Deciding between in-house and outsourcing payroll
Posted on December 21st, 2015
By Chris Hadden, CPP
Greenshades Software Technical Sales Manager
This may sound crazy coming from someone who specializes in helping companies run payroll in-house, but here it is: you may want to outsource your payroll.
My boss, and self-proclaimed ‘Payroll Geek’, Molly Van Kampen, led a session at GPUG Summit earlier this year titled ‘Payroll Shouldn’t Be Painful.’ During this session, Molly spoke to a full room on best practices for managing payroll in-house. During the presentation, one of the attendees raised her hand with a question, followed up by a brief explanation on their current process and company specifics. After interacting with this woman for a few minutes, Molly said, “You should really consider outsourcing your payroll.” A hush fell over the room. Molly Van Kampen, did you really just tell someone to outsource their payroll? Why, yes she did.
So long story short, sometimes clients actually should outsource their payroll. The question is: Who should?
Payroll is not a revenue generating department, or task, within an organization. Payroll expenses (wages, taxes, etc) are generally a company’s largest expense. In an effort to cut cost and save as much money as possible, a logical thought would be to run payroll in-house. You may be surprised to hear though that running payroll in-house is not always cheaper than outsourcing your payroll to a third party organization.
Generally, companies specialize in something they are experts in. So a natural first question would be, “Are you a payroll expert?” In all reality, if you plan to run payroll internally, you need to have payroll experts on hand, or, at the very least, be partnered with a consulting team that has payroll experts available to you.
So here are some more questions to ask yourself:
- How many legal entities am I managing?
- How many employees do I have?
- How many states and local jurisdictions do I currently have employees in?
- How much time am I spending (on a weekly basis) running payroll?
- Do I, or anyone else in my organization, have an FPC or CPP certification from the American Payroll Association?
- Have I struggled in supporting direct deposit for my employees?
- Do I have an internal technical team capable of maintaining an in-house payroll application?
Why do these questions matter?
Generally speaking, the more employees an organization has, and the more states these employees are working in, the more complex managing payroll in-house may be. However, that’s not necessarily the full story.
Some organizations (including the company whom Molly recommended outsourced payroll to) have a small number of employees. However, the organization has a large overall number of states in which these employees work. This leads to a significant amount of compliance and education upkeep that is required for the payroll team. The team handling this is likely a small team to begin with due to a small company size overall. In some cases, the cost of the additional compliance support that is needed for companies such as this is actually more than the cost of outsourcing the payroll entirely.
The 2015 Small Business Taxation Survey (http://www.nsba.biz/wp-content/uploads/2015/04/2015-Taxation-Survey.pdf) found that 23% of employers spend as low as 2 hours per month on payroll, while 22% spend 10 hours or more per month on payroll. From the same survey, it found that 41% of small employers reported to be outsourcing their payroll, however, 13% of employers who outsource their payroll are still spending 10 or more hours per month on payroll related tasks. How is that possible? There are certainly a number of individual and unique factors for each business that could lead towards additional time managing payroll related tasks, even when outsourcing, so it’s important to understand the full scope of what the outside provider is offering before signing any contracts. Many employers who outsource still find themselves with hours of admin related tasks. So, before signing a contract with a particular provider, I highly recommend you ask to speak with a company similar to your size and industry who is using this same provider.
Are you certified? As a CPP member myself, I can vouch for the intense training and examination that goes into either the FPC or CPP certification from the American Payroll Association. Completing certification and continuing education is critical with payroll. If you are considering running payroll in-house, it is recommended that you have two or more certified members on staff. Keep in mind, what happens if your payroll expert walks out the door tomorrow? You better be sure to have a back-up in place, because I can ensure you that your employees are not willing to hold off on getting paid, nor will the IRS hold off on collecting their dues.
Some smaller business have struggled with implementing a direct deposit pay offering for their employees, due to increasing bank fees. With this in mind, some small organizations have found outsourcing payroll to be a way to leverage the payroll company’s size for better (lower) fees.
Running payroll in-house requires some type of software application, in this day and age. While many payroll software applications (such as Dynamics GP) are headed towards a more cloud-based environment, many payroll software applications still require on-premise deployment. When considering payroll options (in-house versus outsourcing), don’t forget to consider the initial technical support needed, as well as ongoing upgrades that will involve your IT team. If you don’t have these IT resources available, at the minimum, consider partnering with a technical consulting company. However, outsourcing payroll may be a good alternative in this case.
If you are considering outsourcing your payroll, keeps these IRS tips in mind: https://www.irs.gov/uac/Newsroom/Tips-for-Employers-Who-Outsource-Payroll-Duties
So which one is cheaper?
Cost is something that matters to every organization, and in most cases is the number 1 determining factor when deciding on in-house versus outsourced payroll.
When comparing the cost between options, keep these hidden costs in mind to help build an “apples to apples” comparison (or least as close of an “apples to apples” comparison you can have).
Keep in mind these hidden costs:
- In-house payroll
- Possible compliance penalties with incorrect or late payroll taxes
- Add-on products that may be needed to help build a complete in-house solution for maintaining compliance
- Cost of payroll software support (whether it is internal IT costs or support fees from software company)
- Human time spent on processing payroll
- Technology upgrades to support payroll system
- Outsource payroll:
- W2 printing is billed as an additional fee in many cases, sometimes at a steep rate. Be sure to check your contract or the price quote, carefully.
- Employee verification (employee address and Social Security Number verification). This service is billed on a monthly basis, and in many cases, may not be included in the price quote.
- Job verification. There may be an additional fee every time an employee or third party verification (loan application, etc) contact the payroll service company for proof of employment.
- IRS Penalties due to employer provided bad data. There is sometimes a false sense of security that employers can have when outsourcing payroll. Keep in mind, payroll companies are only going to be as accurate as the data you provide them. So in most cases, if you provide incorrect employee data, you will be liable for any penalties.
- Additional fees to access data. Some payroll companies will charge a processing fee to access your data (current or historical data).
- Human time still spent on payroll. Even when outsourcing, you are still spending time with Admin type functions (manual entry of data provided by service provider, for example). Some larger outsource companies can help automate more things but smaller/local companies (like CPA firms) still struggle with this.
- Some providers keep your payroll taxes until they have to be paid to the IRS, in essence, letting your money accrue interest for them in the interim.
- Some companies have been hit with “termination of contract” fees when they left their outsourced payroll service.