This article is part of a larger series on Payroll Services.
Payroll is a big part of any business and should not be considered lightly. Doing it right not only keeps employees happy but protects your business from being out of compliance with state and federal laws. Many companies opt to outsource all or part of their payroll duties to a service or provider, while others handle it completely in-house, using their own staff and resources. Below, we cover the most important factors to consider—from budget to recordkeeping and security to technical assistance—before deciding which is best for your business.
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Hiring a payroll service may seem like a greater expense, but when you are considering in-house vs outsourcing, take everything into account. When making comparisons, be sure you divide the expenses by paycheck or pay run so you’re comparing apples to apples.
Cost of In-house Payroll
Processing payroll in-house can be a less expensive option but can quickly end up costing more than many outsourced payroll options, depending on your individual needs.
You’ll need to consider whether or not payroll will be a full-time job within your business, so you can determine the salary of the person responsible for it. Also, you’ll need to think about any software (like timekeeping systems) you may want to utilize to make the job easier and what the cost of that will look like.
Cost of Outsourcing Payroll
Outsourcing is often a cheaper up-front cost, but it is important to understand how pricing and billing work with whatever outsourced service you choose.
Some providers charge one monthly cost that includes all payroll processing fees, tax filing fees, benefits administration, timekeeping, etc., whereas others bill for each of these on an a la carte basis. To keep outsourcing within your budget, you’ll want to be sure you fully understand what costs you’ll be responsible for and when your billing cycles start and end.
2. Time Tracking
If you have hourly employees, one of the most important payroll duties you have is keeping an accurate account of hours worked per pay period. This affects overtime, PTO, and paycheck calculations.
Tracking Time & Attendance In-house
With in-house payroll, you will need to track time manually with a spreadsheet or get a time tracking platform for your employees that feeds into a database you can use. If you have point-of-sale (POS) software, you may already have access to built-in scheduling and time-tracking features you can use.
If you need free time and attendance software and your business has one physical location, consider Homebase. It eliminates the need for paper time sheets (by providing electronic timecards), tracks PTO, and helps you identify and calculate overtime, so you comply with federal and state labor laws. Try Homebase today.
Outsourced Time Tracking
When outsourcing, you’ll need to work with the payroll service to determine what options you have to track employee work hours. Some payroll software require you to input the hours yourself, while others have time-tracking functions or integrate with time-tracking platforms.
Be sure to calculate the costs of purchasing third-party tools when making budget comparisons between in-house payroll and outsourcing.
3. Paycheck Calculations, Taxes & Other Withholdings
When calculating paychecks, you may need to figure out more than simple salaries. Commissions, tips, and bonuses add to a person’s paycheck and should be taxed accordingly; you must factor this into your payroll calculations. You also need to calculate how much you must withhold for taxes, benefits, and other liabilities. It’s also important to file and pay federal taxes in a timely manner—some states and local areas have tax filing requirements too.
Managing Paycheck Calculations & Payroll Taxes In-house
You can go completely old-school by using a calculator or spreadsheet to help you make accurate payroll calculations, but some do-it-yourself payroll platforms will help you perform these calculations as well. If you opt to do payroll in-house, you will need to verify that you have the most up-to-date tax tables (rates can change every year) and consider local taxes. It’ll also be important for you to establish a process to set the money you withhold aside, so you can pay tax agencies and vendors on time.
Doing payroll in-house does not have to mean doing everything with a pencil and a ledger or with an Excel sheet. There are stand-alone programs that let you track hours and calculate payroll, like Patriot Payroll. It offers a DIY option that lets you perform calculations, print paychecks, and pay via direct deposit—but you pay and file the taxes. A few DIY payroll solutions offer phone support with experts as well, but many of these charge for current tax tables.
Outsourcing Payroll Calculations & Payroll Taxes
Most outsourced payroll solutions have access to electronic federal and state tax tables that update each year. They also withhold the proper tax amounts from employee paychecks, keeping this money separate from other payroll transactions. The best payroll services also handle benefits withholdings, though free options may not file the payments. The amounts withheld automatically reflect on employee pay stubs and your payroll records, so you know how much to pay and to whom.
4. Payroll Payment Options
There is a growing trend of employees wanting to be paid by direct deposit or payroll card if they don’t have a bank account. Printed checks are still an option, although not as popular.
Other payment options include PayPal, Venmo, and other online payment services; we caution against using payment services like this for payroll, though, because they don’t withhold taxes and benefits for you like payroll software. As your business grows, this process will make it hard to keep track of your business’ payroll liabilities.
In-house Payroll Payment Processing
When you do in-house payroll, you will need to print and mail all paper paychecks on your own. This means you’ll need a printer, MICR ink, and payroll check stock; there are some websites online that will allow you to print paychecks for free, but there are limitations. If you want to offer direct deposit, you will have to work with your bank for direct deposit services. Banks usually charge a fee per check ($1 to $3); some may also have pay card services you can sign up for, or you can find third-party pay card services.
