As a small business owner, one of your many responsibilities is taking care of your internal team—after all, they’re the people who keep your business in motion. Ensuring that your team gets paid accurately and on time should be among your top priorities as a manager.
When it comes to executing payroll, you have two options: outsourced and in-house payroll. In this post, we’ll take a look at the differences between in-house payroll and outsourced payroll processing, as well as benefits and drawbacks of each.
Use the links below to jump to the section that best covers your query, or read end to end for an in-depth overview on the topic.
- The difference between in-house vs. outsourced payroll
- What is in-house payroll?
- The benefits of in-house payroll
- The drawbacks of in-house payroll
- What is outsourcing payroll?
- The benefits of outsourcing payroll
- The drawbacks of outsourcing payroll
- What to consider when choosing a payroll provider
Depending on the pay structure of your organization, you may distribute paychecks or direct deposit funds to your employees on a weekly or every two weeks basis. Payroll processing is often handled by your internal human resources or financial department. Alternatively, you can outsource your payroll by hiring a third-party payroll provider.
According to a Deloitte survey on payroll operations in North America, 32% of businesses use in-house payroll, and 24% outsource their payroll processing completely. Additionally, 43% of North American businesses use a third-party server to host payroll but complete the process internally.
The main difference between in-house and outsourced payroll processing is that an in-house team is on staff—and on payroll—while an outsourced provider is hired externally. In the sections below, we’ll take a closer look at what defines in-house and outsourced payroll processing, as well as their respective benefits and drawbacks.
In-house payroll is when an internal department handles payroll processing for the organization. The staff who process payroll in-house are categorized as employees, and as such, are paid through the same payroll system that they help manage. In-house payroll clerks often fall within the human resources or financial department.
How does in-house payroll work?
The in-house payroll process is a collaboration between your payroll processing team, your staff, and the tools you use to get the job done. Here’s a step-by-step look at how the in-house payroll system works:
- Set up a payroll bank account. This is where funds will be withdrawn when employees cash their checks or receive direct deposit.
- Create a system for team members to track their hours. This will help you determine how much to pay them if they’re hourly employees. Conversely, salaried employees will be paid a standard rate for each paycheck.
- Establish a payroll schedule—every two weeks is the most common pay period used.
- Collect timekeeping data for each employee that worked in a given pay cycle, and use the information to determine their gross pay.
- Subtract any necessary deductions from each employee’s gross pay. This includes retirement and healthcare contributions, income tax withholdings, FICA taxes, and relevant payroll taxes.
- After you’ve calculated what’s leftover, you can initiate payment on your organization’s predetermined payday.
When making any sort of decision for your business, it’s a good idea to consider the pros and cons of your options. Keeping your payroll in-house can offer a number of benefits to your business, depending on its size, structure, and standards.
Now that you have a deeper understanding of how the in-house payroll processing system works, let’s take a look at the benefits.
Control over payroll processes
One of the primary benefits of having an internal payroll system is that you typically have greater control over the payroll processes and management. An internal payroll clerk can adopt your existing procedures or help you develop a payroll system that suits your specific preferences. Alternatively, if you were to hire an outsourced payroll provider, you might need to adjust your processes to meet their standard workflow.
Another benefit to having your payroll processed in-house? Making last-minute changes or resolving issues can be more efficient than connecting with a payroll company.
Inexpensive cost compared to outsourcing
Cost is another key metric to consider as you compare in-house and outsourced payroll solutions. Depending on the size and structure of your business, you might find that hiring someone internally is more affordable.
Recent data from the Bureau of Labor Statistics shows that payroll and timekeeping clerks earn an average of $22.79 per hour or $47,390 annually.
If you’re a large company with thousands of employees, the money you spend on payroll processing would be divided amongst a bigger pool, lowering the per-check cost. Hiring someone internally may be more economical than paying a per-check or per-employee fee for thousands of checks each pay period.
Keeping your payroll processing in-house eliminates the need for a third party, which inherently lowers the risk of having your employee data compromised. The fewer people or systems that your data travels through, the lower the security threat.
As you know by now, there are many benefits to using an in-house payroll system, but there are just as many drawbacks to consider. Let’s take a look at the potential negatives of in-house payroll solutions.
Takes employee time to run payroll
It’s no secret that hiring employees is one of your biggest business expenses. Not only do you need to account for their salary, but also onboarding costs, which average around $1,500. For some organizations, hiring a payroll expert just isn’t feasible, even as a part-time agreement. After all, time equals money.
