Is Outsourcing Payroll Cost Effective?

The Milestone Team December 20, 2022
Is Outsourcing Payroll Cost Effective?

Does it add value? Business owners ask this question a lot about any part of their business. Whether it be technology, personnel, products or a potential partnership, entrepreneurs want to make sure their investments create additional value. Outsourcing payroll services is not only cost effective, but it also adds value to small businesses. 

What Are Payroll Outsourcing Services? 

Payroll outsourcing services are services provided by third-party partnership companies who specialize in taking over the payroll functions of your business. The processing of payroll is given to these companies. The partnership company does payroll according to your cadence and systems, but they also may provide expert advice on how to optimize your payroll processes. 

Outsourcing payroll does not mean taking over decisions surrounding benefits, terminations, or raises. Instead these are communicated to the payroll specialist to be processed accordingly. Outsourcing payroll can also happen for projects. Common projects include state tax registrations for a distributed workforce, payroll system selection and implementation, or workflow design. 

What Is The Average Cost Of Outsourcing Payroll Services? 

Payroll outsourcing is dependent on a business’s size, cadence, and  payroll complexity. Typically, outsourcing payroll is calculated on either a per employee per month (PEPM) or hourly basis. An average PEPM rate is around $20-$25 per employee per month. This rate can be higher if the payroll is especially complex or lower if your company has a lot of employees. An hourly rate for a payroll specialist is typically at least $25/hour, and the rate for a payroll manager is around $54/hour. 

So, Is Payroll Outsourcing Cost Effective? 

Yes! Back to the overarching question of this post, payroll outsourcing is indeed cost effective. A study found that on average, small business executives spend five hours each pay period on payroll. This adds up to 10 hours a month. If your business has 20 employees, your outsourced payroll rate would be about $400-$500 a month. A business executive’s time is typically, at minimum, worth $200 an hour. Therefore, business owners spending 10 hours a month on payroll is not cost effective. This means outsourcing payroll could actually save your company money in the long run.

What Are The Pros And Cons Of Outsourcing Payroll? 

Beyond cost and time, there are still benefits and drawbacks associated with outsourcing payroll.

Pros:

  • Compliance – Outsourced payroll companies’ success depends on their ability to do payroll accurately and on time. Their expertise in processing your payroll and navigating challenges is impactful for the health of your business. It also protects you in case of an audit. 
  • Happier Employees – Employees are significantly less happy when their payroll has errors or their pay date is inconsistent. Studies show that employees are likely to leave after just 2 payroll errors. Having your payroll done right and on time leads to happier employees. 
  • Lower Stress – Let’s be honest, payroll is a headache. Keeping up with all the rules, regulations, and changes is not fun. Outsourcing payroll gives you peace of mind and one less stressor. 

Cons:

  • Short-term cash flow – While outsourcing payroll is cost effective, it is an additional cost on your books that will shrink your cash flow. Depending on your business, the extra time you get back may not result in equally increased revenue right away. Entrepreneurs should make sure this drawback can be handled before they commit to a partnership. 
  • Security – Introducing another business that helps handle sensitive information will always increase your security risk. This should be part of the discussion when vetting a potential partnership. Both sides need to establish communication and processes that protect your employees. 

Are Payroll Outsourcing Services Still Effective In 2023? 

Payroll outsourcing services will be effective in 2023 and beyond. This strategy is simple, valuable, and cost-effective. As long as your company researches your potential partnerships and establishes best practices with the outsourced company, payroll outsourcing will be effective. 

How Milestone Can Help With Your Outsourcing Payroll Needs.

Milestone’s team is built by back office experts ready to help tackle your payroll needs. We love to help free up entrepreneurs to focus on other areas of their businesses. Our experienced team of payroll service professionals are ready to help solve any payroll problem. Contact us today to get started. 

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