Payroll is a critical task for any organization and one of your company’s largest expenses. It must be completed correctly, on time every time. The accuracy of payroll affects employee satisfaction and morale. It also affects compliance with local, state, and federal regulations. Inadequate record-keeping can expose your business to employee litigation or tax fines and penalties.

Exploring your options

Outsourcing may make sense for large businesses, but what about small to midsize ones? How will you choose between outsourcing your organization’s payroll and keeping it in-house? Is there a middle ground that gives you the best of both? It’s an important decision and one that requires careful deliberation to avoid missteps that cause frustration for employees and staff—and embarrassment for employers.

In-house payroll

According to a study conducted by Goldman Sachs and the American Payroll Association, 43% of firms with fewer than 500 employees and half of the firms with 500-5,000 employees conduct their payroll with in-house software and resources. Why? Here are a couple of reasons:

  • More Flexibility: Some organizations require more flexibility in their systems for tracking shift differentials, overtime, pay cycles, and other variables.
  • Long-term savings: While initial costs for systems and staff for in-house payroll are typically higher than with outsourced solutions, in general, processing in-house will likely have a lower total cost of ownership between 2-4 years after implementation.

Outsourced payroll

Like any decision to outsource, it’s often a matter of allowing organizations to focus on what they do best. In the world of payroll, keeping up with constantly changing tax and labor laws is a challenge. Here are a couple of reasons to outsource:

  • Ensure compliance: Outsourced providers are specialists and experts in the area of payroll tax and labor law.
  • Reduce administrative burden: Managing payroll in-house often requires staffing, internal processes, and software/hardware maintenance.

Hybrid of in-house and outsourced

We’ve found that, despite being reluctant to give up control of payroll, many companies decide to outsource payroll because they don’t want to handle payroll taxes in-house. With a hybrid solution, many clients achieve the best of both worlds:

  • Outsource tax expertise: While processing payroll in-house, you still have the ability to outsource the remittance of your local, state, and federal payroll taxes. For example, the EmpowerTax™ filing service with our interface for Sage HRMS can make your payroll processing easy and reliable. EmpowerTax™ simplifies these tax filings as well as year-end processing.
  • In-house flexibility: With a hybrid solution, you retain the ability to easily access payroll information and make last minute changes if necessary.

camparison chart of payroll options: in-house, outsource, and a hybrid of the two

Facts to consider

As you study the options and reflect on the pros and cons, here are some important factors to consider:

  • Accuracy and accountability: Which option provides greater control with the option to review and correct errors before paychecks are actually issued to employees?
  • Service consistency: Who will best manage the payroll schedule? Will absences and vacations affect payroll processing?
  • Workforce variations: Does your business require specialized payroll knowledge? Is it easy and cost effective to develop and maintain?
  • Flexibility: How often do you have to make last minute changes?
  • Data location: How will payroll data—employees’ personal data including social security numbers, salary information, and banking details—be used, managed, and stored?
  • Compliance: How will sufficient expertise in payroll legislations and labor laws be maintained?
  • Cost: Which payroll solution is the most cost effective for your organization?
  • Employee self-service: Do your employees expect self service? Over 80% of employees in the US have access to payroll information through self-service (American Payroll Association survey).

Choosing a payroll software provider

After carefully considering the options, you may decide that the in-house option best meets the needs of your organization. If so, what are your next steps? We recommend that your begin by selecting a qualified payroll software provider.

First, you should find reverences, ideally from companies in the same industry as yours. Once you have narrowed the field, here are eight questions to help you vet prospective vendors:

  • Can the software share information with your HRMS and 401(k) provider?
  • How are tax tables updated?
  • How is an accurate and timely payroll process guaranteed?
  • Can the software accommodate a variety of incomes, deductions, taxes, benefits, vacations, and cafeteria plans?
  • Will the software generate and deliver required payroll reports? Does it support customized reports?
  • Can you print prior years’ W-2 forms?
  • How will the transition from your current payroll processing be handled?
  • What is the total payroll cost per employee?

Still have questions about the best solution for your organization? We welcome the opportunity to have a conversation about your needs. We hope Delphia Consulting can help provide a solution, but if not, that’s ok, too. You can reach us here. 

Sources: 

Goldman Sachs and American Payroll Association’s Payroll Manger Survey Results,” 2004

American Payroll Association, “Getting Paid in America,” 2015

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Joe Rotella, SPHR, SHRM-SCP
Joe Rotella, SPHR, SHRM-SCP
Chief Marketing Officer at Delphia Consulting
Joe is a leading thinker and a professional speaker in the areas of HR technology, marketing, and web usability. He is a well-recognized speaker for the Society of Human Resources Management.