Payroll Outsourcing Services, Costs & Pitfalls

Outsourcing payroll is an easy way for a small business to save time and money. In this article, we’ll provide payroll outsourcing services options, such as using a bookkeeper, payroll software, or a professional employer organization. We’ll also share what payroll outsourcing services cost, and benefits and tips on what to look for when you select a vendor to outsource payroll.

If you’re interested in outsourcing payroll as well as HR services like benefits and compliance, check out ADP. You can run your payroll and pay taxes online in just a few steps, and pay employees by check, direct deposit, or paycard. Click here for a free quote.

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How Payroll Outsourcing Services Work

A payroll outsourcing company will process your payroll by gathering your employees’ information (hire date, job title, pay rate), obtaining any timecard data, calculating the pay that’s due to each employee, and then depositing that pay into their bank account, or issuing a payroll check.

These are the steps that they typically follow to do so:

• Set up their payroll software with your company and employee data, including your payroll account and employee’s accounts for direct deposit
• Request or obtain time card data each pay period to input into their payroll software
• Add new employee information and provide state required new-hire reporting
• 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) as well as post-tax deductions (like garnishments for child support)
• Make deposits to employees’ accounts (direct deposit, pay card) and/or mail or deliver paychecks and advices to your office or to employees’ homes
• Make payments to vendors, such as insurance companies, on your behalf
• Pay all payroll taxes and insurance when due, such as quarterly state and federal taxes
• Provide reports to the business

Depending on the services offered, a payroll outsourcing company like Gusto, may also be able to assist you with new hire onboarding paperwork, required employee tax documents, and I-9 compliance. Some may even provide labor law posters, employee handbooks, benefits insurance offerings, employee training, and HR/payroll consulting.

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What Payroll Outsourcing Services Cost

Prices for outsourcing payroll vary greatly depending on the size of your company, your location, and the outsourcing option chosen, from under $100 a month if you use software for just a few employees, to over $1,000 a month for full service. We’ve compared payroll outsourcing options and pricing below.

To make the comparisons fair, we’ve used an example of a weekly payroll for a company with 25 employees that has both hourly and salaried staff.

*Paid annually

Payroll Outsourcing Services Options & Providers

Outsourcing options are as varied as using your neighborhood bookkeeper to hiring a big name payroll outsourcing service, with prices that vary as well — from under $100 a month to thousands a 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 Local Bookkeeper or Accountant

If you already have someone managing your bookkeeping you might want to ask them if they’re able to run your payroll too. For example, if they’re a Quickbooks ProAdvisor, they might know how to add Intuit payroll software, also made by Quickbooks, to manage your payroll as well.

What a Local Bookkeeper Costs

A local bookkeeper costs between $20 and $30 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. In our example, we assumed that a weekly payroll for a business with 25 employees would take about 16 hours a month and cost about $4800 a year.

That’s much less than hiring a full-time employee to manage your small business payroll.

What a Local Bookkeeper is Missing

A local bookkeeper may not be up to date on federal and state HR and payroll laws, such as document retention requirements. It’s a good idea to ask them about their HR and payroll experience before you hand over your confidential employee payroll data and HR files to them.

If you’re looking for a local bookkeeper to help with payroll, consider searching our directory.

2. Outsource Payroll to a Full Service Payroll Provider

A full service payroll provider will have all the payroll basics you’ll need, from new hire W-4s to year-end tax documentation such as W-2s and 1099s. They’ll often provide resources like labor law posters and will manage your payroll for you, end-to-end. All you have to do is provide them with the data.

The benefit of using a full service payroll provider is that you’re less likely to make mistakes that affect you or your employees’ paychecks and taxes. That’s because they use back-end software with all state, federal, and local labor and tax laws built in. Many also provide consulting services to answer your and your employees’ payroll questions.

What a Full Service Payroll Provider Costs

Full service payroll providers like ADP generally cost more than a local bookkeeper. For example, 25 employees on a weekly payroll would cost about $6,000 per year. Additionally, there are typically upcharges for each payroll run, year-end taxes, garnishments, etc. However, additional benefits like electronic payroll reports, direct deposit, and tax compliance, can reduce the headache of managing payroll yourself. Click here for a free quote.

What a Full Service Payroll Provider is Missing

A full service payroll provider isn’t likely to be local to your business, so accessing them may be less convenient. You can’t just go talk to them. Instead, you’ll be assigned a representative, who may not always be available. So if you want a personal relationship with your payroll provider, or need help after hours, you might want to stick with someone local.

3. Outsource Payroll to a National Bookkeeping Service

Several national bookkeeping firms offer both accounting and payroll services for your small business. Some may be lower cost than using a local bookkeeper if you have them do both your bookkeeping and payroll. And they may have the payroll expertise that a local bookkeeper may lack.

In addition to payroll they can do all your small business accounting, keeping all your back office work in one place. We’ve provided a review of the best bookkeeping firms if you want to compare them side-by-side.

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 a 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.

What a National Bookkeeping Firm is Missing

With a focus on bookkeeping, not payroll exclusively, you’ll need to confirm that the bookkeeping company you choose has payroll expertise. Most do, but you’ll want to verify they’ve done payroll in your state and are aware of federal, state, and local HR and payroll laws. They’re also remote, so may not be available when you have a question, such as how to process retro pay.

4. Outsource Your Payroll Using Payroll Software

Payroll software is a tool, it’s not outsourcing per se, but many offer full-service solutions with customer support. Some of the newer payroll software is so intuitive that it might meet your needs. You’d purchase the software and have one of your own staff members input the payroll data. The software does the rest.

