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Payroll Outsourcing: The Pros and Cons


Businesses today have more options than ever for handling payroll. DIY-minded business owners may juggle payroll along with their other responsibilities, or delegate payroll to an employee. Other businesses try to avoid the hassle by hiring an outside firm. Which approach is best for your organization?

As a small-business owner, consider where you want to put your effort. How much time do you spend attending to payroll? Are you staying compliant with state and federal regulations? Are you confident about the security of employees' confidential information and your company's financial data? Is your recordkeeping regarding staff wages, benefits, and retirement programs timely and accurate?

You may have these responsibilities under wraps. But if you feel stretched thin by payroll administration, legal compliance, data security, and recordkeeping, you may want to consider outsourcing. A payroll service provider computes your payroll and associated taxes, prints and distributes checks, and generates reports. It can also establish direct deposit for employees, file your payroll taxes, issue Forms W-2, deduct workers' 401(k) contributions, and track employee benefits.

Weigh the pros and cons of outsourcing to decide whether outsourcing payroll is right for you.

The Pros

  • Time savings – In a 2013 survey conducted by the National Small Business Association, small-business owners ranked payroll taxes second out of 12 categories for administrative burden. Indeed, each pay period calls for considerable effort and attention to detail. Outsourcing frees up time that can be spent on other areas of your business.
  • Cost savings – Every pay period you must calculate wages; print, sign, and distribute checks; create reports; and prepare and pay payroll taxes. By outsourcing, you can spend time that would otherwise be consumed by these tasks on profit-generating activities.
  • Improved security – Most payroll providers offer secure systems for sensitive employee and company data. They employ redundant backup systems, multiple server locations, and the latest technology to protect client data.
  • Regulatory compliance – It can be challenging to keep up with payroll tax laws, and penalties for errors can be significant. Payroll providers know payroll backward and forward, and can help you stay compliant with payroll-related laws and regulations.

The Cons

  • Difficulty obtaining wage and employee data – Depending on your payroll service provider, you may encounter hurdles in accessing payroll figures and other employee data because the information resides on another company's server.
  • Delayed corrections to payroll errors – If mistakes occur, a payroll firm may not respond as quickly as you or your employees wish.
  • Cost – Not all vendors tailor services and prices to your company's size. Do research on vendors beforehand and purchase only those services that make sense for your financial situation.
  • Risk of vendor going out of business – It happens — payroll administrators, especially newer ones, fail.  In this unfortunate situation, you may lose access to your payroll data, or worse, your money.

Each of these disadvantages can be avoided by careful selection of a payroll company. Make a thoughtful decision based on:

  • Referrals from other business owners
  • Professional qualifications including years in business, experience with your market, and licensing
  • Access to, responsiveness, and professionalism of customer service representatives
  • Range of services and assistance offered
  • Fees and charges
  • Data required each pay period, method of data transfer, and data security

Payroll outsourcing isn't right for every small business, but it's a boon to many. Make the decision that’s right for you by taking advantage of the wealth of information Paychex offers to small businesses.


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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