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Human Resources | Versus

In-house Payroll vs Outsourcing: Which Is Best for You?

Charlette Beasley

REVIEWED BY: Charlette Beasley

Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.

 

WRITTEN BY: Robie Ann Ferrer

Published January 17, 2023

Robie has more than five years of content writing experience and specializes in writing about payroll and human resources software for small businesses.

Published January 17, 2023

This article is part of a larger series on Payroll Services.

Table of Contents
  1. 1 Difference Between In-house vs Outsourced Payroll
  2. 2 Budget
  3. 3 Time Tracking
  4. 4 Paycheck Calculations
  5. 5 Payroll Payment Options
  6. 6 Payroll Recordkeeping & Security
  7. 7 Payroll Expertise
  8. 8 Year-end Payroll Tax Forms
  9. 9 Bottom Line

Payroll is a big part of any business and should not be considered lightly. Doing it right keeps employees happy and protects your business from being out of compliance with state and federal laws. Many companies outsource all or part of their payroll duties to a service or provider, while others handle it in-house, using their own staff and resources. Below, we cover the seven 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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          What’s the Difference Between In-house Payroll vs Outsourced Payroll

          In-house payroll is when you have a staff or team handling pay calculations and tax processing for your workers. These team members are considered employees and part of your human resources (HR) or finance department.

          PROS CONS
          Control over pay processes (many outsourced payroll providers require you to follow their procedures) Your in-house payroll staff may not be adept in handling complex pay runs
          For companies with basic payroll needs and very small teams (fewer than 10 employees), hiring an in-house payroll clerk can be less expensive than getting payroll outsourcing services Payroll review tasks added to the business owner’s to-do list (plus, you need to manage the payroll team if you don’t have an in-house HR manager)
          Freedom to use payroll and HR solutions that fit your business needs (most outsourced payroll services come with their own systems that you should use) Potential payroll compliance issues if your payroll clerk isn’t an expert
          No access to HR advisory services (which many outsourced payroll service providers offer)

          Outsourced payroll is when you hire a third-party service provider to process your workforce’s payroll. The third-party service provider can be an accounting firm, a payroll company offering outsourcing services, or an independent contractor, such as a payroll clerk or accountant.

          PROS CONS
          Many outsourced payroll service providers offer access to pay processing systems (removes the need for you to manage different business software) Can get pricey, especially if you have a large workforce and the provider charges on a per-pay check basis
          An outsourced payroll system generally comes with workflow and automation tools to streamline payroll Some outsourced payroll service providers may have add-on fees for system setup, advisory services, and other HR tools
          Some outsourced payroll services include HR solutions like time tracking, scheduling, and employee benefits Potential employee data security issues if the provider doesn’t have strong security policies
          Strict compliance to payroll, tax, and labor regulations
          Access to a support team, including payroll and/or HR experts

          1. Budget

          Hiring a payroll service may seem like a greater expense, but when considering in-house payroll processing vs outsourcing, take everything into account. When making comparisons, be sure you divide the expenses by paycheck or pay run so that you’re comparing apples to apples.

          Processing payroll in-house can be a less expensive option but can quickly cost 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 that 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 the cost of that.

          Outsourcing is often a cheaper upfront 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.; others bill for each of these on an a-la-carte basis, while some may even charge per-paycheck fees for each pay run. 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 your most important payroll duties is keeping an accurate account of hours worked per pay period. This affects overtime, paid time off (PTO), and paycheck calculations.

          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 and under 20 employees, consider Homebase. It eliminates the need for paper time sheets (by providing electronic time cards), tracks PTO, and helps you identify and calculate overtime—making it easy to comply with federal and state labor laws.

          Visit Homebase

          When outsourcing, you’ll need to work with the payroll service to determine your options 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 comparing in-house payroll and outsourcing budgets.

          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 must also calculate how much you must withhold for taxes, benefits, and other liabilities. It’s also important to file and pay federal taxes on time—some states and local areas have tax filing requirements too.

          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 to establish a process to set aside the money you withhold so that you can pay tax agencies and vendors on time.

          Doing payroll in-house does not mean doing everything with a pencil and a ledger or with an Excel sheet. There are standalone programs that let you track hours and calculate payroll. Some provide a do-it-yourself (DIY) system that handles all pay calculations and deductions for you, but you have to file payroll taxes yourself. A few DIY payroll solutions offer phone support with experts as well, but many of these charge for current tax tables.

          If you have only a handful of employees and prefer to manage payroll tax filings on your own, consider Patriot Payroll. Aside from providing a full-service payroll package, it offers a DIY option that lets you perform calculations, print paychecks, and pay via direct deposit—but you pay and file the taxes.

          Visit Patriot Payroll

          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 track your payroll liabilities.

          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; some websites will allow you to print paychecks for free but with 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.

          When you outsource payroll, you are more likely to have access to multiple payment options. Most payroll software can print paper checks from the system; you just have to spend a few minutes configuring it so that the check information aligns.

          Some payroll solutions like ADP and Paychex will sign, print, and deliver paychecks directly to your employees’ doors—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., which you’re required to keep on file for at least three years.

          If you process payroll in-house vs outsourcing, 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.

          If you hire a payroll service provider, you are entrusting them with sensitive employee information, from Social Security 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 vs outsourcing, 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.

          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.

          Most payroll services have certified HR experts who stay current 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 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.

          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.

          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, hand out, or email.

          Bottom Line

          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 maintain control of all payroll aspects by doing it yourself. Regardless of which you choose, the most important thing 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 with solid pay processing and HR solutions, consider Gusto. It handles payroll tax payments and filings for you, and even lets you run payroll as many times as you need in a month without having to pay extra. Basic to advanced HR tools are also available to help you hire and manage employees with ease. Sign up for a plan today.

          Visit Gusto

          About the Author

          Robie Ann Ferrer
          Robie Ann Ferrer

          Robie Ann Ferrer is payroll and HR expert at Fit Small Business, focusing on software. She has more than five years of content writing experience. Prior to becoming a writer, she worked as an HR specialist at several multinational companies.

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