The Problems with In-House Payroll
A typical in-house payroll department has many concerns. Besides the task of issuing paychecks, it may have to do so for many company locations where tax rates differ, employees are paid on different dates, and tax reporting to the various state governments must be made on a variety of different forms. Worst of all is the tax remittance, which involves a heavy penalty if it is paid even one day late. All of these problems and costs can be avoided by handing over the payroll processing function to an outside supplier.
Reasons to Outsource Payroll
Payroll is one of the most commonly outsourced company functions. There are several good reasons for this, which are:
- Backups. Suppliers backup a company’s payroll information continually, and should have off-site storage of the backups, as well.
- Check stuffing. All payroll suppliers will stuff paychecks into envelopes, which eliminates a low-end clerical task that the payroll staff would otherwise have to perform.
- Direct deposit. Most payroll suppliers have the capability to issue payments to employees by direct deposit. Companies that process their payroll in-house can also do this, but only through the services of a third party that handles direct deposit.
- Expert staff. Suppliers have a core of highly-trained staff who not only know their systems and payroll regulations quite well, but who also provide training to clients, as well as advice over the phone.
- Multi-location processing. Larger payroll suppliers have locations in most major cities, and so can directly deliver paychecks to most urban locations. They send paychecks to more remote locations by overnight delivery service.
- New hire reporting. Each state government requires a company to report the hiring of new employees to them, so that they can determine if there are any garnishments outstanding against these individuals. Payroll suppliers usually offer this reporting service free of charge.
- Pay cards. Larger payroll suppliers offer payroll debit cards as a payment option. This is a good alternative to direct deposit for those employees who do not have bank accounts.
- Pension plan linkage. Some payroll suppliers either operate their own 401(k) pension plans or are linked to such plans offered by third parties. These suppliers can link pension deductions in the payroll system to their plans, so no separate pension remittances are required.
- Reporting. Suppliers have a standard set of “canned” payroll reports, and usually offer report writing software that allows you to extract information and present it in formats that are specific to your company.
- Software updates. The employer no longer has to maintain any payroll software in-house, and so is no longer concerned with software updates. The supplier is responsible for all updates to its own software.
- Tax remittances. A supplier calculates all payroll taxes and remits them to the government without the company having to be involved. The savings from avoided tax remittance penalties may pay for the entire cost of the supplier.
- Tax tables. Suppliers maintain the most up-to-date records of tax rates charged by all government entities, and so can accurately calculate taxes payable to cities, counties, states, the federal government, and other special entities throughout the country.
- Unemployment claims. Large payroll suppliers will respond to unemployment claims on behalf of the company. This involves the complete range of activities from initial claims filings through final disposition of the claims. Suppliers typically provide summaries of all claims on a secure website, which the payroll manager can access to obtain the latest status of claims. This is not a cost-effective service for smaller firms that only deal with a few claims per year.
- W-2 forms. All suppliers provide W-2 forms to employees after the end of each calendar year. Many also store this information on-line, so that employees can access their forms from previous years.
- Other services. Some suppliers offer additional services related to payroll, such as pension plans, benefits administration, and timekeeping systems.
Thus, there are a broad range of services available to a company that is willing to outsource its payroll function. The key factors are enhanced convenience and the elimination of any risk associated with not remitting payroll taxes on a timely basis.
Reasons Not to Outsource Payroll
There are some situations where using a payroll supplier is not viable or is not cost-effective. These situations are:
- Cost. Despite what the payroll suppliers may say, outsourcing payroll is more expensive than processing it in-house, because the supplier has marketing costs and a profit requirement that an in-house payroll department does not have. Suppliers give the appearance of having low-cost services by selling a basic bundle of services at a low cost, and then adding high fees for additional services.
- Database linkage. Outsourcing payroll shifts the payroll database to the supplier. This can be a problem when a company is maintaining a large, integrated database of information (as is the case with an enterprise resources planning system) and needs to have this information in-house. Some larger payroll suppliers may be willing to create an interface that extracts the needed payroll information from a company’s ERP system, thereby keeping information on-site.
These two factors are less critical for smaller businesses, which therefore form the core group that outsource payroll. Larger companies are more likely to retain payroll in-house, since they can process payroll at lower cost than suppliers, and can retain payroll information within their computer systems.