Is Outsourcing Payroll a Good Idea?

The Milestone Team November 2, 2022
Is outsourcing payroll a good idea

Outsourcing in general is an intimidating concept to many small business owners. Small business owners take great pride in their companies. Hiring outsourced labor gives up a piece of the control that small business owners generally have. 

Although intimidating, partnering with the right payroll outsourcing company can offer peace of mind, because you know things are being handled correctly. Outsourcing payroll is without a doubt a good idea, but not all good ideas are right for your business. Let’s compare the pros and cons to decide when outsourcing payroll is the best option for a company.

How Does Payroll Outsourcing Work? 

There are 3 types of outsourced labor when it comes to payroll outsourcing. The first type is a freelance worker. A freelance worker would act as a 1099 contract employee that would basically run your payroll as an internal employee, only part-time. You would not be responsible for benefits for this type of worker. 

The second type of payroll outsourcing is a PEO. PEOs assume co-employment for your employees. They then not only run payroll, but usually benefits administration, employee documentation, and potentially more for your business. The concept advertises lower rates for your employees because of group pooling for benefits. 

The final type of payroll outsourcing is an outsourced firm. This partnership is a contract relationship between two businesses. The payroll company steps in to help operate your processes. They can also provide advice on items such as pay frequency, payroll system selection, and optimizing the experience for employees. 

In House Payroll vs Outsourcing

For the purpose of this comparison, in house payroll will be compared to outsourcing payroll to a third party firm. Here is a comparison of in house vs. outsourced payroll in major areas of concern. 

Mean annual wage for a payroll clerk

InhouseOutsourced
CostMean annual wage for a payroll clerk is $49,560 plus benefits, or $23.50 hourly.$12-25 Per employee per month.
TimeIt takes small business owners 21 days a year to do payroll.Majority of time is spent upfront. 
InhouseOutsourced
ComplianceMore difficult to ensure compliance with changing laws, lack of expertise, spread out workforce, or one set of eyes.Easier to stay compliant with changes when the company is dedicated to payroll services and has a team of experienced payroll staff.
ControlHigh-level of control and knowledge of internal changes.Less control over the entire process. Changes have to be communicated externally.
Time-OffInternal employees have to figure out payroll if an employee goes on vacation, is sick, or leaves the company.Firms have other employees who can step in easily and do the work.
ScalabilityA single full-time employee can scale to a decently sized small-business. They may not be optimized until that point is reached. However, a c-suite executive or other core function employee tasked with payroll would have trouble scaling.Payroll outsourcing is scalable to all sizes depending on the firm. Some firms may specialize in small business only. 
SecuritySecurity is as strong as the company’s security.Relies on both companies’ security.

Benefits of Outsourcing Payroll

There are 3 main benefits of outsourcing payroll. The first is peace of mind. The peace of mind knowing your company is compliant with federal, state, and local laws is invaluable, especially if you have a spread out workforce. Second, outsource payroll is time-saving. A small business owner’s most valuable asset is their time and the time of their core personnel. This offloads time in a cost-effective manner. 

Finally, consistency is a major benefit. Outsourced firms have set practices and processes that are consistent. This means that even if your designated payroll specialist goes on vacation, someone can step-in and process your payroll without a complete re-education. 

Risks of Outsourcing Payroll

There are two main disadvantages to outsourcing payroll. The first is the lack of control. Most firms will allow visibility into their work, but your company usually has less control over the processes than it would internally. 

The second risk is data privacy and security. All sensitive data about employees will have to be shared externally. This requires trust in the company’s security standards and service agreements. It also requires diligence on the part of the small business to partner with a secure firm. Secondarily, information about raises, hiring, and firing will be shared. It’s important to set a standard in the service agreement or elsewhere about how this sensitive information will be handled as far as communication. 

Should a Small Business Outsource Payroll?

Every small business is different in structure, but our general rule of thumb is that outsourcing payroll services is a good strategy for small businesses. Outsourcing payroll is a cost effective option compared to hiring someone in-house. It’s also scalable and saves time. It fits best with companies that have reached 20 employees or more, but it can be very valuable for smaller businesses to free up core personnel. Outsourcing payroll is definitely a strategy that small businesses should at least consider.

Looking to Outsource Payroll Today?

Milestone’s expertise is back office peace of mind. We eagerly partner with entrepreneurs who are making a difference in the world, because we believe that our services will give them more freedom to do so. Contact us today to get started. 

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