How Payroll Outsourcing Services Work (+ Options, Prices & Pitfalls)
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.
Heather is a staff writer and payroll specialist with several years of experience working directly with small business owners. Her expertise allows her to deliver the best answers to your questions about payroll.
This article is part of a larger series on Payroll Services.
Outsourcing payroll can be an easy way to save time and money. Rather than tracking and calculating employee payroll by hand or by using spreadsheets, you can hire a bookkeeper, use an accountant, or work with a professional employer organization (PEO).
Many small business owners choose to outsource their payroll and HR because of how complicated and time-consuming it can be. A payroll outsourcing company will gather your employees’ information (hire date, job title, and pay rate) and time card data, calculate the amount that’s due to each employee, and then pay that amount by issuing a direct deposit or payroll check.
These are the steps that payroll outsourcing services generally follow when processing payroll:
- Set up payroll software with your company and employee data, including your payroll bank account and employees’ bank accounts for direct deposit
- Collect new employee information and provide state-required new hire reporting
- Request or obtain time card data (clock-in and clock-out times or hours worked) each pay period to input into their payroll software
- Confirm hours worked each pay period as paid or unpaid, and calculate gross pay
- Run your payroll, processing pre-tax deductions (like benefits and taxes) and post-tax deductions (like garnishments for child support)
- Make deposits to employees’ accounts (direct deposit, pay card) and mail or deliver paychecks to your office or employees’ homes
- Make payments to vendors, such as insurance companies, on your behalf
- Pay all payroll taxes, such as quarterly state and federal taxes, and insurance when due
- Provide reports to the business
Payroll Outsourcing Service Options
Outsourcing options can vary from using your neighborhood bookkeeper to hiring a big-name payroll outsourcing service with prices that range from under $100 per month to thousands of dollars per year. What’s different about service providers is how much they do versus how much of the work you do as the business owner.
1. Outsource Payroll to a PEO
A professional employer organization (PEO) is a co-employer, meaning you and the PEO split employment duties. You’ll manage your company’s day-to-day business while the PEO handles HR, payroll, and benefits processing.
If your employees have a question about their latest paycheck, they can call and speak to a dedicated team member who knows your business. Also, if your company receives a notice to garnish an employee’s paycheck, the PEO will work to file the garnishment under its own employer identification number.
A PEO actually hires your employees and then leases them back to you. It adds your employees into a pool with its other clients’ employees to drive down benefit costs so that it can offer affordable premiums.
Below are a few of the PEO options that can be a great fit for small businesses:
PEOs: | Best for: |
|---|---|
Small businesses needing a low-cost, high-functioning PEO | |
Growing businesses wanting the expertise of a large PEO | |
Small businesses seeking a highly customizable PEO solution for tackling HR and payroll tasks | |
Technical companies requiring robust integrations and IT hardware support in their onboarding |
See our top-recommended PEO companies for small businesses for more information on each provider and other high-ranking PEO options.
What a PEO Costs
A PEO is more expensive than outsourcing payroll to a bookkeeper because you get a lot more than simple payroll processing. PEOs provide HR, payroll, benefits and, often, HR consulting services. It can cost an employer with a staff of 25 at least $12,000 to more than $40,000 total per year.
Who PEOs Are Right For
If you want the entire HR-payroll function outsourced, a PEO is a good value. It saves you from having to hire an HR, benefits, and payroll person full time.
| PROS | CONS |
|---|---|
| Takes the responsibility of payroll and HR completely off of your plate | Not the most affordable option |
| Won’t have to stay on top of changing laws and regulations | Typically can take a long time to transition on and off platforms |
| Reduced liability since the PEO becomes the employer | May not have a dedicated resource available during off hours |
| More affordable benefits for your team | |
2. Outsource Payroll to a National Bookkeeping Service
Several national bookkeeping firms offer both accounting and payroll services for small businesses. Having many aspects of your business managed in the same place often makes your business operations easier to track and stay on top of. Usually, you have access to the same services you would receive from a local firm with some extras, like year-end financials.
These bookkeepers are usually remote and, therefore, most of your communication is done via the internet or over the phone. In addition, any documents you or your bookkeeper need to send to each other must be provided electronically. This can be great for tech-forward businesses.
