There is popular little nugget of business wisdom these days that says: If you can outsource a non-essential task, you must outsource that non-essential task. But while it’s nice to assume that every small business owner has the option to outsource, it might not be a practical choice for all businesses.
Running payroll is an integral part of business management because both your employees and the IRS need to be paid on-time and accurately. But the process of payroll can feel burdensome and overwhelming to small business owners who find themselves wearing lots of business hats. For small businesses that want to ensure payroll simplicity, outsourcing the job to a third-party reduces stress and helps you stay compliant. However, outsourcing isn’t free, and depending on how you outsource, it doesn’t guarantee simplicity, either.
Don’t know if outsourcing is right for your business? Keep on reading to find out.
What Is Payroll Outsourcing?
Payroll outsourcing is the process of paying a third-party to manage and run your payroll for you. This can be done via the use of payroll software, hiring a bookkeeper, or employing a Professional Employer Organization (PEO). It used to be true that outsourcing payroll was only something only the big companies could afford, but that is no longer the case. In recent years, the options for payroll outsourcing for small businesses have increased and it is easy to find an affordable option that fits your business needs.
How do you outsource? Well, your small business could start by exploring one of the many payroll available software options, including Gusto, Square, Intuit Quickbooks. If your payroll needs are a bit more nuanced, hiring a bookkeeper with payroll knowledge is a great asset. Another option is a PEO, which not only assists with payroll but also helps address HR compliance and all other aspects of employee management.
All reputable payroll software or services should offer help in the following areas:
- Paying your employees or contractors through direct deposit/check
- Filing your Federal and State taxes (some will also file your local taxes for no additional charge)
- Filing your quarterly payroll taxes and paperwork
- Paying vendors on your behalf
- Garnishing wages and processing other deductions
- Assisting with pre-tax and post-tax deductions and benefits
- Time tracking/PTO tracking
- Assisting with W-2 preparation and distribution
- Online Processing
Many payroll companies are combining their services with HR, too, and can offer training modules, employee handbooks, and access to the legally required labor law posters. These programs are designed to create easy onboarding, provide clients with tax support, and help employees access their own wage information.
With payroll software, while most of the work is outsourced, someone from your business is still responsible for managing funds and hitting that “Pay” button. Plus, you’ll still be responsible for making sure your employees track their hours correctly. Full outsourcing could include hiring a national payroll service, a bookkeeper, or a PEO.
The Pros & Cons Of Outsourcing Payroll
Outsourcing has benefits and challenges. When making the decision to outsource, small business owners must think about the most cost-effective and easiest way to manage their businesses.
The Pros of Outsourcing Payroll
- Tax Assistance & Reporting: Employers must send payroll taxes to the government regularly and file quarterly tax paperwork on their payroll data. With lots of room for error, some small business owners might not want the headache of manually running payroll and carrying the burden of responsibility to pay the right taxes to their respective locations.
- Reduces Risk Of Error: Whether you are hiring an expert or using a sophisticated cloud-based program that guarantees accurate payroll reporting, this is a handy aspect of outsourcing. IRS penalties and fees are very real and can hurt your business if you miss filing your reports or make a payroll mistake. Also, making a mistake on an employee’s payroll can be a headache to fix. Give those worries to someone else.
- Saves You Time: Manual payroll runs may be time-consuming. Anything you outsource saves you time to spend differently for your business.
- Enhanced Security Of Sensitive Information: Many outsourced payroll options come with enhanced and increased security for sensitive employee information. If you don’t want the responsibility for protecting social security numbers, maintaining HIPPA laws, etc., then it’s best to outsource the protection of that data.
- Offer Employees Direct Deposit:Â Direct deposit is the most preferred method of payment among employees, and current stats say that up to 82% of employees are paid via direct deposit. However, not all small businesses may be eligible to offer this on their own based on federal and state laws. Outsourcing provides the opportunity to transcend the restrictions and offer direct deposit (although, you should always ask the payroll representative about relevant bank or industry restrictions). This is a state by state, company by company decision, so it’s best to contact a payroll or tax expert.
- Easy To Combine HR Compliance: As an employer, you have responsibilities to your employees required by law. It is becoming more common for top payroll outsources to include HR compliance in their list of services. Since this addition is a competitive feature on most payroll programs, it’s a great additional time-saver.
The Cons of Outsourcing Payroll
- It’s Not Free:Â Outsourcing payroll can be expensive. Depending on your company’s needs and number of employees, a good payroll system or PEO isn’t a cheap investment. (However, if you currently use an accountant or bookkeeper for payroll, perhaps outsourcing to an online company would save you the cost of an entire employee. So, price is neutral depending on your needs.)
