11 Pros and Cons of Outsourcing Payroll

One of the largest time expenses for a small business is their payroll. The amount of time it takes to process benefits, withholdings, and everything else that goes into a paycheck can be a full-time job that a business owner may not be able to afford on their own. This is why many small business owners look at outsourcing their payroll so they can focus on what they do best.

What are the pros and cons of outsourcing payroll? Here are some of the key points you’ll want to consider.

What Are the Pros of Outsourcing Payroll?

1. It allows for more payroll services to be offered.
Outsourcing payroll can allow a small business to offer additional services, such as direct deposits and 401k contribution deductions, that they may not be able to do on their own.

2. Payroll taxes become much easier to file.
Outsourcing payroll will also generally create the financial reports needed to make filing payroll taxes a lot easier for a small business. For some businesses, they may even find that they can even outsource the filing process so they don’t have to even really worry about the tax paperwork.

3. It saves an enormous amount of time.
Payroll is consistently ranked as the second most costly administrative duty that must be completed. When this task is outsourced, the amount of time that is freed up can be enormous.

4. Small businesses can experience cost savings.
When compared to the costs of calculating wages, printing and distributing paychecks, creating financial reports, and preparing or paying the payroll taxes, the amount of cash a small business can spend could be quite high. Outsourcing these tasks may save money over the cost of doing it on one’s own.

5. Payroll outsourcing can offer greater security.
With data security becoming a great concern for employers and employees alike, outsourcing payroll can give a small business a more secure data system then they could establish on their own. One contract may provide multiple servers, backups, and other security technologies that protects their employee data.


6. Payroll firms often help with regulatory compliance.
Not only does a small business need to deal with payroll taxes, but they must also comply with current tax laws. A failure to comply can mean penalties, fines, and worse. Outsourcing often helps a company stay in regulatory compliance without the challenge of doing it all on one’s own.

What Are the Cons of Outsourcing Payroll?

1. It can be difficult to immediately access data.
Because much of the payroll data is going to be maintained off-site, it can be difficult for a small business to obtain the information they might need at a moment’s notice. Even when there are Cloud connection systems in place, data access may be purposely limited to keep it more secure.

2. Mistakes can take extra time to correct.
Payroll processing is not always 100% perfect. If an employee doesn’t receive their full pay, contacting the payroll firm to make a correction can sometimes be a lengthy process. Instead of immediately correcting the situation, a small business owner is forced to rely on a third party to resolve the issue.

3. Cost savings is not always experienced.
There are some payroll firms that offer a sliding scale of costs based on the size of a business. Others offer zero tailored services or prices. This means a small business owner must research all vendors and firms in their area before making a decision. There may be communities where there are no service providers that offer payroll outsourcing at a cost that makes sense for the financial situation of the small business.

4. Payroll firms may go out of business.
If a payroll firm goes out of business, then accessing your payroll information can become next to impossible. For the small business, there is also the risk of losing the money paid to the firm to process the payroll. This is why it is generally a good idea to work with firms that have an established long-term reputation for success.

5. Information theft is still a possibility.
You can have firms sign non-disclosure agreements and privacy statements all you want, yet have an employee at the firm steal your payroll data to use for their own benefit. Sometimes internal theft from outsourcing your payroll is a greater risk than hackers or outside theft.

The pros and cons of outsourcing payroll show that it can be an idea that saves time and money, but isn’t completely without risk. By taking the potential negatives into account before contracting this service out to a payroll firm, the risks of an adverse situation arising can be limited.

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