Millions of U.S. businesses outsource their payroll processing. Why do they do it, and what benefits does it bring them? Learn about five reasons that are driving payroll outsourcing, and why it could make sense for your business.
How common is outsourcing payroll? In a recent survey conducted by Robert Half and the Financial Executives Research Foundation1, 39 percent of U.S. companies — more than 10 million businesses — claimed they outsource their payroll processing. And 43 percent outsource their payroll tax responsibilities.
While some businesses opt to handle running payroll functions in-house through manual bookkeeping or do-it-yourself payroll apps, small business owners have increasingly come to prefer the expertise of professional payroll providers.
But why do so many business owners decide to outsource payroll? Here are five main reasons:
1. Time saved
No matter how many employees a business has, processing payroll demands a lot of time and attention to detail. Pay period follows pay period, each time requiring the business owner or their payroll person to type in large amounts of data and double-check for any keying errors. That’s time taken away from critical tasks like building revenue and serving valued customers.
Outsourcing payroll gives owners more time to focus on what matters most to them. In many cases, they’ll only need to contact their payroll company representative once each pay period.
2. Money saved
Time saved is money saved. Think of the time required for each of the following:
- Calculating payroll each time period
- Printing, signing, and distributing paychecks or pay stubs
- Generating reports for in-house and accountant use
- Preparing and remitting payroll taxes and returns to government agencies
When evaluated on a per-payroll-period or a monthly basis, a time/cost analysis may well indicate the benefits of an affordable full-service provider.
3. Enhanced security
Payroll processing is a complex and potentially risky business operation. Even with trusted employees, there is always a risk of identity theft, embezzlement, or tampering with company records for personal gain. There's also a risk from using payroll software from companies that aren’t well established and may be out of business or bought by another company in a few years. How safe and secure is payroll data on the company's server or network? This nagging question can consume a business owner's energy and attention as well.
By contrast, outsourcing payroll to a stable, experienced provider can offer a "safe haven" for your confidential payroll data. In addition to redundant backup and multiple server locations, a quality payroll provider invests in state-of-the-art systems for storing and protecting data, simply because it's part of the service provided to clients.
4. Compliance with government regulations
Generally speaking, small business owners aren't experts in the complicated world of government tax regulations. At the same time, they’re legally responsible for any cases of misrepresentation or a failure to accurately report employment taxes to federal and state government agencies.
These mistakes can lead to audits and penalties — situations no small business wants or needs. According to the IRS, more than 1.8 million tax returns were audited in 2016 for businesses with income between $200,000 and $1 million.2 And 978,564 businesses of all sizes were assessed civil penalties.3
Government rules and regulations are always changing, and small business owners can't be expected to stay on top of these changes. Professional payroll providers, on the other hand, must stay current with rules, regulations, and changes in tax rates. Some even have whole departments dedicated to helping clients stay aware of regulatory updates, so they can make more informed decisions about their business.
5. The expertise of professionals
A professional payroll company employs individuals who know payroll processing inside and out. These individuals specialize in the complexities of payroll taxes, as well as compliance with government regulations. It's what they're trained to do and part of the guaranteed service they provide.
Savings in time and money, greater data security, and the comfort of knowing experts are handling your payroll functions — these are all compelling reasons for millions of businesses to outsource their payroll. With so many benefits the question then becomes, “How do I choose the right payroll provider?”
1. Robert Half & Financial Executives Research Foundation. 2016 Benchmarking the Accounting & Finance Function https://www.roberthalf.com/sites/default/files/Media_Root/images/rh-pdfs/accounting_finance_benchmarking_report_2016.pdf
2. The United States Department of Justice. Employment Tax Enforcement, September 28, 2017. https://www.justice.gov/tax/employment-tax-enforcement-0
3. 2016 Internal Revenue Service Data Book, October 1, 2015 to September 30, 2016.