Payroll Services: How Much Should You Outsource?

Posted by on August 7, 2012 in Financial Services [ 3 Comments ]

payroll servicesAs a small business owner, particularly when you’re just starting out, you’re often forced (or feel obligated) to play many roles within your company: Business strategist, product developer, human resources and payroll manager, accountant, salesman, marketer, etc.. – the list goes on and on. But you do have the option of outsourcing some of these responsibilities. Handing off your payroll services in particular could lift a weight off your shoulders, particularly if you struggle to get checks out to your employees that are both accurate and on time.

“Doing payroll” isn’t a one step process. There are many steps you must take to properly pay your employees:

  • Administrative Organization – this includes maintaining the proper information on your employees, including sensitive information like social security numbers. This also means documenting pay rates, vacation time, personal days, hours worked, etc…
  • Collecting Timesheets and Invoices – If you work with a network of contract employees, you’ll need to collect invoices that document their work for pay. For any part-time employees, it’s also necessary for you to keep track of their timesheets so you pay out only the hours they worked. This can be done electronically if you’ve set up a time clock, or can be tracked through a spreadsheet that employees hand in each week.
  • Processing Payroll – This step isn’t just adding up the number of hours your employees have worked and multiplying it by their pay rate; it also involves calculating adjustments, and accounting for deductions based on health insurance benefits (if you offer it), retirement contributions, government taxes and fees, court-ordered wage garnishment orders, and paying out commission-based compensation, bonuses, or overtime.
  • Cutting Checks – Whether or not you offer direct deposit to your employees, you must either cut checks for those employees who have not opted in to such a services, or you must print and distribute summaries so employees can see the activity and withholdings  around their pay.
  • Taxes – When you take on employees, you have a responsibility for settling payroll taxes, such as social security, Medicare, or unemployment.  There are also several payroll tax reports that you are required to submit throughout the year, and this can be a confusing process. The IRS’s Employer’s Tax Guide offers guidance on all federal tax filing requirements

As much as software has helped in automating and optimizing certain processes, it’s not always a quick and easy process. It often makes sense to outsource one or more of these steps to a payroll services provider. In what ways might it make sense for your company to outsource certain payroll steps? Let’s take a look at the process again:

Administrative Organization

Doing payroll involves a lot of savvy recordkeeping. In addition to having to keep updated records on employees, some federal and state laws have requirements regarding how long you have to keep certain records. Some forms must be kept on file for inactive employees for up to three years after they’ve left your company. Outsourced payroll services are quite familiar with these requirements, and can be a significant ally when it comes to being buttoned up during an audit.

One drawback in outsourcing this administrative step is that you’re relying on a third party to be in compliance with requirements on your company’s behalf. It’s also important that employees can get in touch with your payroll services provider to update their information, change their status on W-2’s and ask questions. You must be confident that your employees and contractors will receive excellent and prompt customer service in this respect.

Collecting Timesheets and Invoices

If you outsource this process and opt not to oversee any paperwork submissions by employees or freelancers, you’re opening yourself up to be usurped by any dishonest workers. You’d likely always have to have SOME hand in this step, such as verifying submitted timesheets and invoices and signing off on them.

The good thing about outsourcing this process in general, however, is the ability to hand off a load of math. You may review these records to ensure that they’re not overbilling or overestimating time worked, but when it comes to turning these numbers into pay outs, your payroll services provider can verify the math and ensure that calculations by workers are correct.

Processing Payroll

“Time saved” may be the largest benefit in outsourcing your payroll. This process, the calculating of hours, wages, deductions, compensation adjustments, and bonuses, is the biggest piece of doing payroll. Some software can assist with and automate this, but if payroll isn’t in your wheelhouse, you’re better off leaving it to the professionals.

If you’d like to oversee that payroll gets done properly and you prefer have some control over the process, consider using an “insourced” payroll or financial services freelancer who can assume the role in-house and brings a level of expertise that allows him or her to get up and running in no time.

Cutting Checks

Whether you offer direct deposit or not, payroll requires cutting checks (and/or summaries) and delivering these to employees through the mail. It also requires you ensure the proper signature is on each check. Signatures can be delivered to a payroll services provider via an image file; it’s no longer necessary for you to sit there and sign your name on each individual check. A payroll services provider can handle this step, saving you the time it takes to print, assemble, and distribute checks to employees. And while stuffing envelopes doesn’t require you to have significant payroll knowledge, it’s not a task that you as a small business owner should be spending your time doing.

The most obvious drawback of outsourcing this task is the ease at which someone other than a payroll service can do it. It may be more cost efficient for you to bring in a contractor for a few hours each pay period to handle this task and ensure employees are given their checks in a timely fashion. It may also save you time to deliver checks in-person if possible, as postage can add up if you have a large staff.


Tax rate information and government guidelines are always changing and are complex to understand. As a small business owner, you may not have the resources or time to keep up to date on this information, and outsourcing the tax element could provide relief to a significant burden. It’s important to know that this step is not a once-a-year thing, either. Taxes need to be accounted for throughout the year, and it’s important that your payroll system is organized to account for all taxes paid from employees. Come January, your payroll services provider can coordinate the distribution of all W-2s, so that employees may file their taxes in a timely fashion.

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3 thoughts on “Payroll Services: How Much Should You Outsource?

  1. avatarsimon taylor

    There are convinced costs that are a given when running a staffing company. The main costs associated with the business relate to payroll and insurance. So I am looking for outsourcing payroll cost effective company. Please give me your suggestions.

  2. avatarErica Bell

    Hi Simon,

    Thanks for reading and for reaching out. The best payroll provider will depend on your needs. Please check out to get quotes from providers that meet your needs.

    – Erica

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