As a business owner, your employees are the top priority. You ensure they are paid accurately and on time. When managing your payroll, you have two options; recruiting an in-house payroll team or outsourcing the services to a third party. This brings a debate on the payroll you should choose for the business. Before making a decision, explore the advantages and downsides of each payroll system.
How does managed in-house payroll work?
Managed in-house payroll is when a business owner sets up a department in the company to deal with the payroll responsibilities. The payroll team is part of your in-house employees in the finance or HR departments. However, large companies have a department responsible for handling payroll data, paying employees and filing the statutory requirements. An in-house team gives you the flexibility and control to make decisions and changes associated with your payroll processes. Typically, a managed in-house payroll performs the following tasks:
- Creating a system to track employee work hours for accurate payments.
- Creating a payroll schedule for weekly, bi-monthly and monthly payments.
- Collecting and approving timesheets and using them to calculate the pay rates.
- Managing employee deductions such as healthcare, tax and retirement contributions.
- Tracking and managing sick leave, overtime and vacation pay.
Advantages and disadvantages of an in-house payroll
- Additional oversight and control over the payroll management: Having an internal payroll team gives you additional control over the payroll. When you handle payroll in-house, you understand the process better.
- Avoid a learning curve for new software and integrations: With an in-house payroll, you have control over the new software integrations. Since you already have time and attendance tracking or bookkeeping, you don’t have to integrate new systems and learn them. Outsourced payroll services usually have a list of integrations for tracking time, which may cause some frustration with your payroll team since they have to learn the new software.
- Takes advantage of employee expertise: Most small businesses designate payroll tasks to an employee. If you already have an employee with expertise in preparing payroll, you can utilise their expertise instead of hiring a new employee.
- Time-consuming and complicated: According to QuickBooks, a payroll team requires at least five hours to calculate payroll daily and 300 hours a year. The payroll process is time-consuming for small HR teams managing in-house payroll. Calculating taxes and payroll is also complicated and requires expert knowledge. With compliance becoming complex and challenging over the years, it requires someone with updated knowledge of the entire process.
- High risk of errors and fines: Working on payroll in-house makes it subject to human error. Your HR team is already bogged down with their duties and may perform payroll calculations at the last minute leading to errors. Aside from calculation mistakes, you may incur penalties for filing inaccurate taxes or missing deadlines.
How does outsourced payroll work?
When outsourcing payroll, you partner with an expert payroll service provider to manage the payroll process. Outsourced payroll providers automate the process, and you don’t have to manage it daily. The professionals handle the payroll process and provide you with the required services. Depending on the size of your business and employees, you may want a payroll provider who can perform administrative tasks and tax compliance duties. You can also offload additional responsibilities and functions to the outsourced payroll provider.
With outsourcing, you turn over the process to an external party. This reduces the time you and your staff must devote to payroll tasks. Some of the benefits and disadvantages of outsourced payroll include:
- Cost savings: Hiring an in-house team is costly since you have to pay salaries for the entire payroll team. With outsourced services, you only pay the payroll provider, and they handle all the issues related to your payroll needs. The cost of outsourced payroll saves your company money.
- Time savings: Outsourced payroll saves time and frees up your business to concentrate on other things. A payroll service provider works around the clock to ensure your company complies with the payroll requirements.
- Convenient integrations: When you use outsourced payroll, it comes with integrations that improve your business. You can find integrations to help you streamline related tasks like human resources and accounting. For instance, small businesses that outsource their payroll usually enjoy integrations such as HR benefits and time and attendance software.
Less oversight on the payroll process: When you use outsourced payroll, the provider oversees the entire process. While the process is convenient and time-conducive, you have minimal control of the entire payroll process. You also grant the provider access to your employees’ and business data for payroll duties. Reputable payroll companies usually have security measures to ensure your data is secure and you maintain oversight of the payroll activities.
Managed in-house vs outsourced payroll
Outsourced and fully managed payroll perform the same tasks. The only difference is the people who handle the duties. In-house payroll teams calculate payroll and perform their duties in-house, while an external provider performs outsourced payroll. With in-house payroll, you utilise internal resources to perform payroll tasks. You assign the duties to an employee who completes the payroll tasks manually or leverages various software solutions in the company to prepare the data.
With outsourced payroll, you work with an external professional with expertise in providing human resource and payroll functions. Your provider will handle the timesheets, ensure employees are paid on time, and comply with relevant laws. They take care of the tax filing and prepare payroll reports. You can offload the entire payroll process to allow your business to focus on other duties.
Factors to consider when choosing between in-house vs outsourced payroll
Choosing whether to use in-house or outsourced payroll is challenging, and you need to consider multiple factors before making the final decision. Some of the factors to help you choose include:
- Budget: Compare the amount you will likely spend on in-house payroll vs outsourcing. It is important to check the expenses associated with the payroll tasks and the cost of making mistakes. Outsourcing is often cheaper upfront, but you need to compare the payroll service bills or prices the outsourced services offer.
- Payroll expertise and technical assistance: Payroll has numerous moving parts, and if care isn’t taken, it can lead to fines. When your payroll team has other responsibilities, keeping track of the changing payroll regulations, like overtime rules and pay frequency laws, is challenging. A dedicated payroll provider stays updated with the relevant laws and has certified HR experts on their team to ensure expertise. Hence, you need to choose a provider that matches the expertise you need.
- Company size: The size of your business and the number of employees determines the ideal payroll option. A managed in-house payroll may be cost-effective when you have a few workers. You assign the payroll duties to one employee, and they can do it comfortably. When you have a large team of employees, one employee cannot perform the payroll tasks. Outsourcing the services is the best idea if you don’t want to invest in a payroll department.
- Compliance and data security: Employee and business information is sensitive, and it is important to keep the data secure. Outsourcing your payroll tasks exposes your data to breaches. However, you can evaluate the provider’s data security policies and determine if your data will be secure.
The choice between fully managed vs in-house payroll comes down to your preferences. Do you want to pay for convenience or retain control of your payroll process? Regardless of the choice, ensure the payroll process is done right.