Payroll Outsourcing: Is It Right for Your Business?

Processing payroll for your full-time and contract employees is a crucial function that keeps your company running smoothly — but it also sucks up valuable time and resources that you could be spending on growing your business.

If you find yourself spending more time coordinating paychecks than running your company, it’s probably time to outsource your payroll. Luckily, there are payroll outsourcing services available to help.

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What is payroll outsourcing?

Payroll outsourcing ensures compliance via auto-generated tax documents, like W-2s and 1099s, plus state and federal tax filing. The most comprehensive outsourcing services even track sick leave and paid time off for full-time employees.

A payroll outsourcing service can also include everything from importing timecards directly from your point-of-sale (POS) system to allowing employees to set up direct deposit — all with the goal of making payroll as efficient and easy as possible.

Why should you outsource payroll?

First and foremost: Managing payroll isn’t why you started your business. Chances are you’re not a seasoned professional at filing W-2s, and spending hours on administrative work isn’t where you’re most valuable to your organization.

There just isn’t enough time in the day to become an expert in every back-office function that isn’t directly related to the success of your core business. Unfortunately, poor execution on employee payroll can put your business at risk of tax and legal fines from the IRS.

Outsourcing payroll can also help you navigate the nearly 10,000 federal, state, and local taxing jurisdictions that employers must comply with across the U.S.

As your core business evolves and grows, so will your workforce. If you have plans to expand your team, or find that your payroll is constantly in flux, a payroll service can help you keep up with your changing employee base, be it full-time employees or contractors.

You should evaluate the advantages and disadvantages of outsourcing payroll to determine if it’s the best move for your small business.

Advantages of outsourcing payroll

  • Time savings: Leveraging technology to automate clocking time and attendance or direct deposit ensures that you don’t waste resources on repetitive administrative tasks.
  • Access to outside expertise: Once your business reaches 50 full-time equivalent (FTE) employees, there are a whole new set of forms required and new rules to adhere to. Outsourcing provides a third-party expert to walk you through the ins and outs as you scale.
  • Reduced risk: According to the IRS, 40 percent of small businesses pay non-compliance penalties of $845 per year on average for late or incorrect filings. Using a third-party payroll service gives you the peace of mind that you’re not exposing your company to undue risk — or undue fines.
  • Data security: Using a secure portal to protect sensitive financial data gives you and your employees the satisfaction of knowing that their information is secure, not just stored away in an old file cabinet.

Potential disadvantages of outsourcing payroll

  • Difficulty obtaining employee data: It’s hard to stay on top of every new employee for direct deposit information. Using a system that lets employees fill out their own W-4s and banking information helps them get paid faster.
  • Delayed corrections: Working with a third-party sometimes means it takes longer to fix payroll errors. Choosing a payroll service that lets you review, edit, and approve hours instantly means you can fix mistakes as soon as they happen, without the lag time.
  • Cost: Of course, there is an added cost to leveraging a payroll service, but chances are your time is a lot more valuable. Research shows that businesses with 10 employees spend $2,600 annually on payroll-associated labor. Consider the cost of your time when deciding whether or not to go with a payroll outsourcing service.

How much does payroll outsourcing cost?

Typical payroll services charge a base subscription (often monthly) as well as a fee per check or employee. You may pay additional fees for services like tax filing and direct deposit (which can include a transaction fee), or for adding and removing employees and independent contractors.

As a small business owner, don’t let processing payroll for your hourly or salaried employees distract you from growing your business. Square Payroll is built with small businesses in mind, so you can spend less time on paperwork and more time doing what you love. We’ve even automated the payroll process so you can set it and forget it.