Outsourced Payroll vs Payroll Department: Which is best for your business?
Deciding whether to perform specific tasks in-house or outsource them to an external provider is not a new problem. Companies across the globe have weighed up the pros and cons of both options for years to determine which option.
You can outsource almost every business function. Whether it’s marketing for advertising campaigns, customer service teams to reinforce good practices or a logistics team looking to optimise their processes, the reasons behind the decision are often remarkably similar.
Generally, companies choose to outsource because they want to reduce costs, focus on core functions, improve service and gain expert knowledge. This is no different for businesses when it comes to needing to execute their payroll processes.
When executing payroll, you have two options: outsourced and in-house payroll. In this article, we’ll look at the differences between in-house and outsourced payroll processing, as well as the benefits and drawbacks of each.
Before we go into more detail, let’s look at a few reasons why businesses consider outsourcing their payroll processes:
- Payroll is complicated and requires a certain amount of pre-existing knowledge and spare time to manage correctly.
- Many companies do not have the resources to perform the task in-house.
- They already outsourced their finance function and so decided to outsource payroll too.
Outsourcing payroll benefits many businesses – particularly startups, scaleups and SMEs with limited resources. The reasons for this are simple.
Managing payroll is both time-consuming and manual and eats into the time allocated to more high-value tasks that can impact company success. Payroll can also be highly complicated, with the rules that govern it continually changing.
Consequently, staying on top of the latest legislation and remaining compliant is often beyond many businesses’ capabilities. With this in mind, the natural choice is to do market research and choose a third party to manage payroll.
Let’s understand a few key areas as we dive into the details, advantages and disadvantages of outsourcing your payroll.
What is in-house payroll?
An in-house payroll department manages all of your organisational payroll activities. They are the employees who process payroll and often manage employee benefits (such as overtime and paid vacation). Whether distributing paychecks or setting up direct deposits, payroll processing is typically handled by your internal financial or human resource department.
How does in-house payroll work?
At its core, in-house payroll is the collaboration between your payroll processing team, your employees, and the tools you use to complete your payroll activities (such as a direct deposit). Typically an in-house payroll department completes the following tasks:
- Establish a payroll bank account to pay all of your employees.
- Create and implement a system for your employees to track their hours (salaried employees are paid a standard rate for each pay period).
- Create a payroll schedule; every week, two weeks or every month.
- Collect and approve timekeeping data for each employee during the pay period to determine gross pay.
- Manage deductions for each employee, such as retirement contributions, healthcare deductions, social security, tax deductions, and payroll taxes.
- Track and manage overtime, sick leave, and vacation pay.
What is outsourcing payroll?
Outsourcing payroll involves partnering with a third party to manage all of your payroll responsibilities. This consists of researching reputable and experienced payroll providers to ensure you work with a company that can provide the highest calibre of payroll services.
How does outsourcing payroll work?
Outsourcing your payroll will range depending on the size and needs of your business. However, most solutions follow the below general guidelines:
- Your company will partner with a payroll service provider.
- Follow the instructions provided by your payroll provider to gain access to their services.
- Your provider will manage and process employee data, timesheets, payroll taxes, deductions (i.e., retirement or healthcare), and much more.
- Your external payroll provider will designate a team to approve all payroll activities and authorise payroll processing.
Generally, the companies who don’t have the required technical expertise and staff and those who would like to go in for cost-cutting generally opt for payroll outsourcing services.
Pros and Cons of each service
In the case of an in-house payroll, there are certainly some distinct advantages: more comfortable access to data and more privacy, which are sometimes very necessary in an organisation. However, there are often individual hidden costs in an in-house payroll, such as purchasing payroll software and investing in the technology required to do the process.
On the other hand, payroll outsourcing services come with certain advantages, such as profit generation actions and access to a broader range of additional assistance. Payroll outsourcing cost is often a significant factor that influences corporates to seek the help of payroll outsourcing companies.
Some significant advantages of outsourcing payroll
It keeps the business updated
Most of the experts or vendors are up to date with the payroll operating systems, which helps the businesses to keep updated. There is a general feeling of confidence that service providers will tailor this service to your business needs. With so many changes happening quickly, businesses may find it hard to update their payroll processes.
Generally, a business saves precious money by seeking good payroll outsourcing companies. The company doesn’t need to invest in technology and qualified staff with an outsourcing solution. They need to contact the third party to do this job, and thus there is a reduction in expenses.
Access to all payroll services
The payroll department needs to maintain many activities, which are complicated with a handful of staff. With the help of an outsourcing company, you can access payroll processing, payroll tax payments and tax filing, and even complex calculations such as deductions, overtime, monthly or hourly wage, etc.
Time-saving and tax compliance
One of the significant benefits of payroll outsourcing services is that you can save valuable time for your business. There is no need to spend countless hours keeping track of all data and calculations. Taxes are a sensitive aspect of your finances, and the company needs to deal with them rigorously. There are many risks involved if the process goes wrong. Hence, it is best to leave it in the hands of experts.
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 essential 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.
Comprehensive online payroll services for businesses with MASA
Here at MASA, we provide full-service payroll solutions for businesses of all sizes. We can easily customise our payroll plans to suit your company’s needs and help you identify and eliminate inefficiencies within your payroll department.
If you would like further advice on choosing the best approach for your business, would like to know how much payroll services cost or have other inquiries, contact us today to get expert advice on our payroll processing services.