Benefits and Compensation

Pros and Cons of Outsourcing Payroll

Processing payroll has a lot of variables. Organizations need to understand federal, state, and local income tax requirements; how to process wage garnishments; how to set up payments for any benefits that come out of payroll, etc. There are also regulatory and compliance issues like the distribution of W-2s.

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Given these variables, a lot of employers opt to outsource payroll. Here are some of the potential advantages to outsourcing payroll to a third party:

  • It frees up administrative time; whoever was responsible for it internally can now be assigned to other tasks.
  • It will be done by experts. Even the software used by third parties is typically set up to eliminate common payroll errors.
  • It can help your organization stay in compliance because the third party will be knowledgeable about requirements the employer may have missed.
  • It can ensure things like tax collection and remittance are done accurately and in a timely manner, which can reduce errors.
  • It will hopefully be completed by a firm that has expertise in all legal ramifications related to payroll processing.
  • The third party may also be able to assist with benefit administration, which could even allow the employer to offer additional benefits.
  • It should ease end-of-year compliance because the payroll organization will handle things like W-2 distribution.
  • It reduces the miscellaneous costs associated with payroll processing, like the salary for the employee who performs this role, the costs of paper checks, the costs associated with payroll reporting, etc.
  • Third-party payroll processing typically has stringent security measures in place to protect data.
  • It can also reduce the potential for errors in things that need to be tracked along with payroll, like paid time off (PTO) or other accrued benefits.
  • The third party may have easy options for employees to access their data, which can reduce the number of questions your team may have.

The advantages of outsourcing payroll are many, but they aren’t without risks. Here are a few:

  • The employer is still legally liable for ensuring payroll is accurate, so it does not completely absolve your company of all responsibility. Therefore, it’s paramount to choose an organization you trust.
  • If there are problems, it could be tougher to fix them quickly because it’s out of your hands.
  • Your organization may have earlier deadlines to submit information to allow for processing time.
  • Just because another (hopefully professional) organization is handling it does not mean there is no risk for error.
  • There are still costs involved, which may include fees for extra services beyond basic payroll processing costs.
  • It may be more difficult to make one-off changes when you run into an issue you need to address.
  • There may be a data security risk because sensitive employee data will be visible to another organization at risk of data breaches.
  • Like any other implementation, switching to outsourcing will take a fair amount of time and resources to do it right and will require integration with relevant data inputs from your organization.
  • You have no control over the livelihood of the payroll organization; if it experiences problems, this could impact you, too.