save you time. As discussed above, you won’t have to learn every intricacy of the tax code on your own. But more importantly, you typically only have to input hours worked, and the rest is magic! No calculations, no reports to figure out.

An outside payroll service can generate everything you need for what is usually a small fee. For a business owner, time spent researching a new topic area is less productive usually than spending time generating sales or inventing new products.

Accuracy

Many payroll services now link to popular accounting programs such as QuickBooks. With just the entry of employee hours, your payroll data is instantly transferred to your accounting software for improved accuracy, and of course, single entry of data is a time-saver. Transfers can be seamlessly made to your general ledger so that profit and loss statements and balance sheets are up to date.

Fixing mistakes is a time-consuming and, consequently, costly endeavor. With one-step data entry, you never have to input data twice again!

Remote Input

One of the added benefits of using an outside payroll service is the ability to input data remotely. You can still access the payroll system and confirm employee hours even if you are away from the office on a business trip or on vacation. You don’t have to generate checks and can have everything handled remotely.

Direct Deposit

Direct deposit is a great feature when you outsource your business’s payroll. Rather than being tied to generating checks, direct deposit ensures that employees are paid accurately and on time, regardless of your schedule. There is no paper generated, no fees for checks, and no worries about covering checks. Everything is automatic. It makes for happy employees as well!

Mobile Platforms

More and more payroll service providers have apps for using mobile platforms to generate payroll. This is a real time-saver for any business owner on the go, and can be used in a myriad of situations. You’ll never be caught unprepared with a mobile app for your payroll!

In order to choose the right vendor to whom to outsource your business’s payroll, here are a few questions to consider:

  • How many employees will be serviced?
  • Until you reach a critical mass, it may make sense to use the lower level services of a payroll provider to keep the cost-to-value proportion in line. For less than five employees, it may be easier to use a service that generates paycheck and tax forms but perhaps does not file taxes directly. Fees escalate as you add more responsibility to the service.

    However, if you know you are not good with numbers, outsourcing may still make economic sense given the possibility of errors leading to penalties and fees.

  • What is the value of your time?
  • If you can bill a client for more than the cost of the payroll service, it’s a no-brainer that outsourcing makes economic sense. Many entrepreneurs do not value their time nor count their regular billing rate when doing internal tasks. Remember that your time is not free, and if nothing else, there is the opportunity costs of lost business you might have been generating if working on marketing and sales. Add your value into the equation when estimating if outsourcing is cheaper than doing payroll in-house.

  • How risk tolerant are you?
  • If you don’t flinch at a call from the IRS and see their questions as a game, then the risk of payroll errors will not bother you. However, many people enjoy the peace of mind that comes with having others responsible for employment tax law compliance and all it entails.

Each situation is different, so only a business owner can determine if outsourcing business payroll is cheaper than doing it in-house. However, given the great benefits including reduced risk of IRS penalties for errors, the odds are you’ll sleep easier at night knowing your payroll is being handled by a professional!


Sarah Boisvert writes on a variety of business topics such as incorporating social media into your marketing program and adding payroll service to your small business. She also covers technology and manufacturing.

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