- Loss Of Control: By relinquishing payroll, you are giving up control of a major aspect of your business and entrusting it to someone else. That might mean doing it their way instead of doing it your way, and that can always be a challenge. Another thing: Business owners are ultimately still on the hook for payroll errors even if you outsource the job.
- Business Unreliability: And there is the sad, but possible situation, that you could invest in a business that doesn’t do the job for you in myriad ways. Whether the business turns out to file taxes incorrectly or fails to offer you stellar customer service when you need it, relying on someone else is always a risk.
The Pros & Cons Of DIY Payroll
Many small businesses make the decision to run payroll in-house. The DIY route is a solid option for small businesses with uncomplicated payrolls and a thrilling spirit of accomplishment. Some people hate the minutia of payroll, but some people really love it! It’s definitely a great job for a detail-oriented human with a penchant for numbers and reports. DIY payroll can also be a great route depending on your specific business. For example, do you just pay contractors? There are no employer required taxes for contractors, so you may not need a sophisticated program for tax and benefit deductions.
The Pros of DIY Payroll
- It’s Free: Money matters, cost matters, and if every dollar in your company is crucial and you need ways to save, you can run payroll yourself. For some small businesses, outsourcing just isn’t in the budget. There are several free online calculators available that assist with tax requirements. Simple accounting software helps with numbers and there are also free payroll templates online.
- You Are In Control: Running payroll and reports on payroll is a huge part of the business and helps create a story about the business as a whole. There might not be a program or person out there that does it exactly the way you desire; or maybe it’s important to spend time managing the financial aspects of your business.
The Cons of DIY Payroll
- Payroll Dependent On Human Being: In this scenario, you or an employee are entrusted to learn how to manage payroll. Now imagine that person on a long vacation, going on leave, or getting ill. If you only have a single human running payroll (which may be complicated depending on your business), you could run into some stress if you need someone to quickly take their place.
- It Takes Time: It’s the business dilemma. Time and money are both limited, so you’ll spend whichever you have more of. If you have more money than time? Outsourcing is a solid option. If you have more time than money? DIY might be a better fit.
- Increased Stress/Risks: Payroll takes time; it requires attention to detail; it requires punctuality and precision and patience. If that’s you, awesome. If it’s not? Don’t try to be the person who wants to do-all-the-things and ends up hating life. There is increased stress with running payroll on your own, and due to the tax requirements, there is a lot of room for error.
Payroll Outsourcing Options
If outsourcing seems like something your business might pursue, there are several roads to explore. You can hire a bookkeeper either full or part-time, find payroll software to use, or even hand payroll over fully to an accredited program. Each option comes with its own benefits and risks.
|Payroll Outsourcing Options||Best for||Average Cost|
|Full-Service Payroll Software||Businesses looking for payroll software that handles most tasks for you including automatic filing.||$40 -$300/mo|
|Self-Service Payroll Software||Businesses looking for basic payroll software that calculates their payroll, but doesn’t file taxes for you.||$10 – $35/mo|
|Accountant or CPA||Businesses with complicated payrolls and tax situations.||$100 – $400/hr|
|Bookkeeper||Businesses looking to outsource bookkeeping and payroll tasks.||$20 – $45/hr|
|Professional Employee Organization||Business looking to outsource all payroll and HR management.||$150 – $2,000/mo|
Full-Service Payroll Software
Best for businesses looking for payroll software that handles most tasks for you including automatic filing.
A full-service payroll provider will run payroll for you — start to finish. You help onboard employees and give the company information about pay and pay schedules, and then all you have to do is click “pay.” (It’s not entirely hands-off, but as close as you can get.) Some of these programs are similar to their self-service online counterparts. Here is where most of them differ: Some will take over the onboarding of employees, many file your quarterly and year-end payroll taxes for you, and many come with a tax guarantee. You are paying for the guarantee that their company, not your business, is on the hook for penalties related to tax mistakes.
What Does Full-Service Payroll Do?
A full-service payroll provider pays your employees, removes taxes and deductions and garnishments and sends them all to their respective places. They file your taxes for you and assist with distributing W-2s. It’s full-service, darlin’, so order up any reports you want and benefit from same-day direct deposit. And: most full-service payroll providers combine integrations to offer benefits, retirement plans, and HR platforms. Sounds nice, huh?
