Why Aren’t You Outsourcing Your Payroll Yet?
By Outsourcing Your Payroll Processing and Tax Responsibilities
It might be debatable on what exactly is the most important facet to your business. Could it be sales? Content marketing? How about customer service?
What About Payroll?
Whatever you consider to be the most important function to your business, we can all agree that your business wouldn’t exist without payroll. Payroll is how you reward your employees for the hard work they put into to make you successful. Along with the other benefits or perks you offer, payroll is typically the most important factor used to attain and retain employees.
With that said, payroll processing and payroll tax responsibilities can be confusing and extremely difficult for a lot of businesses to handle. For example, there are hundreds of tax codes and payroll regulations that businesses need to understand and follow. With so many of these codes to keep track of, staying in compliance can be a major pain point for a lot of organizations.
This is where many organizations face a decision to either have an in-house payroll processor or outsource their payroll responsibilities
39 percent of U.S. companies—more than 10 million businesses—claimed they outsource their payroll processing. And 43 percent outsource their payroll tax responsibilities.
According to a 2016 report by Robert Half and the Financial Executives Research Foundation
Because there is an array of issues to keep on top of regarding payroll, many organizations are trending towards outsourcing these responsibilities so they don’t have to dedicate a lot of time to this highly confusing area of business.
According to Small Business Trends, payroll is a non-core function for businesses.
“A non-core function is one that is not a profit center (meaning, you don’t charge customers for it). A non-core function may be essential but doesn’t differentiate your business strategically from competitors. In most businesses, administrative and backoffice activities such as payroll are non-core functions. As such, they are potential candidates for outsourcing.”
So, why should you be outsourcing your payroll? Well, for the following reasons of course!
Common Payroll Challenges
A major challenge facing businesses when they process payroll in-house is simply meeting deadlines. In-house payroll is time consuming and depending on how a company is handling the organization of their employees’ HR data, time-in/time-out, benefits selected and PTO it can be a daunting assignment for most to bring in all these components together when it’s time to process payroll. To manage these moving parts, many businesses are looking to outsource their payroll processing to a single database, all-in-one solution to manage both payroll and HR.
In-house check printing requires businesses to purchase and maintain a check printer/sealer. The benefit of outsourcing to a payroll company is that they are equipped and have staff to handle a large output of checks and reporting, while also handling the packaging and delivery of checks to multiple locations if needed.
Direct Deposit Despair
If your business offers direct deposit services for your employees, it can be painful to handle any reversals or direct deposit breakdowns in-house. A great benefit to outsourcing is that payroll companies will be responsible for sending ACH files, collecting and distributing funds to both employees and 3rd party agencies.
A lot of these payroll processing businesses will also supply your employee base with an employee portal for them to access their direct deposit stubs at any time. This also avoids wasting money and trees by not having to send out paper check stubs.
Staying In Compliance
By outsourcing payroll, businesses are ensured their processing duties are handled by experienced tax professionals. These people are required to stay on top of all updates and changes to current tax laws.
Compliance issues will always be a big reason to outsource as the IRS has many rules and regulations around tax payments, tax filing and record keeping. They issue penalties with interest if employers fall out of compliance.
According to the IRS, “More than 1.8 million tax returns
were audited in 2016 for businesses with income
between $200,000 and $1 million. And 978,564
businesses of all sizes were assessed civil penalties.”
A lot of business owners struggle with the ever-changing landscape of tax laws and compliance. To avoid hefty penalties from the IRS, it’s probably in the best interest for organizations to outsource to payroll experts. A lot of these payroll businesses have clauses where, if there are any problems with your payroll processing/ tax reporting such as incorrect dollar amounts, direct deposit and other compliance issues—they will rectify the issues and cover any penalties or fees that might incur from any mistakes made.
Finding Time To Focus On More Business-Critical Issues
It doesn’t matter how many employees an organization carries. Payroll
processing is such a timely and detailed process, it requires the business
owner or payroll administrator to handle large quantities of data that they must double-check for any keying errors. Because of this, it doesn’t give them any time to help a valued customer
in need, or time to improve other areas of business operations for the
In-House Payroll Is Costly
What’s that saying? “Time is money”?
That couldn’t be truer. Payroll processing is a timely operation. Business owners or payroll administrators spend hours of time doing the following:
- Auditing and calculating payroll each period
- Creating reports for in-house and account use
- Printing, signing and distributing paychecks or stubs
- Assembling and transferring payroll taxes and returns to government agencies
- Researching and staying up-to-date on all the latest payroll and tax compliance laws
Why go through all that hassle, especially when other areas of business can be boosted?
Lack Of Data Security
We know that payroll processing is a complex operation to handle, yes. But did you know that it can also be a carry high security risk too? Even with employees you trust, an in-house payroll operation can be susceptible to embezzlement, identity theft or tampering of company data for personal gain.
Aside from these potential employee variables, you’ll need to evaluate the security of your payroll processing software. The software itself may be quite secure, however, depending on whether your data is hosted on a server or network, your business may be open to serious security flaws that only a dedicated staff of I.T. security specialists can monitor.
That can be quite expensive for a lot of businesses.
In comparison, by outsourcing payroll processing, your data will typically be stored on highly secure servers with cutting-edge technology, redundant data backups and a dedicated team of I.T. specialists monitoring these servers 24/7.
What Should Businesses Look For When Deciding Upon An In-House VS An Outsourced Solution?
First, businesses need to evaluate what exactly their technology needs are for the present and the future.
If a company plans to grow, they will obviously want to find a payroll processing provider who can handle the scalability needs for their growing business. If they have specific needs, like job costing, general ledger, worker’s comp, they should be asking to view sample reports and how it would be handled in the prospective platform to be sure it will
meet their requirements.
With that said, the most important thing businesses need to look out for in any payroll platform—in-house or outsourced—is security.
As mentioned above, payroll is a target for fraud and this can happen to an in-house system or with outsourcing. It’s extremely important that the employer do their due diligence to ensure that the payroll company they choose is reputable, and that they have policies and procedures in place to prevent fraud and to prevent hacking.
On top of all that, it is important for a company to do proper account reconciliation to avoid fraud . Companies should do accounting reconciliations every pay period, month, quarter and year.
Outsourcing to a payroll company can be helpful because they provide general ledger reporting and exports into various accounting systems which makes accounting much easier.
Finally, a challenge with payroll processing will always be the accuracy.
A payroll platform can’t ensure accuracy of the data entered, but employers should look at the controls that are in place to prevent errors from happening. For example, warnings displayed if a check is over a specified dollar amount; preview reports prior to processing payroll; preventing employees from being paid with missing information (ssn, pay rate, etc.).
The benefit of outsourcing is that the employer will likely be assigned a support representative or team to
help them with general questions and troubleshooting the software. The software will be updated regularly, maintained for compliance, and they get the benefit of using their technology along with other offerings their provider will supply.
Employers, payroll service providers and other stakeholders should be on the lookout for a platform that will help them avoid the following common issues such as:
- Missing payroll deadlines due to system issues
- Miscalculating payroll amounts
- Paying fees and penalties due to incorrect tax filing amounts
- Various integration challenges from payroll to general ledger