Processing Payroll: In-House or Outsource?

A question that is always top of mind is whether payroll should be processed in-house or outsourced with a service provider. The short answer is consistent every single time: it depends.

It is very important to evaluate your company’s process in order to identify whether it is being managed in the most efficient and cost effective manner.

Misconceptions of Cost Savings

Many companies perceive processing payroll in-house as a cost saving payroll management method; however, in most cases this is far from the truth. Processing payroll in-house comes with the responsibility to ensure all tax tables and deductions are properly set-up, arranging the direct deposit files with your bank, printing and issuing all paper checks, remitting and filing all federal, state and local taxes, remitting payments to benefit providers, as well as entering journal entries and other routine tasks that come with the payroll process.

While companies who process payroll in-house pay less in platform maintenance fees when compared to the cost of hiring a company to outsource payroll, they are making up for the cost in labor. It is well known that processing payroll in-house takes longer than outsourcing payroll with a service provider. Processing payroll in-house usually requires a team of employees to get the job done accurately and efficiently, especially while ensuring you are maintaining a system of checks and balances (i.e. the same person entering payroll isn’t the same person transmitting the direct deposit information, paying the benefit providers, posting journal entries and reconciling accounts). All of those labor hours add up and take away from tasks that need to get done, and shift the focus away from other initiatives that could be made for the company.

Tax Compliance

After ensuring employees are paid accurately and timely, the next most important process is tax compliance. Processing payroll in-house will hold the company accountable for remitting tax payments on time and to the proper agencies. Additionally, the company will be responsible for the filing on quarterly and annual returns, W2’s, and 1099’s.

This can be a daunting task and if you do not have enough staff with adequate knowledge of tax compliance, it can put your business at risk for audits and create exposure to additional liabilities.

The benefit of having your payroll outsourced is that payroll service providers staff their teams with tax specialists and take on the responsibility of paying and filing all necessary taxes and forms as a third party acting on your behalf. This takes a huge burden away from the company and can help avoid a lot of issues when dealing with the complexities of tax compliance.

Data Security

With data privacy laws on the rise, GDPR and CCPA to name a couple, there has never been a more important time to ensure security over the data you house within your payroll system. The data contained within a payroll system is some of the most sensitive data you can have - inclusive of social security numbers, birth dates, legal names, addresses, and bank account information.

Processing payroll in-house can give you a greater sense of security as the servers within your company are generally more secure than the cloud servers used by outsourced payroll companies.

Did You Know?

Payroll service providers usually request funds for your payroll to be sent days before your actual pay date. All of the funds they collect for payroll & taxes are held in interest bearing accounts. These companies usually wait until the very last minute to remit the funds to the tax agencies, allowing them to earn thousands of dollars of interest on the funds you give them each and every payroll.

In, Out, or In Between?

Ultimately, deciding on whether to outsource payroll or process in-house depends on a company’s size and expertise, as well as their budget and access to the appropriate technology.

Most companies fall in the middle of the spectrum by delegating some larger payroll and tax compliance items to a service provider and taking on the remaining tasks in-house. I believe the middle of the road is the way to go. It is important for companies to have some insight and control over their payroll, as it is usually the company’s largest expense. However, ensuring employees are paid timely and accurately as well as keeping up with federal and state tax compliance is a large component of payroll that is better left to the experts.