Don’t get too excited: you still need to keep employee records accurate, be able to answer employee questions about payroll and the laws in your state, and follow local tax laws. (If a mistake turns out to be yours, well, the fine print in the guarantee says that renders the no penalty guarantee null and void.)
What Does Full-Service Payroll Cost?
Each service provider is different, but the range of costs for full-service payroll run between $40 – $300 a month plus $3 – 6 a month per employee depending on the service. There are sometimes additional fees, too, for integrations, implementation, and benefits administration.
Which Businesses Should Use Full-Service Payroll?Â
Times are changing. Even a few years ago, it was not cost-effective to outsource full-service payroll for a business with fewer than 50 employees. However, with more and more services entering the market, the competition among providers is heating up. A small business with a few employees might find a few hundred dollars a month a reasonable price to pay for payroll. Depending on the business, the benefits outweigh the DIY route. Any company of any size can find a full-service payroll system that works. For the most affordable option for small businesses, check out Square Payroll. Merchant Maverick uses Gusto and we highly recommend the program for its features, integrations, and attentiveness to customer service for small businesses. For businesses already using QuickBooks, check out Intuit’s full-service payroll program.
Self-Service Payroll Software
Best for businesses looking for basic payroll software that calculates payroll but doesn’t file taxes for you.
There is crossover in payroll services between the full-service payroll options and other more bare-bones payroll services. If full-service isn’t economical, practical, or on your radar yet, there are other payroll service options in addition to those who do-it-all. Intuit QuickBooks has a desktop program that runs numbers for you and can assist with printing checks and paystubs, but you will still need to file your own payroll taxes with your quarterly payroll updates to the government.
What Does Self- Service Payroll Do?
Payroll services vary. Most of them will take on calculating payroll, managing deductions, and printing checks. Without a full-service option you are often sacrificing tax filing and support, or other HR features like managing benefits or tracking time and paid time off. Many major competitors like ADP and QuickBooks offer simplified payroll services at a more economical rate.
What Does Self-Service Payroll Cost?
Pricing will always depend on the size of your business and how many payrolls you run. For example, ADP charges per payroll, so you will pay more if you are on a weekly pay schedule. In general, some basic payroll services, like Patriot, have a base fee as little as $10 a month + $3-5 dollars per employee. Some are subscription-based, like QuickBooks, and start at $35/mo+. The more services you need, the higher your monthly cost will be.
Which Businesses Should Use Self-Service Payroll Software?
Small businesses that want to pick and choose the features they pay for and receive some basic guidance will benefit from picking a payroll service that suits their needs. Whether that is a local payroll service company or services from the same providers who offer full-service options.
Best for businesses looking to outsource their bookkeeping and payroll or for businesses with complicated payrolls and tax situations.
It is true that in our fast-changing automated world, the roles of bookkeeping and accounting are slowly shifting toward computers. If you miss real-person contact and you don’t want to ship payroll off to the cloud, you may also find hiring an accountant or bookkeeper is still a solid option in 2019.
What Does An Accountant/Bookkeeper Do?
An accountant manages and analyzes a company’s money, taxes, and compliance. A bookkeeper is the business record keeper of all financial transactions. There are many online bookkeeping and accounting services available that will include running payroll as part of their services. These companies and real humans do more than payroll, however, as they will help manage all credits, debits, and loans, as well. In this capacity, you are not adding HR services or other options. You are hiring someone to run and analyze the numbers for you.
What Does An Accountant/Bookkeeper Cost?
To hire accountants and bookkeepers, they will let you know their hourly rate, or you may offer a competitive salary. Accountants, who are schooled and trained in regulation and money, will cost more per hour ($100-400 per hour on average) than their bookkeeping counterparts ($20-45 per hour on average).
Which Businesses Should Use An Accountant/Bookkeeper?
If you have complicated payrolls and a complicated tax situation, an accountant is a worthwhile addition to your company. Having an accountant in-house is nice, but it’s also a luxury. You can hire accountants per hour to help you with specific tax issues or money needs. Bookkeepers manage the day-to-day money in your company. If you have a lot of money coming in and out, someone specifically focused on keeping your accounts current and paying your employees is a great asset.
Best for business looking to outsource all payroll and HR management.
A Professional Employee Organization is an entity that provides small businesses with help for human resources, payroll tax filing, worker’s compensation insurance, safety and training, and so much more. If a bookkeeper focuses solely on running payroll, a PEO focuses on running anything employee-related in your business.
What Does A PEO Do?
