Payroll Outsourcing

Millions of business owners based in the U.S. prefer to outsource their payroll as opposed to processing it internally. The practice of outsourcing payroll is more common than one might consider. According to a survey conducted by the Financial Executives Research Foundation and Robert Half, as much as 39 percent of U.S. enterprises (which roughly translates to about 10 million businesses) outsource the processing of their payroll, and 43 percent outsource the tax responsibilities associated with it. While there is still a category of businesses that opt to process their payroll in-house through do-it-yourself applications or manual book-keeping, companies by and large are now increasingly referring to the expertise of professional payroll providers to fulfill their responsibilities towards their employees.

Payroll outsourcing trends are gaining popularity since they have their own sets of perks. Here are five significant reasons that enterprises are now referring to professional service providers to process their payroll:

1. Direct Deposits:

Providing employees with direct deposits is a difficult task for an enterprise that doesn’t employ an outside payroll service. Businesses are now increasingly realizing the importance of offering direct deposits to their employees. Not only does it save employees constant trips to the bank, but it also saves business owners the time they would have to spend on paper handling and to reconcile individual payroll cheques every month. Payroll outsourcing allows businesses to provide compensations to their employees through direct deposits which not only reduces the risk of fraud but also eliminates the use of paper cheques that could otherwise be counterfeited or altered.

2. Reduce Processing Costs:

While big enterprises are capable of maintaining functional payroll departments, small and medium-sized businesses end up spending more than necessary if they process their payroll in-house. The direct costs of in-house payroll processing concerning labor hours lost can be easily recovered by outsourcing payroll to a service provider. The number of labor hours spent in payroll processing activities like calculating payroll for each cycle, support and training, getting updated with changes in laws and tax rates, preparing and providing remittances to the government, generating reports for in-house records, etc. is much more than the cost spent on outsourcing payroll.

In addition to this, businesses can also save up on the cost of purchasing the new and updated payroll software products that have the most recent tax tables installed in them. Outsourcing payroll rids the businesses of overhead and processing costs and ensures that the payroll gets rolled out smoothly each month .

3. Avoid Penalties:

The penalties for omissions, errors, or late filing of payroll taxes can prove very costly to the business. According to the IRS, about 40 percent of small businesses pay an average penalty of $845 every year due to incorrect or late tax payments and filings. Mistakes in payroll processing are not only economically painful, but recurrent errors can also cause the IRS to place red flags on a business. While small business owners aren’t entirely aware of the latest tax regulations, at the same time they are also responsible for any instances of misrepresentation or failure of reporting employment taxes to state and federal agencies. These mistakes further lead to penalties and audits, situations that no business wishes to encounter.

Government regulations concerning tax laws and rebates are always on a shift, and business owners cannot always be expected to be up-to-date with all the happenings. Outsourcing payroll ensures that all the tax rebates are paid in due time, and professional payroll service providers are far less likely to make errors that demand government penalties.

4. Increase Productivity:

Regardless of the number of employees, processing payroll inside the business is a time-consuming task that demands continuous monitoring and upkeep. One pay period follows another, thus requiring the business owner to key-in critical data on a larges scale while also rechecking for any plausible errors. This takes time away from key management and significantly impacts their productivity.

Without prior training, keeping track of many lists such as benefit deductions, new hires, terminations, emoluments, paid time off, state and federal regulations, and benefits can be daunting. In-house payroll processing demands significant labor hours to be spent each month on preparing payments and also ensuring that they are delivered on a timely basis. Payroll outsourcing, on the other hand, allows business owners to concentrate on other essential tasks, and also allows accounting and human resources personnel to work on more critical tasks that could improve the businesses.

5. Enhanced Security:

Payroll processing in-house is a potentially risky business operation that could prompt identity theft, embezzlement, and tampering with company funds in the hands of even the most trusted employees. In addition to this, in-house payroll software solutions also pose the risk of how safe company’s data could be on a particular network. On the other hand, most payroll outsourcing firms have technologies that can instantly detect and alert their clients to numerous kinds of payroll-related fraud. Not only do these firms act as a haven for company data, but they also have a redundant backup at multiple locations.


Processing payroll in-house can not only hinder productivity but also places businesses under the risk of frauds and unnecessary penalties. Outsourcing payroll services not only increases business profitability, but it also ensures that the payroll is processed smoothly every month without any penalties.

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