Payroll is a critical function of every business. It’s how you reward employees and compensate them for their work. However, payroll can be a daunting task for small and medium-sized businesses due to time, costs, payroll regulations and other important factors.
To overcome these challenges, many businesses decide to outsource their payroll to a knowledgeable and reputable payroll vendor. In fact, 39% of U.S. companies outsource payroll, according to a study conducted by Robert Half and the Financial Executives Research Foundation.
Payroll services range from online self-service models to full-service professional employment organizations (PEOs). And while outsourcing payroll offers a range of benefits for your business, it’s important to weigh both the pros and cons to determine if this solution is right for you.
What are the Pros and Cons of Outsourcing Payroll?
Payroll involves important tasks and responsibilities, such as compensation, reconciling payroll data, filing taxes, recordkeeping and much more. When outsourcing this function, you want to make sure it’s in the best hands, while yielding positive results for your business. Here are a few benefits and drawbacks of outsourcing your payroll rather than handling it in-house:
Time Savings
Processing payroll requires a lot of time and attention to detail. Each pay period, you or your payroll specialist is tasked with inputting large amounts of data and double-checking for errors. By outsourcing payroll operations, however, you have more time to focus on the strategic initiatives you have outlined for your business, like growing revenue or delivering excellent customer service.
Regulatory Compliance
Payroll regulations are constantly changing. As a business owner, it can be difficult to keep up with every new change and adjust payroll procedures in order to remain compliant. But outsourcing your payroll to a reputable organization can help you avoid compliance issues or costly mistakes. Qualified PEOs, for example, maintain a strict adherence to industry standards and best business practices to ensure this function runs smoothly and effectively.
Improved Security
One of the biggest concerns regarding payroll is the safety and security of confidential data and information. Handling payroll internally can be risky due to untrustworthy employees or unsecure payroll software. Conversely, most payroll companies are equipped with state-of-the-art systems designed to store and protect your private information.
Reduced Costs
Maintaining a robust payroll department can be costly for small and medium-sized businesses. Especially when you account for the various components involved in payroll processing, like salary, benefits and tax management. By using a payroll company, the productivity and efficiency will be elevated without you having to incur those costs. This is especially true if you have 30 employees or less, as you’re likely to experience a significant cost-savings by outsourcing this function.
While there are a number of benefits to outsourcing payroll, there are also a few risks to taking this route.
Risks to Consider:
Trust
It may be difficult to trust a third-party vendor with such an important business function. When looking for a payroll partner, it’s important to research their competencies in payroll, plus any accreditations and designations that hold them to certain standards. A reputable PEO, for example, should have a list of credible references for you to contact and confirm their level of expertise, track record and reliability.
Liability
Mistakes happen, and there’s a chance your payroll partner may process employee payments incorrectly or make an error when filing payroll taxes. And unfortunately, these errors can lead to a lawsuit for your business.
When outsourcing your payroll, choosing a company that has adequate business insurance to cover any payroll errors or liability claims is key. A PEO would be an ideal partner, as any errors are covered under their professional team and company federal ID number. Most payroll services that are not co-employers - like PEOs - do not have those type of liabilities covered.
Delayed Support
If a payroll error occurs, an external team may not respond as quickly as you or your employees may want. To guarantee responsiveness, it’s important to find a partner that provides high-level support and quick response times. They should make this a part of their value proposition. At PRemployer, for instance, we adhere to the “Sundowner Rule,” which is a company-wide policy that ensures any customer services issue is handled within the same day.
Unexpected Costs
Although outsourcing your payroll function can save money, hiring the wrong partner can lead to higher costs, as every vendor may not tailor prices to your company’s size. Before choosing a payroll partner, research the company and their fee structure to make sure it works for you.
For example, PEOs offer two main pricing structures: payroll percentage or flat fee per employee. Fees based on a percentage of the payroll is ideal for businesses with hourly or part-time employees, but a flat fee is more cost-effective for those with salaried employees.
While there are clear advantages and disadvantages to outsourcing your payroll, the benefits definitely outweigh the risks. Consider finding an experienced PEO to handle this important function. Doing so will allow you to free up time and resources to focus on driving growth in your business.
