In-House vs. Outsourcing

Andrew Omalley

Sep 30 2021

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Payroll is one of your most essential functions. Your employees depend on you to pay them the right amount on time. Making a mistake can have dramatic consequences, from unhappy employees to disastrous legal problems. Such a vital process necessitates a critical decision: should you do your payroll in-house with software? Or outsource it to a payroll firm?

First, let’s define what in-house and outsourced payroll mean. Then, we’ll cover the advantages of each one.

In-House and Outsourced Payroll: What’s the Difference?

In-House Payroll

Performing payroll in-house means you (or one or more of your employees) run all the payroll processes for you. Now, you can do your payroll with something like Excel. But payroll-specific software like Gusto often works best. Many general accounting options, such as Quickbooks, also have excellent payroll functionality or add-ons.

Outsourced Payroll

Outsourcing your payroll involves hiring an external company to handle the work. Some ask you to provide employee information directly to the company. Others, like Paychex, let employees interact through an employee self-service portal. In either case, you don’t have to do much else besides interact with your outsourced payroll firm every so often.

Now, let’s look at the advantages of each.

In-House

Gain a Valuable Employee

When you do payroll in-house, you control who actually performs the payroll. You can do it yourself or hire someone else. If you hire someone else and they stay with your business for a long time, their knowledge can become quite valuable. They may be able to help out in other areas. Additionally, they can more easily train new payroll employees. Scaling becomes a little easier this way.

More Cost Control

You have more control over several aspects of payroll when you do it in-house. One that’s especially important is costs. You get to control the wages you pay to your payroll person — to a certain degree.

Obviously, the market dictates the range of pay you can offer your payroll people. But you won’t have to worry about hidden fees or costs when you hire an employee — something you need to be aware of with outsourced payroll firms.

More Control Over Data

Outsourced firms take several security measures to keep your data safe. However, outsourcing payroll always runs the risk of a data breach, no matter how secure that outsourced service is. Once you hand your data to an outsourced firm, you’re putting your trust in them to keep it safe. Doing payroll in-house offers you more control over sensitive data pertaining to your business and your employees.

Flexibility For Certain Situations

Keeping your payroll in-house gives you more flexibility to make last-minute changes to payroll. If you outsource payroll, you’d have to coordinate with someone offsite, and those last-minute changes might not make it in. Your flexibility can apply to various miscellaneous situations, too. For example, it’s easier to pay an employee cash wages with in-house payroll if you wanted to do so.

Industry-Specific Issues

Some industries use specific software for certain tasks in that industry.

For example, if you run a construction company, you likely use construction job costing software — and it’s probably integrated with your payroll system. Sure, you can hire an outsourced payroll firm specializing in your industry. However, It may be simpler to keep payroll in-house, depending on your business.

Outsourced

Cost-Efficiency

Outsourcing seems expensive at first, but consider the costs of an employee:

  • Hiring
  • Training
  • Salary
  • Benefits
  • Payroll taxes
  • Managers — if you grow large enough

Outsourcing often costs less than the sum of these costs. Plus, the fee for outsourced services is more predictable (assuming no hidden fees). You’ll also save on space, hardware, and equipment costs that would usually be spent on the employee.

Instant Expertise

There’s no training required when you outsource to a firm, unlike with hiring an employee. These firms’ primary job is payroll, so you gain instant access to experts when you hire an outsourced firm. You can be rest assured that your payroll will come in correct and on-time. Plus, the firm can answer any questions you have about payroll and compliance issues.

Tax Help

Tax time is every business’s least favorite time of year. Fortunately, most outsourced payroll firms help you stay compliant with various tax laws. They’ll make sure the proper taxes are withheld for payroll. Some firms help file and pay your federal, state, and local taxes as well.

Doing this yourself often requires a lot of searching the Internet to make sure you’re doing things right. If you hire an employee, you instead have to spend plenty of time and money screening for someone who will do things right.

Scalability

Outsourcing most functions — including payroll — vastly improves scalability. First of all, you save all that time you would’ve spent on payroll. You can direct this time towards business growth. Additionally, many payroll firms grow with you. It’s much easier to ask your firm for additional services and up your fees than to go hire more employees.

In fact, some payroll firms may operate on a sliding scale based on size. You pay proportionally to your revenues. As you grow larger, expenses stay consistent, and you never pay too much. Plus, the firm will know your business fairly well at this point. This never hurts.

The Verdict

Neither option is necessarily superior — it depends on your business’ size and payroll complexity.

In-house is best for smaller businesses — usually those with 10 or fewer employees. It’s also a great choice if you work mostly with contractors. A business in this situation doesn’t often have payroll that’s complex enough to slow down operations. Outsourcing to another firm doesn’t offer enough time and monetary return. Larger businesses with complex payroll requirements would do better by outsourcing. Having experts handle all your payroll will save plenty of time and help keep labor costs low.

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