Mar 03, 2021

Should You Outsource Your Payroll?

As a small business owner, payroll is probably never far from your mind—and this becomes more and more true as your staff grows. However, dealing with payroll is likely not your favorite part of running a business.

To keep employees—and the Internal Revenue Service—happy, many small businesses outsource their payroll tasks to a specialized service, while others opt to hire someone in-house to handle payroll. Either way, it’s usually wise not to do all of your payroll and run your small business all by yourself.

Costs to Consider

Your direct costs will always be higher when you outsource your payroll, but you can easily pay out far more in fees, penalties, and lawsuits if you make errors doing everything yourself. Additionally, you almost certainly have more pressing things to do during all the time you spend managing payroll—time is money, after all.

“In truth, smaller firms with a stable, salaried staff and minimal changes in tax obligations may well be better off processing internally; it can certainly be more convenient and efficient if your needs are straightforward,” Mie-Yun Lee writes for Entrepreneur. “But many ultimately discover it’s not all that cheap—especially when you factor in the time spent managing the process.”

When deciding between outsourcing your payroll or hiring someone to do it internally, it‘ll generally be cheaper to outsource than to hire a highly qualified payroll expert. However, if you have someone in-house, all of their energy is dedicated to your company’s payroll. Because of that, it might be worth paying the salary of a payroll manager as your company grows.

Is Your Business Big Enough?

If you’re a sole proprietor and the only employee working for your company is you, all of your “payroll” is likely deeply linked to your tax situation. Hiring out solely to handle your payroll isn’t necessary, but you should still tap an accountant or tax professional to help out with the financial side of your business.

Even if you have just 1 employee, it’s worth it to outsource your payroll management. That way, you can ensure that you stay on the right side of the IRS, and your payroll manager can easily scale up administering your payroll as your staff grows.

If there just isn’t enough money in your budget to outsource payroll, you can do it yourself with the help of some software and lots of research. Expect to spend several hours every week managing your payroll and tax liabilities.  

Save Time and Productivity

Even if you administer your payroll on time and never run afoul of the IRS, you’ll still spend dozens of hours every year focused on this task.

“As a business owner, your time has a dollar value that’s linked to the revenue you generate from the tasks you handle at any given time. The time you are able to save each day is money earned,” Sujan Patel explains in Inc. “If you look at the total time you spend on payroll each pay period compared to the costs of outsourcing, you’ll see a great deal of cost savings when you take those tasks off of your plate.”

Take a few moments to calculate how much your time is worth, then consider how much time you spend doing payroll. Compare this amount to how much it costs to outsource payroll or hire someone in-house.

Dealing With the IRS

IRS penalties for payroll tax issues are severe. If you’re doing your company’s payroll taxes, you need to be engaging with the IRS on at least a quarterly basis. Ideally, you are withholding and remitting taxes for your employees every time you cut paychecks.

Outsourcing your payroll to a reputable company helps to ensure that you comply with all IRS regulations, although your business still may be liable for penalties depending on the circumstances.

Messing up your payroll can earn the ire of many more parties than just the IRS—if you underpay your employees, it’s a crime. The Department of Labor can also get involved with payroll issues.  

A Payroll Expert at Your Side

Outsourcing payroll or hiring someone in-house means that someone will be paying closer attention to your payroll than you probably could with all your other responsibilities. Not only will an expert help you to follow all of the relevant laws, but an extra set of eyes can also track patterns and provide insights about your employees. You can source a better analysis of how many hours your staff is working compared to your company’s productivity or see how much paid time off is taken throughout different months of the year.

Automating With Payroll Software

Even if you don’t want to outsource payroll or hire an administrator just yet, using the latest offerings in payroll software can ease the burden tremendously. Options like Gusto can track time, automatically file payroll taxes, and provide insights into staffing.

About the author

Barry Eitel
Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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