Some things are too burdensome and expensive to do in-house. For example, most startups and SMBs don’t hire in-house legal counsel or auditors. Why? Because it’s unnecessarily complicated and would sink a modest SMB budget. But for some reason, many small businesses manage their payroll internally because that’s what’s always been done.
In the past, it may have been the easiest option to hire “a payroll person”. But today, thanks to ever-growing complications in compliance, finance, and technology, it’s usually more effective to outsource.
Still not sure? Here are four solid reasons why it’s more effective to outsource your payroll, compared to handling it in-house. It can be a great way to avoid the in-sourcing.
The time, employee salaries and benefits, overtime to fix mistakes, and opportunity cost of handling payroll in-house are all enormous. And given that most SMBs don’t require a full-time staff member just for payroll, it becomes a background annoyance for an HR or accounting employee, or the headache of a manager who has to plan for a part-time employee.
Outsourcing payroll means you only pay for what you need, making your HR and finance team run a lot leaner.
In the case of payroll, the “key stakeholder” is the employees that are getting paid. For them, in-house payroll usually means increased mistakes, sometimes not getting paid on time, and a clunky paper-based transaction. Outsourcing to a payroll expert often means a modern, digital dashboard where they can check in, and direct deposit options that makes payroll a seamless process.
There are economies of scale at work in outsourcing to a payroll expert. They’ve invested in payroll technology that makes everything faster and more efficient, but only because they’re handling such a large volume. SMBs don’t have access to the same modern tools, and unfortunately, that means employees often miss out on the improved experience.
The IRS estimates that 40 percent of all SMBs in the United States pay a payroll penalty each year for some form of noncompliance. It could be something as minor as depositing the wrong amount of funds, or as serious as misclassifying an employee completely. Outsourcing to a payroll expert not ensures compliance through dedicated payroll software that completes automated checks, but also gives you access to payroll expertise built up through thousands of hours of similar work.
Payroll experts can instantly spot when something is off, and are in-tune with state, provincial, and federal tax rules, garnishment fine-print, and employee classification laws. You can trust the experts to keep you in the good books of the auditor.
For startups and smaller businesses, handling payroll in-house can actually pose a risk. If a key payroll employee suddenly gets sick or is unable to perform their duties, then there will be an emergency in the payroll department. Payroll is too critical to leave up to one or two employees who may get frustrated and quit, or have to take an unexpected leave.
Working with a payroll expert ensures a level of consistency that isn’t possible for a small in-house team. The likelihood of an entire payroll business going under is much smaller than one or two key employees being unable to do their job.
Most startups and SMBs just aren’t equipped to manage payroll in an efficient, consistent, compliant way. Thankfully, outsourced payroll has become a table-stakes service offering of HR agencies. Likely because it has become too important, expensive, and complex to leave to small in-house teams.
PS: Does your team have a dedicated employee handbook? Our free guide will give you a handy checklist to give you all the inspiration you need for creating one from scratch.