First, your business and the PEO enter into a co-employment. This is so the PEO controls and manages, on your behalf, everything tax-related, and you are freed from administrative duties such as deductions, benefits, retirement plans, etc. A PEO also takes over the burden of human resource management as well. In many of those areas, there are strict regulations and a lot of risk of getting it wrong. It might be prudent and more cost-effective in the long run to outsource the more delicate aspects of employee management. (Also, a PEO might be the only way a small business may offer competitive health benefits which makes your business a more attractive place to work!)
What Does A PEO Cost?
PEOs are either paid a flat rate per employee or take a percentage of payroll. Depending on the PEO, the small business, and the number of employees, those numbers fluctuate between $150-$2000 a month per employee or they take a 3-8% cut of payroll on average.
Which Businesses Should Use A PEO?
If your business is growing and you really do want/need to outsource everything that isn’t strictly related to your business, a PEO will fill that void. Also, if you are a small business owner and you don’t know how best to offer your employees competitive health/dental/retirement benefits, a PEO can pave the way to make those options available for any business, no matter the size. Use a PEO if you want to seamlessly integrate payroll, taxes, HR, employee management, and so much more.
How Much Does Payroll Outsourcing Cost?
The breakdowns listed in the section above show the range in payroll costs among each option. However, there are a few more things to consider.
A simple DIY route could cost nothing at first, but if you misfile taxes and incur penalties, the fines and fees will negate any savings. Or maybe you are a small business paying for services you don’t need or use. Payroll can range from $40-100 for small businesses with few employees up to thousands a month for full-service payroll. Hiring a bookkeeper or accountant part-time or full-time is a solid tens-of-thousands of dollars. Only you know what payroll option works best for your situation.
Which Payroll Option Is Best For Your Business
My magic ball says the right option for you is…
That was a trick: There is no magic option. You will need to assess your business needs with what you can afford and your own level of pioneering spirit. Here are some questions to ask yourself as you make your payroll decisions:
- Do I have a complicated payroll?
- Do I want help filing taxes and quarterly reports?
- Do I have the time to commit to monthly payroll?
- Am I afraid of making payroll mistakes?
- Do I want to offer HR services to my employees?
- Do I want to offer benefits to my employees?
- Do I enjoy puzzles and numbers?
- Am I inundated with employee paystub related requests?
- Can I afford a payroll service?
- Do I have the time to pick options or do I need something fast?
- Am I dazzled by endless reports and features or am I just fine with barebones systems?
Whatever payroll system you chose, make sure your research includes quotes. Some payroll services charge extra for benefits and HR per employee and by the time it’s added up, you’re looking at a more expensive option than a PEO. Know how much you want to tackle, how much you want others to tackle, and what you can spend and go from there.
If you’re still not sure, here are some benefits to both. See which is the better fit.
The Benefits to Payroll Outsourcing
If you do not have someone employed by you who knows how to run payroll, outsourcing is a great option. Since some companies combine payroll and HR, since there are so many available options to also outsource both, it can save your company time and money. Also, when you are running a business and wearing lots of hats, sometimes it’s nice to take one off and not have to worry about where you set it down. (I really just wanted to see that example through.) Outsourcing isn’t stress-free but it is stress-reducing, and that’s important.
The Benefits of DIY Payroll
If your business doesn’t have a complicated payroll (maybe you hire mostly contractors) or there is something calming in running payroll yourself, there are a great number of benefits to keeping payroll in-house. Not only do you have control, but you also don’t have to be dependent on someone else to fix mistakes or make changes. Also, you won’t have to pay any outsourcing fees. With the free tools and resources on the internet, you can find a DIY system that works.
How To Choose The Right Method
Follow your heart! (So cliche, so hardly ever used about payroll, and also so true!) Only you know what’s best for your business and your past experiences with payroll. No matter what method you choose, there will be some required time involved in the payroll process — how much time is up to you. In order to make the decision, you need to know how much money you want to spend, how much time you want to spend, and if you want to offer benefits to employees. If you just need to pay people, DIY. If you want to offer benefits, training, and other employee integrations, outsource.
No matter what you choose regarding payroll, outsource vs. DIY, there are numerous options available for businesses of all sizes. We’re lucky to live in such a technological age where services that used to be only for a few are now available to many. Large, full-service companies like ADP and Paylocity have rebranded themselves with options for small businesses, and those heavy-hitters bring a lot to the table. Certainly if you are looking for ways to streamline your business, between the payroll and accounting services and software available, competition among plans and services is fierce. Merchant Maverick recommends Gusto as a full-service provider with solid features and integrations. Some other payroll service providers worth checking out are Square, Intuit Online, and Paychex.
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