Payroll Outsourcing vs. In-House: Pros and Cons

Is your accounting team doing a lot more payroll than they should be? Are they focusing on keeping up with the numbers rather than finding new ways to maximize revenue? That’s money that’s coming out of your bottom line.

Payroll outsourcing is nothing new. But it is seeing a rise in popularity, especially as domestic labor costs rise. In fact, 61% of all American businesses outsource some or all of their payroll functions.

Let’s go over the pros and cons of payroll outsourcing. By the end of this post, you should have some idea on what’s best for your business.

What is Payroll Outsourcing?

Payroll outsourcing is the practice of hiring an external service provider to handle some or all of your organization’s payroll functions. This lets your internal team hand off some essential functions like calculating wages, paying employees, filing taxes, and generating important documents.

What Payroll Outsourcing Services Include

When you partner with a payroll outsourcing provider, you’re not just handing off basic tasks (unless you want that to be the extent of your services), you’re handing off a few essential parts of the payroll process. Outsourced agents keep up with local labor laws, tax code updates, and wage regulations as well.

• Wage calculations and direct deposits: Payroll providers handle all the math so you don’t have to. They deposit the funds into your employees’ bank account as well.
• Tax withholdings and filings: One of the biggest advantages of outsourcing payroll is offloading tax duties.
• Year-end reporting: When it’s time to pay the tax man, your payroll provider takes care of preparing and distributing tax forms to employees and freelancers.

Pros of In-House Payroll Processing

While an outsourced team offers many benefits, there may be scenarios where it’s more advantageous to keep things in-house. Here are some of the pros of in-house payroll processing:

Synergy

Employees responsible for payroll know exactly how the business works. They work for it, after all. More senior employees understand the more nuanced situations that apply only to your business when it comes to payroll. For example, an employee doing payroll for a dozen sales representatives will understand each employee’s commission structure and get extremely comfortable with paying out what’s owed.

Workers doing payroll can also more closely collaborate with other teams. They can collaborate with HR on new hires, work on budget forecasts with finance, and resolve discrepancies with the legal team.

Increased Security

Keeping payroll in-house means that your sensitive employee data (SSNs, bank account information, salary details, and tax records) never leaves your organization. You control exactly who has access to this information and how it’s stored.

Flexibility and Speed

You’re able to implement changes at the drop of a dime. You could instantly respond to changes without notifying or waiting for an external provider. Outsourced agents could also respond to inquiries pretty quickly, but nothing is faster than a quick walk down the hall or an instant DM.

Cons of In-House Payroll Processing

Let’s look at the other side of the coin. There are some cons to in-house payroll processing, which is why a lot of businesses outsource it.

High Costs

This is the biggest downside. You have to pay your employees their salaries. Not to mention their benefits, equipment, office space, and software. Accounting is a pretty high-demand and highly skilled job, so these costs could quickly get out of hand. You’d be surprised at how much of a hit it could have on your business’s overall revenue.

There are some hidden costs, too. Training a new employee takes up valuable time. Company-wide lunches cost slightly more. Plus, HR needs to spend effort and time on keeping the department staffed and happy.

Compliance Burden

Your team is solely responsible for keeping up to date with ever-shifting laws, wage and hour regulations, and employment legislation. If a mistake were to happen, then that’s on your business. To put it bluntly: You can’t blame anyone else for that mistake. Most payroll issues are minor inconveniences that can be quickly fixed. But if it’s a major problem that warrants a lawsuit? Good luck.

Knowledge Dependency

A lot of businesses run like clockwork. And when a piece (i.e., an essential employee) goes missing, then the whole operation might fall flat. If someone on your team quits, they take all their knowledge and skills with them, potentially leaving you stranded with a payroll process that no one else can do.

Pros of Payroll Outsourcing

So now that we’ve reviewed the pros and cons of keeping your accounting in-house, let’s see why a majority of businesses do outsource payroll.

Reduced Costs

This is the biggest benefit for most businesses. The cost savings are astronomical. Since outsourced agents are likely from countries with much lower average wages than the United States and Europe, businesses get to put those savings back into the business.

A common misconception is that international workers are not as capable as domestic workers, which is simply not the case. Although businesses can save money on international talent, that money is still life-changing income for these workers. The competition is fierce, with highly educated workers trying to fill these roles.

Flexibility with Staffing

You could take on as much help as necessary when you outsource. Hire more or less staff, depending on your needs. For example, if you’re taking on a massive new project that requires some contractor assistance, additional payroll staff could supplement the new surge of payroll work.

These new hires are already familiar with payroll practices as well. Training them wouldn’t be a strain on your finances.

Risk Reduction

Outsourcing providers assume much of the liability associated with potential payroll errors and compliance failures. Reputable providers offer error guarantees and will cover penalties if they make mistakes with filings, withholdings, or deadlines. You’re essentially transferring the risk of costly payroll mistakes to experts who specialize in getting it right.

Cons of Payroll Outsourcing

However, there are some cons to payroll outsourcing:

Vendor Dependency

Similarly to keeping things in-house, you’re depending on a group of people (or maybe even one person) to be extremely reliable. If work isn’t able to get done, then you’re on your own. Luckily, professional BPO organizations like Hugo guarantee that this will never happen through smart tactics and planning.

Implementation Time

Outsourced agents may need some time to integrate into your business. While it may not take as long as training an in-house employee, it’s still something to consider.

Key Factors to Consider

Ultimately, the choice on whether or not to outsource payroll is up to you and your team. But here are some key factors to consider when making that decision.

Budget: How flexible is your budget? Do you have the bandwidth to support an in-house team, or would you rather allocate those funds somewhere else? An outsourced team is the most cost-efficient option, but it does come with some trade-offs.

Time: Do you need a team that could start immediately? Or can you afford to wait a few weeks while HR does recruiting and training? Outsourced workers are all about efficiency.

Scalability: Do you expect any fluctuations in payroll work? If so, it might be best to rely on an outsourced team that could scale with your business.

Talk to Hugo about payroll outsourcing and learn how our team can handle payroll, take over taxes, and integrate our experience into your team.

Frequently Asked Questions

• How big do we need to be before outsourcing makes sense?

Outsourcing could be done at any phase in a company’s growth. A small startup may need to outsource payroll because it can’t afford to hire an entire accounting department. A large corporation may outsource payroll to save money that could be used to reinvest in the business.

• Are outsourced workers aware of U.S. payroll regulations?

Yes! Before working with your business, Hugo does extensive training on U.S. payroll regulations and nuances. Even while working for your business, Hugo representatives continue to go through rigorous training.

• How fast can a team go live?

Hugo’s payroll outsourcing teams can go live in as little as two weeks. Contact us today to learn more.