Outsourced Payroll Payment Processing
When you outsource payroll, you are more likely to have access to multiple payment options. Most payroll software is set up to print paper checks from the system; you just have to spend a few minutes configuring it so the check information aligns.
Some payroll solutions like ADP and Paychex will sign, print, and deliver paychecks directly to your employees’ door, although they charge extra fees. Direct deposit is also an option that most providers offer for free. Some have their own pay card programs as well.
5. Payroll Recordkeeping & Security
When processing payroll, security is a big consideration. You’re handling sensitive information, like employee Social Security numbers, addresses, earnings data, etc., and you’re required to keep it on file for at least three years.
Managing Payroll Records & Security In-house
If you process payroll in-house, you will need physical and electronic safeguards to keep your information secure, whether from the malicious hacker looking for account information for identity theft or the well-intentioned manager who wants to change “one little thing” without knowing how it affects the entire system. That can mean using a safe to house paper-based payroll records or secure server and password protocols for online records.
Managing Payroll Records & Security With an Outsourced Payroll Solution
If you hire a payroll service provider, you are entrusting them with sensitive employee information, from Social Security numbers to bank account numbers. Many of them store information on the cloud, making them a more likely target for hackers than your company. Because of that, legitimate payroll providers have bank-level security, password protection, and role-based access limitations to information within the software.
6. Payroll Expertise & Technical Assistance
There are a lot of moving parts to payroll, with rules that must be followed if you don’t want to deal with fines, low employee morale, or worse. If you opt for in-house payroll, you’ll need to be able to resolve any issues or questions you have on your own, including technical ones. With an outsourced payroll solution, you may have access to certified HR experts who will answer your questions quickly.
Resolving Payroll Issues In-house
If you are doing payroll in-house, you have to keep track of changing payroll regulations that may affect how you process payroll—such as minimum wage, overtime rules, and pay frequency laws. And if you calculate payroll with Microsoft Excel or do-it-yourself payroll software, you will need to complete the setup on your own; if you have technical difficulties, you’ll have to use your resources to resolve them.
Some do-it-yourself payroll software may provide tax tables you can access—often at an additional cost—but they may not remain updated on all the rules, such as Affordable Care Act (ACA) changes. Thus, you may want to have an adviser with whom you can consult. A payroll or tax accountant may offer this service. Some small businesses or professional organizations also have advisers.
Resolving Payroll Issues Using Outsourced Payroll Solutions
Most payroll services have certified HR experts who stay up to date on all compliance information and are available to answer specific questions. In addition, they may have a compliance library that houses answers to the most commonly asked questions. Some services take it a step further by providing HR experts who answer questions that go beyond the paycheck, often at an additional fee or with a higher-tier plan.
When it comes to setting up your system, payroll service providers often cover this for free—although some companies that service large clients charge a setup fee. They also usually have technical advisers on staff who will help you resolve any ongoing technical issues at no additional cost.
7. Year-end Payroll Tax Forms
Payroll is more than ensuring your employees get paid. At the end of the year, you need to prepare and distribute W-2 forms to all of your employees so they can file their taxes. Federal law stipulates you must send the form by Jan. 31 of the following year. If you worked with any contractors and paid them $600 or more during the year, you’ll need to send them the Form 1099. You don’t have to pay taxes for them, but you do need to report their earnings.
Preparing & Filing Year-end Tax Forms on Your Own
If you are doing payroll in-house, you will need to total each workers’ earnings and taxes paid during the year. You can fill in and print corresponding W-2 forms and 1099 forms from the IRS site and mail them to employees yourself. The Social Security Administration allows you to submit copies of the form electronically.
Preparing & Filing Year-end Tax Forms With Outsourced Payroll Software
Most payroll service options will automatically prepare and file year-end tax forms for you. If you’re using software, your employees’ information seamlessly transfers to the form (name, Social Security number, earnings, taxes paid, etc.). And usually, you’ll have the option of printing completed forms to mail or hand out as well as email.
The trade-off between in-house payroll vs outsourcing comes down to whether you want to pay for the convenience and expertise of a payroll service or prefer to maintain control of all payroll aspects by doing it yourself. However, here are some common scenarios in which one choice is better.
Small, single office (<10 employees)
Regular off-cycle payroll requests
Work only with contractors rather than salaried employees
Payroll or HR expert on staff
Complicated payrolls, multiple locations
Don’t have a payroll expert on-staff
Rapidly growing businesses
Business spans multiple states
The most important thing about payroll processing is that it gets done right. After all, you are dealing with your workers’ livelihoods. Not to mention, a poorly done payroll can put you in violation of taxes or employment regulations, resulting in penalties.
If you want to try an outsourced payroll solution without having to pay any money, consider Gusto. It will pay your employees and payroll taxes free for 30-days. After that, it costs only $39/month + $6 per employee/month. Sign up today.