More time-consuming for management and owners
Bottom line, adding payroll to your internal process is adding yet another thing to your to-do list, even if you’re not handling it directly. As a manager or owner, you may be the one to review payroll or, at the very least, you may manage the payroll team.
May not have the expert assistance for setup
A big edge payroll companies have over in-house systems is that their focus is entirely on payroll solutions. This means you’ll likely have more access to expert assistance as you process payroll.
Can’t fully integrate business solutions
Payroll can be a seriously challenging system to set up, mainly because it’s tied to so many other HR functions, like health benefits, employee scheduling, and time tracking. Not being able to configure these systems easily can be a major downfall for in-house payroll.
In-house payroll teams deal with a lot of sensitive information and employee data, including bank accounts, birthdates, and Social Security details. So when it comes to processing your payroll in-house, compliance and accuracy are of the utmost importance. Hiring an individual who’s unfamiliar with or just learning compliance rules could pose problems for your finances and employee relations.
Outsourcing payroll is when a business chooses to hire a third-party company or individual contractor to process payroll.
How does it work?
The outsourced payroll process is different for every payroll provider, but most solutions will follow these general steps:
- Sign up with the payroll service provider of your choice.
- Follow setup instructions using support as needed.
- Your provider will process payroll automatically based on timesheets, employee data, payroll taxes, and other deductions.
- Have a designated internal team member approve paychecks.
- Authorize final payroll processing.
Like in-house solutions, outsourced payroll has its own respective benefits. As you debate which payroll solution is best for your business, take a moment to review the positive aspects of outsourcing your payroll.
One of the main benefits of using an outsourced payroll system is the simple setup. Because payroll companies and software systems are already designed to follow payroll processes, you can easily provide your company’s information and step back. In-house systems tend to be more precarious to build on your own and manage over time.
Integrating your various HR functions, like benefit structures and employee scheduling, is almost effortless with outsourced payroll solutions. You can think of it like a blank template—simply provide your information and configure it to your needs. Then a streamlined and organized process awaits.
Outsourced payroll systems typically use standard processes that closely adhere to compliance rules set forth by the state, federal government, and other governing agencies. The strict requirements they’re subject to generally ensure greater compliance, saving your business headaches down the road.
Making sure that payroll is delivered accurately and on time is among your most important priorities as an employer. In fact, 69% of American workers say that they would experience financial difficulties if their paychecks were delayed just one week. Not delivering paychecks on time could negatively impact employee relations and potentially contribute to turnover if the problem is persistent.
Outsourcing your payroll to a third party can help you ensure accuracy and automate certain processes to deliver paychecks on time, every time.
When things go wrong with payroll processing, a speedy and skillful resolution is critical, and oftentimes having an expert around to handle it is key.
Outsourced payroll solutions typically include access to a support team or sometimes, a designated individual assigned to your account.
The drawbacks of outsourcing payroll
Now that you’ve had a chance to review the pros of outsourcing payroll, let’s take a look at the potential drawbacks you might encounter.
Because most third-party payroll companies charge on a per-check or per-employee basis, the benefits don’t add up for larger companies with thousands of employees. Small businesses, on the other hand, are likely to see better cost savings with outsourced payroll than in-house solutions.
Payroll services usually charge on a per-check basis, generally between $1 and $5 per paycheck processed.
Data passes through third-party system
To process payroll, both in-house teams and outsourced payroll companies need access to a certain amount of sensitive information, like employee bank account details, schedules, etc. Forwarding these details to a third-party vendor can potentially increase your risk of a security breach.
If you do move forward with an outsourced payroll provider, be sure to review their security policies and only work with reputable vendors, like QuickBooks.
Now that you’ve had a chance to review some of the pros and cons of in-house and outsourced payroll services, you probably have a better idea of what direction works best for you. Before you make your final decision to bring payroll in-house or outsource it, use these guidelines to help you choose a payroll provider.
- Consider the size of your company, as well as factors that might complicate payroll processing.
- Assess your budget for each payroll option and weigh your cost savings.
- Evaluate compliance and security policies to keep your business payroll information and employee data secure.
- Check your payroll provider’s accuracy to avoid issues later on down the road.
- Consider how much time you and your team have to process payroll on your own and the level of support you may need.
With our streamlined QuickBooks payroll solutions, you can monitor your payroll and other HR functions all in one place.
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