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Payroll Management: Outsourcing vs. In-House Payroll

From the moment small business owners hire their first employee, they must start thinking about how they should handle the payroll. Payroll management poses a variety of challenges for small businesses: from initial setup through payment distribution – and everything in between. Choosing the right payroll management system is one of the most important endeavors a small business will undertake.

Small business owners can choose either outsourcing their payroll activities or keeping them in-house. Either way, payroll activities are complex and time-consuming. It helps when you know the pros and cons of outsourcing vs. in-house payroll so you can decide which works best for your business.

Image courtesy of pixabay.com/en/users/jarmoluk-143740/

Image courtesy of pixabay.com/en/users/jarmoluk-143740/

Payroll management considerations for small business owners

The first step in payroll management involves setting up your business’ payroll system. We outline which steps a small business owner should follow on our website. You can view them here.

One of the main reasons small business owners must carefully set up their payroll management systems from the get go is so they can successfully avoid negative (and expensive) tax ramifications. The IRS typically penalizes one out of every three business owners for payroll errors.

One of your next steps as a small business owner involves determining whether your business is prepared for the complexities of payroll activities. Payroll activities include managing multiple “moving parts,” so to speak, and there are dozens of possible errors that can occur. Whether outsourced or internal, whoever ends up doing your payroll must understand the relevant tax laws and regulations.

The following paragraphs cover key aspects about outsourcing payroll versus keeping it in-house.

Outsourcing Payroll

A small business might choose the option of outsourcing their payroll management for a variety of reasons. These are among the most common reasons for and benefits of outsourcing:

  • Outsourcing payroll frees up staff time to pursue more important “value-added” and revenue generating activities.
  • Depending on your business, it costs less to outsource payroll. (Many businesses find the cost of outsourcing their payroll is much less in the long-run than hiring an in-house bookkeeper).
  • Hiring a professional often helps a small business avoid making serious tax mistakes – and becoming subject to potential IRS penalties.
  • Small businesses that outsource their payroll have fewer technology and/or administrative headaches to deal with. (Companies that specifically handle payroll management use the most current, up-to-date systems and guidelines).
  • Small business owners can feel confident in knowing they are working with skilled people who have specific payroll knowledge and expertise.

Source: SurePayroll, a Paychex Company

Outsourcing your small business’ payroll management system has a few potential disadvantages as well. These are outsourcing “cons” you should keep in mind:

  • There is always a potential threat to security and confidentiality when sending employee data to another party.
  • Human error is a possibility; and you, as the business owner, are ultimately responsible for any errors. This means that besides paying for the outsourcing, you end up paying for any tax errors, too.
  • Depending on your outsourcing partner, you may not have instant communication when you have questions or need access to detailed information about your staff.
  • The costs included with the initial setup of your business’ payroll management system with a third party, along with the hours spent collaborating with them, may end up being more expensive than expected.

Internal Payroll

There are also multiple advantages and disadvantages for managing your payroll internally. Technology and software has certainly helped make a difference with managing payroll in-house, but it still remains one of the most complicated parts of small business accounting.

The following are advantages to keeping your payroll management in-house:

  • Small business owners have instant access to their data, and may feel better about not transferring “sensitive” employee data to an outside third party.
  • Keeping payroll management activities in-house may end up costing less than outsourcing, depending on the size of your business.
  • Some small business owners simply dislike the idea of giving up any amount of control to an outside party.

And then there are the disadvantages:

  • The purchase of payroll software, along with the training and continuing education on how to use it, may prove costly.
  • Turnover of payroll staff, then hiring and retraining new employees, may potentially create payment delays for your employees.


As you see, there are pros and cons for either form of payroll management. However, if you are a busy small business owner (and most are!), then you may feel hiring a professional makes sense for you. Finding someone you trust who will help you by tackling the complexities of payroll management and keeping you compliant makes life a lot easier for you.

Please give us a call or contact us online and let us know how we can help you with your payroll needs.


Related Resources:

Xero Small business payroll: To outsource or not?

Solid Business Solutions Pros And Cons Of Outsourcing

The New Talent Times Should You Keep Your Payroll In-house or Outsource It?


Image courtesy of Stuart Miles at FreeDigitalPhotos.net


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