Outsourcing Payroll

Many small businesses will benefit from moving their payroll services out of the company. Payroll processing services reduce a company’s risks by filing taxes timely and ensuring regulatory compliance. Outside payroll processing costs can be lower than in-house costs, particularly when you add in the cost of the almost inevitable in-house mistakes. In addition, outsourcing payroll often frees up bookkeeping resources for other more important activities. There are several key factors that should be considered when selecting an outside payroll service.

  • Customer Service
  • Payroll Service Software
  • Costs
  • Payroll Support
  • Employee Leasing

 Customer Service

The elements to consider for customer service include initial setup, training, customer service churning and corporate focus. Moving from one service to another or moving the payroll activities out of the company can be stressful and time consuming. Look for a service that has this planned and can do it quickly and correctly. Training is important for the initial phase of payroll but please recognize the future impact as employees change and regulatory issues change.

When employee resources at your payroll service change the impact will be felt. Small payroll services are hurt badly when they churn employees. Large firms have depth to enable continued support but the loss of a trusted connection is always difficult.

Certain payroll services focus their attention on the needs of small businesses. Look to a firm that operates in the same market you do. This will ensure that they are dealing with the same challenges that you face.

Payroll Service Software

A payroll service is only as good as their software. Data entry that is intuitive and organized into a logical process flow speeds the process and improves the accuracy of the results. Select a company that has existing software. Do not invest in future updates. Current connectivity to the payroll service should be broadband and secure.

There should be simple, easy-to-read reports that support each payroll period and they should have year-to-date information. Ad-hoc inquiries are needed between payroll periods to address questions from employees, management or outside agencies. This information should be available on-line and should be printable.

Moving payroll data from the payroll service to the company’s job cost or general ledger system may be critical for some companies. The software may already have interfaces to systems if they are simple and generally distributed (e.g., Peachtree, QuickBooks, GP). Companies taking advantage of the Internet will develop more robust time and attendance systems that will enable payroll and detailed job cost information.


Charges related to outsourced payroll vary but are often associated with headcount. This facilitates business planning for expanding employee resources. Other costs will be incurred to setup the payroll and process year-end requirements. The payroll service should take care of W-2 mailings and year-end reports to all regulatory agencies.

Look for a company that provides payments to independent contractors. This will facilitate cash planning because independent contractors can be paid in the same cycle as payroll and 1099s can be handled by the payroll service. Some companies handle this with no additional cost. Other companies cannot handle contract employees and the fees become prohibitive.

Payroll Support

Payroll services often provide other services that may benefit your company. The risk reductions of administration of benefit plans can greatly benefit a company. Examples include the 401k, Section 125 Cafeteria plans, garnishments, credit union deposits, healthcare payments and other benefit related activities.

Larger payroll services offer 401k plans or can connect you to affordable 401k plans. They can administer employee related tasks and provide advice for regulatory compliance. Not all payroll services offer this support and those that offer it may be costly.

Employee Leasing

Companies that require a high level of benefits to attract key personnel may consider companies that offer employee leasing. These companies process payroll and offer the full services of healthcare, dental, 401k, drug testing, compliance administration and other activities of the human resources function. These services move cost from headcount to a percent of payroll. They care for the many aspects that human resources should address. This can be as complex as health insurance or dental insurance and as simple as employee handbook maintenance. These companies also get involved with safety, security, wellness care and significantly raise the bar on benefits for employees

Unless payroll processing is your core business, you will likely benefit from outsourcing your payroll. It will simplify your company’s administrative function, and it may pay for itself in labor cost savings and avoidance of penalties and interest arising from incorrect payroll tax filings.

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