Outsourcing Your Payroll: Is it Right for Your Business?
At this point, I could insure my 5-year-old golden retriever for a million dollars. From eating entire rotisserie chickens to dueling with possums, she’s quite popular at our local vet clinic.
Have I tried to mend these things at home? Yes. Have I thought pumpkin puree or Neosporin would do the trick? Yes. In the end, did I have to take her to the vet and spend (cough)? Yes.
The moral of the story is? Know what you’re getting into with a golden retriever – and find a veterinarian you can trust. After all, they went to vet school.
“An expert is one who knows some of the worst mistakes, which can be made, in every narrow field.”
Leaving certain things in our lives to the experts saves time and money in the long run, especially when it comes to payroll.
For example, we leave I.T. to Techguru to keep our data (and our client’s data) safe and secure. Our brains were hardwired for numbers – not computer science. It’s not worth us figuring it out ourselves and risking potential bankruptcy.
It’s good to not know everything – it leaves you more time to become an expert in your field or industry. In this article, we’re going to explain why outsourcing your payroll can help you build a better back office and get one step better, every day.
What is outsourcing payroll?
Outsourcing your payroll means that you have somebody else who is responsible for your company’s tax filings and employee payments.
Whether you have one employee or one-hundred employees, outsourcing your payroll processing helps you ensure that your tax payments are made – and made on time. An FTD (Failure to Deposit) penalty occurs if you do not pay them punctually:
- 2% of the unpaid deposit for payments that are 1 to 5 days late
- 5% for tax payments that are 6-15 days late
- 10% for deposits that are more than 15 days late or made within ten days of receiving the first IRS notice requesting a tax payment
- 15% for deposits not received within ten days after receiving the first IRS notice demanding payment
- 10% penalty for deposits not made by electronic funds transfer
An outsourced payroll provider files your payroll taxes for you, ensuring that they are submitted on time without penalties. You save money, gain peace of mind, and can focus your attention on running your business – not filing taxes.
25% of small businesses use pen and paper to track finances, and 45% don’t have their own accountant or bookkeeper.
However, there are two instances in which outsourcing your payroll may not be the best idea for you and your business.
1. Your industry requires job costing.
Job costing is an accounting practice that tracks the revenue and expenses of a specific job or individual project. It means that you are tracking every dollar of wages for each job or project, so outsourcing this level of detail can be very difficult.
If you have the systems set up to track the time and account for the information by project, outsourcing can be an option but a lot of times — it isn’t.
For example, let’s say you own a pool company. You have a crew that’s going to work on Matt’s pool for a couple of hours. While they’re waiting on the concrete to finish drying, they’re going to go to Mike’s pool.
In this case, you need to know how many hours your employees are at Mike or Matt’s pool because you need to know how much to bill Mike and Matt. From a financial standpoint, this helps you create great cost reports on how much your cost of goods is and if you have adequate margins.
Total Job Cost = Direct Materials + Direct Labor + Applied Overhead
It’s difficult to outsource because no matter who your payroll provider is, they aren’t going to know your jobs the way that you do. They aren’t going to understand how you want your jobs broken down or to produce great reports that make their way back to your financials.
If you’re doing job costing, you may consider moving (or keeping) your payroll in-house, which would mean investing in an internal software that’s attached to your accounting system.
2. You don’t want to let go of your process.
The second reason you should keep payroll in-house is if you are not willing to let go of your specific processes and trust someone else to handle your back-office needs.
If you aren’t flexible with your business operations, outsourcing your payroll will be an ongoing headache for you and your employees. For example, if you process payroll on a Monday and hand out checks on a Tuesday, you may have to change that with a provider.
For many owners, outsourcing means changing a system that’s worked for years – aka, “leave well enough alone.” Payroll providers offer software solutions that are constantly adapting and growing with your specific business needs, which will change the way you operate your business.
Partnering with a payroll provider also means training your team on new software and giving them time to adapt to the changes. If you have a manual process that’s worked smoothly for years, and your business isn’t growing exponentially fast, it may not be worth your time to invest in a payroll provider.
What’s the cost difference?
The cost difference is the penalty for doing it wrong, i.e., missing something or not filing and paying on time. Enter your business information below to see your estimated savings by outsourcing your payroll.
If you outsource to a payroll provider, you generally pay per employee per month. If you have twenty employees and want to only process your payroll, you’ll be paying around $5 per month per employee, or $100/month + a base fee (ours is $89).
As you continue to expand as a business, your payroll provider’s software can scale to your needs. You may start out only needing payroll, but as you hire different employees and continue to grow, you’ll need to eventually offer benefits or integrate your timekeeping system.
The IRS has estimated that around one-third of employers make a payroll mistake in any given year. The average cost of these mistakes to employers clocks in at nearly $850 per year.
Consider leaning on the experts.
Regardless of which payroll provider you choose, we encourage every business owner to consider outsourcing their payroll. It’s a great way to get the complexities of payroll, i.e., tax liabilities, deadlines, timelines, and compliance, into an expert’s hands.
If you’re interested in working with a payroll partner, check out our article on the difference between Independent and National Payroll Providers to see which one would be a better fit for you and your business.