What a National Bookkeeping Firm Costs
To run a weekly payroll for 25 employees, a national bookkeeping firm might cost $4,000 to $6,000 per year if you pay in advance. Like a full-service payroll company, there may be upcharges for extras like processing a garnishment or running an off-cycle payroll for year-end bonuses.
Who National Bookkeeping Firms Are Right For
National bookkeeping firms are best for companies that operate in multiple states. A local provider may only have the expertise for the local area, but a national firm should have resources for every state.
| PROS | CONS |
|---|---|
| Can often cost less if they manage your bookkeeping and payroll | May not have as much personal experience working with your state/local governments, which may cause things to take a bit longer |
| Managing all operations in one place can help keep finances organized and cohesive | Since remote, they may not be available during off hours when you have a question regarding certain payroll issues |
| Typically, communication is all online and can be a great option for tech-friendly businesses | |
3. Outsource Payroll to a Local Bookkeeper or Accountant
If you already have someone managing your bookkeeping, you might want to ask them if they can run your payroll too. For example, if they’re a QuickBooks ProAdvisor, they may be able to process your payroll using QuickBooks Payroll.
Using a local bookkeeper or accountant can be a great solution for business owners who are looking for a really personal experience. This will allow them to have face-to-face interaction with the team working on their payroll and HR without having to hire a full-time person in-house.
What a Local Bookkeeper Costs
A local bookkeeper can cost anywhere between $25 and $75 an hour. Of course, prices vary by location and experience—for example, a CPA-licensed accountant will likely charge more than a bookkeeper without a degree. Based on our research, we calculated that a weekly payroll for a business with 25 employees would take about 16 hours per month and cost about $4,800 per year.
Local bookkeepers can cost much less than hiring a full-time employee to manage your small business payroll, which is what can make it a great option for many small business owners.
Who Local Bookkeepers Are Right For
Small mom-and-pop businesses that need payroll and accounting integration could benefit most from working with a local bookkeeper. Travel is limited, and it’s a good way to keep money flowing in the local community. Bookkeepers can be more attentive when they know they’ll be seeing their clients face-to-face, so it may also allow for better service.
| PROS | CONS |
|---|---|
| Can offer a more personal experience than other outsourcing options | May not have as much payroll/HR experience as other outsourcing options |
| Easier to build a good working relationship when you can have face-to-face meetings | |
| Experience in your personal location allows them to know state and local laws in and out | |
When Payroll Outsourcing Services Make Sense
Outsourcing makes sense for businesses that don’t have staff with the time or experience to do payroll. In small businesses, one person typically performs both bookkeeping and payroll functions. A small business can save money by outsourcing when they don’t require a full-time employee to do this work. If you don’t have an accountant or bookkeeper on staff and don’t want to pay the average salary of a bookkeeper ($42,000 per year) or accountant ($55,000 per year), outsourcing makes sense.
Some businesses assign the payroll processing (hiring, onboarding, training, policy management, etc.) to an existing employee with HR responsibilities. While this can seem like a good option, even if you have an HR person on staff, it doesn’t guarantee that they will have the skills to process your payroll effectively. Due to its sensitive nature, it’s important to have someone who is familiar with labor and tax laws in all states in which you operate.
For business owners anywhere, the key to succeeding early and often is to focus your time, resources, and experience on the revenue-generating functions of your business—and limit risk and expenses. Outsourcing non-core or non-revenue-generating administrative and compliance functions, such as payroll and HR tasks, gives business owners time back and allows them to focus on the long-term growth of their businesses.
Questions to Ask When Outsourcing Payroll
Besides cost, here are 13 great questions to ask when you’re considering outsourcing payroll to a third-party vendor, whether a bookkeeper, payroll provider, or PEO.
- What are my employer responsibilities?
- What happens when I have to run an off-cycle payroll, such as to pay year-end bonuses or to correct an over or under payment?
- How are garnishments handled?
- Can you manage benefits? If my employees want benefits like health insurance, 401(k), or commuter benefits—do you offer those? How much extra will it cost?
- If an employee terminates after business hours and demands a final paycheck on the spot, or I wish to provide one, what options can you offer?
- Can you track employees’ leave balances like sick time, vacation, and paid time off?
- What self-service options are available for employees?
- What third-party software do you integrate with? (accounting, timekeeping, etc.)
- What kind of reports are provided?
- What other services do you have that may help me manage the people aspect of my business?
- Is the software you use or provide capable of automating payroll tax payments and filing?
