What are the Pros and Cons of Outsourcing Payroll?

The Milestone Team November 2, 2022
What are the pros and cons of outsourcing payroll

Outsourcing payroll is a common strategy for small businesses to offload time consuming tasks. Outsourcing back office functions can allow you to focus on the meaningful aspects of small business. Although it is a strong and common strategy, outsourcing payroll is not the best option for all businesses. This pros and cons list should help you decide if outsourcing payroll would be useful for your organization.  

Pros of Outsourcing Payroll

There are 5 major advantages of outsourcing payroll. These benefits may be more or less beneficial depending on the current state of payroll in your business and your choice of outsourcing company

  1. Peace of Mind/Compliance– There’s peace of mind in knowing that your payroll is being done correctly. A good payroll company has a whole team of professionals that can rely on each other as questions arise or laws change. It can be extremely stressful to keep up with changing federal, state and local laws, especially if you have a workforce that spans multiple states. Outsourcing payroll gives small business owners the peace of mind that it’s being done right. 
  1. Time– Payroll saves you and your internal staff time and headaches. Keeping up with employee hires/fires, raises, and employee status changes (such as getting married) can be difficult and time consuming. An outsourced payroll company takes care of these things and gives you some time back. 
  1. Cost– Outsourcing payroll is a cost-effective option. Most companies build their pricing model tailored to the number of employees in your organization. It’s typically between $12-$25 per employee per month for a bi-weekly or semi-monthly pay frequency. 
  1. Scalability– The established processes of an outsourced payroll company makes it very scalable for your business. As a business grows, payroll would become more and more burdensome to handle internally, but it is easily handled externally.
  1. Change Management– It’s much easier to handle change with an outsourced company. Changes from contracting to salary, employees who move from New York to California, or the opening of a new location for your business, are all dealt with by experienced professionals. 

Cons of Outsourcing Payroll

There are 3 major disadvantages of outsourcing payroll. Again, these risks may vary, depending on the outsourcing organization and the current state of payroll in your business. 

  1. Loss of Control– The work is being done externally, which typically means the business owner has less visibility or control over details of the process. 
  1. Security– There’s an extra risk of a security or data breach when outsourcing payroll. This is because both companies and their communication have to be secure. This is a risk with payroll that should be discussed when hiring a payroll company. 
  1. Cost– Yes, cost is both a pro and a con. Because the work is now outsourced, it feels like an additional cost to the business. As a business owner you have to ask yourself, “is the cost worth the time and effort I’m saving?” If you are in the beginning stages of a company, or if you have straightforward and local payroll, then the answer may be no. 

What Payroll Functions Can Be Outsourced

What Payroll Functions Can Be Outsourced?

All aspects of payroll can be outsourced. Most commonly, a payroll processing system is outsourced to a payroll software company. From there, everything from payroll processing, system selection, benefits administration, employee documentation, and more can be outsourced. 

Payroll Outsourcing Statistics

Payroll outsourcing is a very common occurrence. Over 50% of small businesses outsource their payroll processing. In the U.S, 1 in 4 people have experienced a payroll error. This can be extremely impactful, because a majority of Americans live paycheck to paycheck. The IRS also collected $6 billion in employer penalties because of payroll mistakes last year alone. These statistics prove the need for effective payroll services

Ready to Discuss Outsourced Payroll Solutions?

Milestone has many payroll professionals eager to discuss what outsourcing payroll could look like for your organization. We handle any pay frequency on any system. Contact us today to start the conversation. 

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