Back to Payroll Management

Pros and Cons of Payroll Outsourcing Services

Written by:

Edited by:

Reviewed by:
Daniel Eisner and Mark Stewart

Published on September 24, 2022

Updated on November 17, 2022

Pros and Cons of Payroll Outsourcing Services

Pros and Cons of Payroll Outsourcing Services

Businesses choose to outsource their payroll processing for a variety of reasons, from cost savings and streamlined processing to access to the latest payroll technologies. 

Before you decide to outsource your payroll, it’s important to understand the ins and outs, the advantages and disadvantages. This guide will walk you through all you need to know. 

What Is Payroll Outsourcing?

Payroll outsourcing is when a business hires an external firm, called a payroll service provider, to process its payroll. Payroll service providers are experts in payroll tax law and accounting. 

Running payroll is a process with many moving parts and the administrative responsibilities can be cumbersome. This is especially true for small businesses that may not have a full accounting or HR team. When you outsource payroll to a service provider, they’ll handle:

  • Payroll calculations according to your pay periods
  • Employee compensation, including direct deposit and paper checks
  • Payroll tax withholdings and deductions
  • Payroll tax reports and relevant payments on your behalf
  • Payroll processing across all your business locations
  • Staying up-to-date on federal and state laws and regulations
  • Detailed record-keeping of payroll transactions

As you might guess, outsourcing payroll is likely to save you a lot of time and energy. Let’s take a look at some of the reasons employers choose to work with a provider. 

payroll written in ledger with calculator and pen

Why Should I Outsource Payroll?

One of the main reasons companies choose to outsource payroll is because they lack a dedicated team for payroll processing. Even some firms that do have in-house accounting or HR might hire a payroll service provider to enable their teams to concentrate on other functions, such as financial reporting and employee relations.

Payroll data management is also a cumbersome process and a payroll service provider can help streamline your reporting. This is helpful for business owners, especially during tax time. Payroll services are deeply familiar with payroll laws and related changes, helping businesses stay in compliance and meet deadlines.

As with any business decision, it’s worth doing a thorough analysis of the benefits and downsides of outsourcing payroll. You’ll want to consider the size of your workforce and the likely impact of outsourcing. For example, will automating some payroll functions make certain staff obsolete? 

Make sure you do a thorough cost review to make sure outsourcing makes financial sense. 

Pros and Cons of Payroll Outsourcing

Before you dive into payroll outsourcing, it’s important to weigh the pros and cons.

Pros

Cut Costs

If you outsource payroll, you could reduce staff and ease the strain on your budget. Payroll outsourcing is often cheaper than adding employees. It can also shine a light on hidden costs associated with in-house payroll processing and data management.

Increase Accuracy

Payroll service providers are experts at what they do and use the latest technology, significantly reducing the risk of error. When payroll errors occur, they can negatively impact payroll tax filing and cause mistakes when paying out your employees. Outsourcing payroll can provide peace of mind that everything’s being handled correctly.

Stay Compliant

Keeping track of payroll tax and processing deadlines is often difficult for busy business owners and HR teams. Payroll service providers stay up-to-date on payroll tax law at the federal and state levels, making it easy to stay in compliance.  

Save Time

One of the main reasons companies outsource payroll is to save time. Depending on the size of your company, approving timesheets, calculating wages, and paying out bonuses can swallow countless employee hours. Allowing a provider to handle all these payroll functions enables you, and your teams, to focus on more urgent business functions.

Cons

Employer Responsibility

A service provider takes on the burden of paying taxes and employee wages, but business owners are still responsible should any processing errors occur. While it’s true that the IRS could hold the provider liable for unlawful activity, the business doing the filing is responsible for tax errors, missed deadlines, incorrect payments and so on. 

Increased Coordination Efforts

Relying on a payroll provider will save time, but keep in mind that you’ll be working with an external firm. This can make coordination a challenge and you may have to wait longer for issues to get resolved than you would with an in-house team. 

Pay for Unnecessary Services

When you sign a contract with a payroll processing company, you’ll often pay for a bundle of included services. This may be a disadvantage for businesses that need just a portion of those services. 

two employees have a serious discussion inside the office

What To Look For in a Payroll Service Provider?

Now that you’ve examined the advantages and disadvantages of outsourcing, let’s review what makes a great payroll service provider.

World-Class Technology

Your service provider should embrace the latest in payroll software and online tools. Many top providers today offer user-friendly customer portals that simplify everything. The better the technology, the more confident you’ll be that your payroll will always be accurate and secure.

Competitive Pricing

As with any big business decision, you’ll want to make sure your payroll provider’s pricing is fair. While you might not want price to be the deciding factor, it’s wise to do a thorough assessment of what’s included in their service packages and compare them to the competition. 

The last thing you want to do is wind up paying for services you don’t need, or feel that you’ve overpaid for middling service. 

Outstanding Customer Support

Outsourcing payroll rarely works without clear communications and hands-on customer service. You’ll want your payroll service provider to be easily accessible during business hours.

You might want to review how they handle communication errors and inform clients of legal updates and tax changes.

Solid Industry Reputation

When it comes to choosing a payroll service provider, it’s important to select one with an outstanding reputation. Reach out to your network for recommendations and review testimonials from reputable sources like the Better Business Bureau and Trustpilot. 

The better the provider’s reputation, the more likely you’ll be satisfied with your experience.

Summary

Outsourcing payroll is not a decision to take lightly. While it’s usually a wise business move, it’s important to make sure it’s going to make your life easier before you dive in. 

Take the time to do a thorough analysis of your top choices. That way, when you do make your choice, you’ll know you made the right decision for you, your staff, and your business.