Payroll is one of the most time-consuming and error-prone HR functions that companies execute. That's why HR managers are always looking for optimization opportunities. The common options for payroll processing include manual payroll, payroll software, and outsourcing.
Small businesses that choose to do payroll manually, spend long hours on the process. While using payroll software takes much less time, this option comes with certain limitations. These issues can be avoided by delegating payroll processing to a comprehensive HR outsourcing solution.
Learning the difference between payroll processing options can help you choose the right course of action.
Manual payroll may appear to be a cost-effective solution especially if your company has only a few employees. In reality, running payroll by hand can cost you much more than payroll software.
Manual payroll processing keeps your employees from focusing on core tasks and improving the company's productivity. Eventually, you may lose more money when operations slow down.
If you want to keep employees focused on other duties, you may have to hire a payroll expert. When you calculate hiring and onboarding expenses as well as employee benefits, hiring an HR specialist turns out to be costly.
Manual processing is often accompanied by human error. These errors can result in significant fines.
Overall, using payroll software is more cost-effective than manual processing. However, relying solely on software to run your payroll doesn't eliminate all processing-related problems.
While using payroll software trumps manual processing, it comes with several serious issues.
Payroll software rarely has a low learning curve. If you've never used such software before, you need to train employees on how to do it. If your team is focused on other tasks, you may need to hire a payroll specialist who knows how to work with the software.
Besides hiring and training expenses, you may be facing software installation, support, troubleshooting, and upgrade costs.
Some payroll processing programs can't identify the difference between additional voluntary withholding and regular withholding amounts while calculating catch-up withholding for a current tax year.
If your software has this problem, you need to pinpoint the issue and correct it in your payroll processing. Otherwise, you may face fines for under-withholding taxes. Underpayment penalties can reach 25% of the underpaid amount.
While payroll software can calculate payroll, it doesn't file payroll taxes. You are fully responsible for doing calculations, making sure that all forms are filled out properly, and paying taxes on time.
Small business owners spend up to five hours per pay period on payroll taxes. This keeps them from dealing with other important matters. Meanwhile, mistakes they make when calculating taxes often end up being costly.
While working with payroll software is likely to reduce the number of errors, they may still happen. From glitches and lost information to wrong data input, you could end up miscalculating payroll.
All issues that come with payroll mistakes are your liability. Even if you aren't responsible for a software malfunction, you have to deal with the consequences. Since rates, laws, and policies are always changing, a missed software update could lead to unexpected fines.
Besides payroll software, you are probably using other HR tools. If this software doesn't integrate with time & attendance programs or employee self-service portals, you'll be stuck re-entering data and increase the chance of human errors.
While it's preferable to invest in comprehensive HR software, many small companies don't do it because of the cost. Eventually, they end up juggling a large software stack, which usually leads to errors, penalties, and low employee satisfaction rates.
Payroll laws and regulations change regularly. Not all payroll software stays up to date with the latest changes. Accordingly, your team would still need to check for updates and make changes manually.
While some payroll programs get automatic upgrades, for others, you need to monitor the latest updates and install them on your own.
If you decide to outsource payroll processing, you can take care of the majority of the above issues. The HR outsourcing partner can:
Provide all-in-one HR software that integrates payroll with other HR programs, including time & attendance, employee self-service portals, and reporting for managers.
Handle payroll software, so you don't need to spend as much time and money training your employees.
File payroll taxes for you, allowing your HR experts to focus on other tasks.
Share liability if there is a payroll processing mistake.
Keep on top of all payroll-related laws as well as other HR compliance
In short, by choosing a comprehensive HR outsourcing solution, you can delegate all payroll processing functions and expect high-quality results.
Hiring payroll processors can provide a positive ROI for small and medium-sized businesses. The cost-effectiveness comes from the time you gain when delegating the complex payroll process.
However, the average ROI of the most comprehensive HR outsourcing option is 27.2% The more functions you outsource to a reliable HR service provider, the higher the efficiency of this choice is.
By choosing the right HR outsourcing partner, you can avoid issues that accompany payroll software and manual payroll processing.
Tom DiSilva has been providing professional human resource services for over 30 years. As the CEO of Navigate PEO, he actively partners with organizations of all sizes in the Greater New England area and across the country to help their businesses grow. He has expertise in HR and Labor Management, offering guidance and support for key areas of business such as negotiations, operations management, employee coaching, and employee benefits design.