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Is Payroll Outsourcing Right for Your Small Business?


Once your business grows to have at least one official employee, you are responsible for calculating, managing, and delivering payroll for your employees. It can be tough to determine whether payroll outsourcing is right for your business, but 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. To make the best decision for your business, a cost analysis approach can help you carefully weigh the options.

Cost Analysis for Keeping Payroll In-House

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

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 who 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.

While payroll outsourcing may initially seem like an extra expense, a careful analysis of the long-term costs associated with keeping payroll in-house may help your business save thousands of dollars each year in reduced administrative costs, fewer errors, and minimized fees and penalties.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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