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Is Payroll Outsourcing Right for Your Small Business?

Is payroll outsourcing right for your business, or should you keep it in-house? The following considerations can help you sort through the details.
make decision to outsource payroll process

Once your business grows to have at least one employee, you are responsible for calculating, managing, and delivering payroll. Since this can be complex for business owners, many choose a third-party provider to handle some or all payroll responsibilities. It can be tough to determine whether payroll outsourcing is right for your business, but many businesses learn that the benefits of automating these tasks outweigh any perceived disadvantages.

The following considerations can help you sort through the details:

Both sides of the payroll coin

There are several factors that contribute to your payroll outsourcing decision. On the one hand, you may feel that your small business can't absorb the added cost of paying someone else to manage payroll. On the other hand, taking the DIY payroll approach can be time-consuming and expose your company to unnecessary risks.

In a recent Paychex survey, HR professionals reported spending on average 11 hours per week processing payroll, with an additional 4.9 hours spent processing employee benefits, and another 1.8 hours managing time off. Combined, this amounts to over 17 hours spent each week on tasks that can largely be automated with the help of an outside payroll services provider. Assuming a 40-hour work week and an annual salary of approximately $98,000, this equates to over $41,000 paid to an in-house employee just to manage payroll and payroll-related tasks.

For small businesses that may not have a dedicated employee for completing these tasks, the numbers are even more staggering. In a recent study conducted by The Electronic Transactions Association, small business owners valued their time at $170 per hour. Considering the business owner is principally responsible for operations, generating new business, generating financing, and myriad other tasks, this valuation can represent the owner's value to the business. In organizations where the owner is investing time in payroll, this corresponds to an annual outlay of $150,280 per year.

The time value isn't the only cost of keeping payroll in-house, however. Approximately 33 percent of all employers make payroll errors, which can cost money in the form of fines, extra taxes, overpayments to employees, and additional administrative costs for finding and correcting mistakes. While these costs can vary widely across different industries, they should be a consideration factor for employers.

Cost analysis for outsourcing payroll

While payroll software is a financial investment, it's important to weigh that factor against the amount of time (and money) spent when processing payroll on your own. Don't forget that errors from doing payroll manually can also cost you money or time. For instance, calculating or filing taxes incorrectly can result in fines or penalties. Each year, roughly 40 percent of small business owners incur an average of $845 in IRS penalties. To avoid paying more than you owe, payroll software can help ensure you don't miss key tax-filing deadlines and that your company withholds and reports the correct amount of taxes.

If you decide payroll outsourcing may be a more efficient path for your small business, the costs should be very straightforward. Choose a reputable payroll provider that clearly stipulates the monthly costs up front, so you can plan for payroll expenses each month. Reputable payroll providers will also offer various add-on packages, so you only need to pay for the services relevant to your organization.

Growing workforces and payroll complexities

Many companies are embracing a blended workforce, which has further changed the payroll process. As a business grows or becomes more complex — such as taking on freelancers or paying employees overtime — the odds of making errors can increase. A quality payroll system can help you handle various classifications of workers, even if you have full-time and part-time employees, independent contractors, as well as exempt and non-exempt or employees. It can also help you adhere to federal, state, and local rules around overtime pay as well as tax filing requirements.

Today's regulatory environment, tax laws, and employment situations are extremely diverse. When shopping for a payroll system, look for software designed specifically for a small business. If you expect your business will eventually grow, don't forget to ask your payroll administrator if the software can scale with you.

Paychex offers payroll solutions to fit the needs of any size business, with features that make it efficient to manage all aspects of the payroll process.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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