With payroll software your business would do some of the work yourself, like timekeeping and verifying data, but the software will process your data and calculate your payroll for you. In fact, some payroll software vendors like Gusto, have self-service options so employees can manage their own payroll needs, request time off, and even download year end tax docs themselves.

We’ve reviewed some of the best payroll software vendors and recommend Gusto, as it’s low cost (only $39 per month plus $6 per employee per month) and provides full-service payroll processing, from new hire onboarding paperwork, to HR consulting, to year-end tax docs.

What Payroll Software Costs

If you ran weekly payroll for a company with 25 employees (both hourly and salaried) using Gusto for example, it would cost about $2,300 a year. However, some vendors offer fewer features or charge extra (pricing by number of payroll runs, or charging extra for year end tax forms), so it could run between $2,000 to $4000 for this size of company.

What Payroll Software is Missing

Payroll software, while easier than calculating payroll manually, isn’t really outsourcing if what you’re looking for is someone else to do the work.

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5. Outsource Payroll to a Professional Employer Organization

A professional employer organization (PEO) is a payroll outsourcing option when you want to outsource everything people-related, not just payroll. A PEO is a co-employer that manages most of your HR onboarding, and can provide your employees with health insurance benefits and 401K savings options like larger employers offer. They, not you, manage all the payroll data and taxes.

A PEO actually hires your employees and then leases them back to you. We’ve reviewed the best PEOs for small business so you can review the services they offer and the relative pricing models. A PEO broker like ADP can help you find the best PEO for your business. Click here for a free quote.

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What a PEO Costs

A PEO is going to be more costly than outsourcing payroll to a bookkeeper because you get a lot more than simple payroll processing. A PEO will provide HR, payroll, benefits and often, HR consulting services. It will cost an employer with a staff of 25 at least $12,000 a year or more, up to about $40,000 a year.

So 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 or payroll person full-time. Read more about our top PEO recommendations.

What a PEO is Missing

A PEO isn’t super affordable unless it saves you from hiring an HR person as well as paying someone to do payroll. $12,000 a year is still less than hiring a full time employee to do this work. Like other outsourcing options, you may not have a dedicated resource available during atypical work hours (night shift, weekends).

Why Payroll Outsourcing Services Make Sense

Outsourcing makes sense for businesses who don’t have someone on staff with the time or experience to do payroll, or don’t have someone on staff who likes number crunching. In small businesses, one person typically does both bookkeeping and payroll functions. A small business can save costs by outsourcing when they don’t require a full-time employee to do this work.

If you don’t have an accountant type person on staff, or don’t want to pay the average salary of a bookkeeper ($42,000 per year) or accountant ($52,000 per year), per Indeed, outsourcing makes sense.

However, some businesses assign the payroll processing to a person with HR responsibilities like hiring, onboarding, training, and policy management. But even if you have an HR person on staff, it may be better to outsource the payroll aspects of the job to someone familiar with labor and tax laws in all states you operate in.

10 Questions to Ask When Outsourcing Payroll

Besides cost, here are ten great questions to ask when you’re considering outsourcing payroll to a third party vendor — whether a bookkeeper, payroll provider, software company or PEO.

1. What are my employer responsibilities? For example, what am I required to do when a new hire joins the company? What do you, the payroll provider do? Examples include obtaining tax and I-9 documentation, providing names, bank accounts, emergency contact information, confirming pay rate, job title, and obtaining benefits enrollment documentation. Same for terminations.
2. What happens when I have to run an off-cycle payroll, such as to pay year-end bonuses or to correct an over/under payment? Is there an extra cost? Do I need to call you to do it? Can I send you the information by email? What is the process?
3. How are garnishments handled? Is there an extra cost? Do you manage the paperwork, deductions and payments, or is that something I have to do as an employer?
4. Can you manage benefits? If my employees want benefits — like health insurance, life or disability insurance, 401k, or commuter benefits — do you offer those? How much extra will it cost me as the employer to offer and administer those benefits? What extra work will be required on my part vs what will you manage on your end?
5. 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? Is there an emergency after hours contact number? If I write the check myself, how can it be accounted for?
6. Can you track employee’s leave balances like sick time, vacation, or paid time off?
7. What self-service options are available for employees? Can they upload their signed W-4, or download their W-2, or maintain employee or benefits enrollment data themselves? Is there a phone number they can call, or do I have to serve as an intermediary for them?
8. What programs do you interface with — for accounting, timekeeping, e-signature, taxes — to minimize duplicate data entry and streamline my back office?
9. What kind of reports are provided? Are they customizable? Can I run them myself, or download them to a CSV format for further analysis?
10. What other services do you have that may help me manage the people-aspect of my business? For example, do you provide workers compensation insurance, labor law posters, HR consulting, safety training, or other services that compliment payroll processing?

Pitfalls to Avoid When Using Payroll Outsourcing Services

In most cases, outsourcing payroll is low-risk, but make sure you avoid these pitfalls.

Don’t Cancel Your Existing Service Before You Have Year-End Data

It sounds like a no-brainer, but imagine 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 over payroll, make sure you have all the data you need out of the old system.

Don’t Hire an Unqualified Bookkeeper or Accountant

Vet the business or person you’re outsourcing to; make sure that 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 SSNs, birthdates, 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 time cards, 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.

The Bottom Line on Payroll Outsourcing Services

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, or manage revenue generating tasks like sales, marketing and customer service.

We hope these options are helpful as you choose a vendor, provider or software to do payroll for you. Please use the comments to share the payroll outsourcing option you chose and why.