In-House Payroll vs Outsourced Payroll: Which Is Best for Your Business?

Payroll is an important part of any business and should not be considered lightly. Doing it right not only keeps employees happy but protects your business. Many companies choose to outsource all or part of their payroll duties, while others handle it completely in-house.

Which is the best choice for you? Let’s find out.

Defining In-House Payroll vs Outsourcing

Before we discuss the differences, let’s be sure we understand what “in-house payroll” and “outsourced payroll” mean.

In-house payroll: Doing payroll in-house means someone in your business manages the functions of calculating and issuing paychecks, handling taxes, and making sure your business stays on top of local, state, and federal regulations.

You may purchase software to assist you with these functions, but the work is done by an employee. There are stand-alone programs like Microsoft Excel, do-it-yourself plans offered by payroll software like Patriot Payroll, and online payroll calculators that will do payroll calculations. Some are free.

Fully outsourced payroll: You hire an outside company to handle all the work. You may provide employee information directly, or the company may provide a portal for employees to do it themselves. Regardless, the payroll service provider handles calculating and issuing paychecks, keeping you on the right side of laws and regulations, and at least withholding money for taxes and employee benefits. Most of these companies also file and pay your taxes.

How to Choose Which Is Best, Payroll In-House or Outsourcing

The trade-off between in-house payroll vs outsourcing payroll comes down to whether you want to pay for the convenience and expertise of a payroll service or prefer to maintain control of all aspects by doing it yourself. However, here are some common scenarios in which one choice is better than the other.

Choosing Between In-House Payroll vs Outsourced Payroll

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 and PTO calculations as well as paychecks.

Tracking Time and Attendance In-House

With in-house payroll, you’ll need to track time manually with a spreadsheet, or you can get time-tracking software for your employees that feeds into a database you can use. If you have point-of-sale 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 time cards, tracks paid-time-off, and helps you identify and calculate overtime so you comply with federal and state labor laws. Try it today.

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Outsourced Time Tracking

When outsourcing, you’ll need to work with the payroll service to find out what options you have to track employee work hours. Some payroll software requires you to input the hours yourself. Others have time-tracking functions or will integrate with time-tracking software. Be sure to calculate the costs of purchasing third-party software if making budget comparisons between doing in-house payroll and outsourcing.

Paycheck Calculations, Taxes & Other Withholdings

When calculating paychecks, you may need to figure 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 need to withhold for taxes, benefits, and other liabilities. It’s also important to file and pay federal taxes timely–some states and local areas have tax filing requirements too.

Managing Paycheck Calculations and 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 software 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.

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 they 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.

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 W2 forms to all of your employees so that 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 a 1099 Form. You don’t have to pay taxes for them, but you do need to report their earnings.

Preparing and 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 W2 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 Outsource 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.

Payroll Payment Options

There is a growing trend among employees wanting to be paid by direct deposit or a payroll card if they don’t have a bank account. Printed checks are still an option, although not as popular.

Other payment venues include PayPal, Venmo, and other online payment services; we caution against using payment services like this for payroll, 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 really want to offer direct deposit, you will have to work with your bank for direct deposit services; they usually charge a fee per-check ($1 to $3). Some banks 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 so you can 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 also have their own pay card programs, and nearly all will do direct deposit for free.

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 limitations to information access within the software.

Payroll Expertise and Technical Assistance

There are a lot of moving parts to payroll, with rules that have to 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–minimum wage, overtime rules, pay frequency laws, etc. 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 own resources to resolve.

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 business 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 companies 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.

In-House Payroll Software (DIY)

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. Patriot Payroll is an example. It offers a DIY option that helps 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.

Advantages of Doing Payroll In-House vs Outsourcing

Pros of Doing Payroll In-House

• Less expensive
• Quick reaction times for catching and fixing errors
• No regular fees unless you get additional software
• All privacy information is kept in-house
• Your payroll person is personally familiar with your company

Pros of Outsourcing Payroll

• Service stays abreast of changes to regulations, tax codes
• Lower up-front fees; don’t need to pay a dedicated employee
• Most services have bank-level data security to protect customer information
• May have guarantees against tax penalties if they make errors (some, like QuickBooks Payroll, will even cover penalties if you make the error)
• Most offer employee self-service capabilities (changing addresses, requesting PTO, or changing shifts)
• Usually have access to payroll or HR experts

Budget Concerns

Hiring a payroll service may seem like a greater expense, but when you are considering in-house vs outsourcing, be sure to take everything into account:

• Payroll employee salary (figure out the percentage of hours that will go to payroll tasks, and whether that employee can put those hours to other duties)
• Software purchases or subscription costs, if cloud-based
• Third-party software costs, like time tracking software
• Tax filing costs

When making comparisons, be sure you divide the expenses up by paycheck or pay run so that you compare apples to apples each time.

FAQs About Doing In-House Payroll vs Outsourced Payroll

Is it really that hard to do payroll on your own?

Hard? No, but it can get complex. You need to set up the processes for your employees, make sure you have all the correct forms, stay abreast of tax and salary regulations that apply to your local area and state as well as federal law, be sure to withhold money for taxes and Social Security, and file taxes on time. Learn more about what’s expected in our article on how to do payroll.

How do I choose the best payroll service?

When choosing a payroll service, you should consider what is provided for what price, whether it charges by pay run or month, if the plan covers the services you need, and whether you are paying for features you won’t use. You can also check our expert list of the best payroll services for 2020.

Do I have to get a full payroll service?

No. Many companies choose to do part of the payroll duties themselves, outsourcing specific tasks like tax filing. You may only need a bookkeeper or an accountant.

Bottom Line

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 badly done payroll can put you in violation of taxes or employment regulations, resulting in penalties. That said, there are times when an in-house solution makes more sense than outsourcing, and vice versa. As you make your decision, consider your situation and your budget.

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. And after that, it only costs $39/month + $6 per employee/month. Sign up today.

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