Processing payroll is more than just collecting employees’ hours, calculating wages, and issuing paychecks. Your payroll administrator must adhere to federal, state, and local requirements. And, understand how to factor in health care deductions, Social Security, employee tax withholding, and employee benefits.
Engaging an experienced payroll provider to work alongside your team can be a significant asset to the productivity of your business. If you’re thinking about hiring a company, here are seven benefits of outsourcing payroll.
1. Reduce costs
When you consider all that goes into processing payroll – calculating pay, printing checks, keeping up with regulations, maintaining software – it may be more cost-effective to hire a payroll vendor. Here’s an easy way to calculate the financial commitment you’re making to run payroll in-house.
Estimate the number of hours your staff spends running payroll each period or annually. Then, calculate how much you pay them for this one task. If you use payroll software, add the costs associated with the tool (maintenance, licenses, etc.) to employee pay.
Compare your total cost to plans offered by different payroll companies. If you can save money, it may be time to outsource.
2. Rely on payroll expertise
External factors – regulations, withholding rates, new forms, payroll laws – frequently change and affect your ability to process a correct payroll. Keeping up with these changes is time-consuming. Adopting new processes can be complicated.
With the help of an experienced payroll company, you can quickly understand, adapt, and implement changes to reporting requirements, wage and hour laws, and taxes. You’ll gain access to a team of experts that specialize in payroll processing and compliance with government regulations.
You can rely on these experts to monitor the latest requirements and how they may impact your business. When changes do occur, they’ll keep you informed and make the necessary updates in their payroll system.
3. Reduce risk and avoid paying penalties
According to the IRS, approximately 33% of employers make payroll errors, and 40% of small businesses pay an average penalty of $845 per year for late or incorrect filings and payments (Accounting Today, 2018).
Employers are required to pay federal, state, and local (when applicable) income taxes, Social Security and Medicare taxes, and federal and state unemployment taxes. They must also file payroll returns on a monthly, quarterly, and annual basis.
As an employer, you may be familiar with annual W-2 reporting. However, additional reporting is required throughout the year for state withholding, federal withholding, and unemployment wages. Reporting requirements may grow more complicated if you have employees working in multiple cities or states.
If you fail to meet these requirements, the penalties can be complicated and steep. Hiring an expert to file your returns can help ensure nothing is overlooked, returns are accurate, and they’re filed on time.
When it comes to payroll-related activities, there’s plenty of opportunities for mistakes. Mistakes can cost you money. Payroll providers can help you avoid errors and any associated penalties.
4. Free up key staff
In today’s business environment, one person can wear many hats. Do you have someone juggling payroll on top of other job duties? Are they keeping up with the workload? If they’re overwhelmed, they could overlook 401(k) contributions or issue incorrect paychecks to employees. The potential for errors could come with fines, upset employees, and the hassle of making corrections. Are you comfortable with this risk?
Processing payroll requires a significant time commitment. According to a 2018 Deloitte survey, more than 25% of respondents indicated that their payroll staff spends most of their time running payroll.
Working with an outsourced payroll company can help streamline processes and boost productivity – freeing up finance, payroll, and/or HR team members to focus on more strategic projects.
Already outsourcing payroll but thinking about switching companies? Read our blog on the best times to switch and tips to achieve a seamless transition.
5. Gain access to technology
Technology limitations are a top reason why companies outsource. Can you offer direct deposit to employees? Do your employees have access to their pay history, W-2s, and tax documents online? Third-party payroll providers use robust technology and cloud-based tools that allow employees easy access to their information. And most of these tools allow integrations with your accounting system.
In Deloitte’s 2018 survey, respondents indicated that manually entering or loading inputs is the most time-consuming aspect of processing each payroll. Implementing software that automates manual tasks can decrease the overall processing time and eliminate the hassle of data entry.
Some payroll companies offer additional features such as time and attendance tracking, applicant tracking, benefits enrollment, etc. These capabilities can save time, cut down on costs, and increase efficiency and security. Plus, you store your “people” data in one centralized database.
6. Increase data security
There are plenty of bad actors who threaten your business and employees’ security with payroll scams and theft. Most companies have security protocols in place to protect this highly sensitive data from threats. Why? Because protecting confidential client information is critical to the success of their business.
Preventing employee data from being compromised is crucial, as attacks can lead to identity theft. Many payroll providers use cloud-based systems that automatically issue monthly scans, install antivirus software, and encrypt client data. This is one of the greatest benefits of outsourcing payroll. Be sure to ask your payroll company what systems they have in place to protect your company’s data.
Tip: Look for companies that regularly pass SOC1 Type 2 audits. Learn more about SOC reports here.
7. Less stress
Processing payroll is stressful. People’s livelihoods are in your hands. When you work with a third party, their experts deal with the stress and hassle of the payroll process. But remember, even if you outsource, your payroll responsibilities don’t totally go away. Outsourcing can reduce payroll administration’s administrative and transactional components, but in-house payroll specialists are still needed to drive policy and decision-making (Deloitte Survey, 2018).
Plus, you’ll need to continuously share employee information with your vendor and manage the contract. Still – it’s a significant weight off your shoulders.
The benefits of outsourcing payroll can be extensive, but the critical element of realizing these benefits is hiring the right provider.
Originally published 4/26/2017. Updated 6/1/2021.
Need more convincing? Let’s talk about the benefits you could experience by outsourcing payroll!