- Do you offer direct deposits for free or as an add-on?
- How are payments to contractors handled?
Pitfalls to Avoid When Using Payroll Outsourcing Services
In most cases, outsourcing payroll is low risk, but there are some pitfalls you need to avoid. If you’re not careful, you could put your employees’ confidential data at risk, incur penalties and fines for noncompliance, and waste money on inadequate payroll outsourcing services.
Here are some pitfalls you need to avoid when using payroll outsourcing services:
Don’t Cancel Existing Service Before Securing Year-End Data
It sounds like a no-brainer, but imagine if you decide to change vendors in November. If you cancel your existing service prior to year-end, you may have trouble getting tax documents out after the first of the year. Before you change payroll services, make sure you have all of the data you need out of the old system.
Don’t Hire an Unqualified Bookkeeper or Accountant
Vet your outsourcing partner or professional to make sure they haven’t had any legal action against them. Look at online reviews. Ask for references. Run a background check. You’re giving this person or vendor direct access to your business accounts and confidential employee data such as Social Security numbers, birth dates, and checking account routing numbers.
Don’t Forget to Put Controls in Place
Regardless of the size of your company, put in controls to prevent fraud or embezzlement. For example, consider segregation of duties, meaning that the person who approves the timecards isn’t the same person who approves or signs the paychecks. And the person who signs the paychecks isn’t the same person who balances the business checking and payroll accounts.
Do Check for Customer Software Reviews
There are many payroll software products available—many at affordable rates. Before paying for service, check for online customer software reviews. Many companies can build an attractive website, but their product quality doesn’t always match. Take one or two bad reviews of the same software with a grain of salt, but if you find several with similar complaints, take caution. Good software should have good reviews overall.
Alternative to Payroll Outsourcing Services
Many business owners find themselves looking for help when processing payroll but aren’t ready to fully outsource the process altogether. If outsourcing your payroll entirely is not the right option for your business, consider using payroll software.
Payroll software is more of a DIY tool rather than an outsourcing service, but many offer full-service solutions with customer support. Payroll software can be a great solution for business owners who are open to keeping part of the payroll process in-house and can often be one of the cheapest options.
With payroll services, you would do some of the work yourself, like timekeeping and verifying data, but the software will process your data and calculate payroll for you. In fact, some payroll software vendors have self-service options so that employees can manage their own payroll needs, request time off, and even download year-end tax documents.
Below are a few of the payroll software that can be a great fit for small businesses:
Payroll Software: | Best for: |
|---|---|
Small businesses with fewer than 100 employees looking to establish an organized payroll and onboarding process | |
Businesses needing their payroll system to integrate with their QuickBooks accounting software | |
Multistate businesses that need to pay payroll taxes in different states and localities | |
Small retailers and restaurants that are already using or interested in using Square POS |
For more information on each provider and other high-ranking payroll software options, check out our guide to the best payroll software for small businesses.
What Payroll Software Costs
If you run a weekly payroll for a company with 10 employees, the monthly cost can range widely anywhere from $0 to $300+ depending on the pricing plan options. Some vendors offer more features or charge extra (pricing by number of payroll runs or charging extra for year-end tax forms), so costs could run more than $400 for this size of company.
When choosing the right payroll software for your business, you’ll want to consider what your payroll budget is and what kind of add-ons are valuable to you.
Who Payroll Software Is Right For
Payroll software is best for companies with an employee who will manage payroll and HR in-house. Software provides some automation, from payroll processing to filing payroll taxes, but it requires review and approval from a company representative.
| PROS | CONS |
|---|---|
| Easier than calculating payroll manually | Not a good option if you don’t want to keep a portion in-house |
| Cheaper than PEOs and Bookkeepers/Accountants | Still requires manual entry for hours, employee information, etc. |
| Arms you with the tools you need to process payroll accurately | |
| No need to search for tax rates | |
| Most offer Direct Deposit payments at no extra charge | |
Bottom Line
Running payroll isn’t for everyone. Many small businesses choose to outsource payroll along with other back-office functions, like accounting and taxes, so they can focus on their core business and manage revenue-generating tasks like sales, marketing, and customer service.
Outsourcing costs can vary depending on the number of employees, vendor chosen, and features utilized. It may seem like a lot but is actually a huge saving from what it would cost to hire a full-time payroll/HR employee in-house.
