10 Pros and Cons of Outsourcing Payroll

10 Pros and Cons of Outsourcing Payroll

by on 30 Nov, 2021

Payroll is one of the most complex and time-consuming functions fulfilled by HR experts. Outsourcing it to a third party can be highly beneficial. In fact, more than 30% of organizations worldwide are already doing it.

While appealing, payroll outsourcing isn't always straightforward. The decision to work with a payroll company shouldn't be taken lightly.  Outsourcing payroll to a payroll processor may not be as advantageous as delegating it to a comprehensive HR outsourcing solution.

5 Pros of Payroll Outsourcing  

The key advantages of outsourcing payroll services include: 

1. Time Savings

Payroll is time-consuming. Some small business owners report spending 10+ hours per month on payroll. Meanwhile, payroll taxes can take up to 5 hours per pay period. That's 21 days per year.   

Outsourced payroll can provide business owners and their employees extra time to focus on other core tasks and priorities. 

2. Cost Savings 

When comparing in-house payroll vs outsourcing, you need to consider the HR department's salary. To cover all payroll bases and avoid unfortunate errors, you may even need to hire a payroll specialist. 

The costs of hiring a new team member can be taxing for small businesses. Besides hiring and onboarding, you need to calculate the risks of churn. Coupled with the costs of buying and maintaining associated equipment and software, in-house payroll can turn into a significant financial burden.

3. Reduced Chances of Payroll Fraud

When payroll processing is done in-house, the chances of payroll fraud increase. Dishonest employees can collaborate with HR staff, so they ignore timesheet fraud, participate in pay rate falsification, or look the other way from sick leave fraud. 

The risk of payroll fraud is 100% higher in small companies than in large enterprises. That's why small and mid-size businesses can especially benefit from third-party payroll services.

4. Payroll Compliance

Staying compliant with local and federal laws can be complicated, especially when your HR employees juggle numerous tasks. Meanwhile, failing to comply with payroll-related legislation could lead to significant fines.

For example, each violation of the payroll-related elements of the Fair Labor Standards Act (FLSA) could cost your company $1,000.   

One of the advantages of in-house payroll processing is having dedicated HR staff that focuses on compliance. Unfortunately, SMBs can rarely afford to hire additional compliance experts. 

By outsourcing payroll to a reliable HR partner, you can be sure that all payroll elements stay compliant with the latest laws and regulations. 

5. Payroll Accuracy

More than 50% of Americans experience paycheck problems. About a half of them are likely to go job hunting after facing two or more payroll issues. Meanwhile, payroll errors like overdue taxes could lead to significant penalties.

Unless you have dedicated employees who focus solely on payroll, the risks of errors are high. By outsourcing payroll to a reliable HR service provider, you can be sure that it's getting sufficient attention. 

5 Cons of Payroll Outsourcing 

While outsourcing payroll may be highly beneficial, some disadvantages exist, especially if you don't choose a comprehensive HR outsourcing solution.

1. Risk of Inexperienced Company

If you don't find a reliable company for payroll outsourcing, you risk working with inexperienced payroll processors. In this case, you can't expect accuracy, compliance, or time-saving benefits. 

You can avoid this issue by spending sufficient time on payroll company selection. The time you invest in vetting payroll partners contributes to the ROI of HR outsourcing. 

2. Liability for Mistakes

While highly professional, even the most reliable payroll processors can make a mistake. If they do, your company is fully liable for it. 

The only way to share this liability is to work with a comprehensive HR outsourcing solution. Such relationships aren't possible with payment processors.

3. Limited Compliance

Dedicated payroll processors only focus on payroll-related compliance. Anything that goes beyond payroll responsibilities isn't covered. 

Meanwhile, other aspects of HR compliance that have to do with employment and work practices are left up to your employees. 

However, if you choose to work with a comprehensive HR outsourcing partner, you can delegate all HR compliance issues to it. 

4. No Tax Remittance

Payroll processors can assume your payroll functions, but it's still up to your staff to file payroll taxes. Since the process is time-consuming, many companies struggle to meet deadlines. 

By choosing a comprehensive HR outsourcing solution, you can delegate tax remittance responsibilities to your outsourcing partner. 

5. Multiple Software Vendors 

When you work with a dedicated payroll processor, they usually employ certain payroll processing software. While this can cut costs, it also means that you have to handle additional programs that may not integrate with the software you use for time & attendance, benefits enrollment, onboarding, and HR administration. This could lead to errors and extra work. 

If you decide to outsource payroll processing services to a comprehensive HR solution, they will provide integrated HR software that incorporates key HR functions. 

Comprehensive HR Outsourcing: All the Pros and None of the Cons 

While considering the risks and benefits of outsourcing the payroll function, keep the comprehensive HR solution in mind. Besides helping with payroll, such a company can fulfill a variety of other HR tasks, share liability, minimize errors, and ensure total compliance. 

If you are a small business that knows how to select payment processors, you can reap all the above advantages without the possible downsides by partnering with a comprehensive HR outsourcing solution. 

13 warning signs that you should outsource payroll

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How Does Outsourcing Impact HR?

Every year, Human Resources for small and medium-sized businesses (SMBs) is becoming more and more complicated. A small HR team may struggle to cover the entire ground, from.

Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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