Outsourcing Payroll: The Ins and Outs

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Depending on your company's payroll cycle, you may be taking out a couple of hours every other week to sit down and handle all the paperwork that goes along with making sure that your employees get their paychecks. That can be a significant time commitment, especially as your business grows and you need to add more help. There are alternatives, though: Outsourcing your payroll to a company that can handle it for a fee can make sense and even save your business money on administrative costs.

The Benefits of Outsourcing

When you outsource managing your payroll, you aren't just handing off responsibility for making sure that the checks get cut. Most payroll services handle depositing and filing payroll taxes throughout the year, making sure that your employees get the appropriate tax form at the end of the year, help you stay in compliance with labor laws, and calculate wages and deductions for your employees. Because a payroll company doesn't just do one thing. They make it easier to provide your employees with direct deposit of their paychecks and provide you with access to certain benefits, such as 401(k) plans. Some payroll companies will even go so far as to use employment records to remind you of your employees' birthdays and other important events.

Mary Crafts, the founder of Culinary Crafts, found that working with A Plus Benefits to handle her payroll provided opportunities to her employees that she couldn't have put together on her own. The company not only handles workers' compensation issues for Crafts, but she says:

Through A Plus I was able to offer my employees a lot more health insurance choices and better rates than I could have found on my own.

Your payroll does remain under your control, of course. You do have to approve outgoing checks and review reports regularly with your payroll provider. But the approval process is significantly shorter than the time it may take to do payroll yourself.

Finding a Payroll Firm

Ann Siegle is a partner with Tria Design & Marketing. Her firm is on its second go-around with outsourcing its payroll:

We first began outsourcing payroll about 12 years ago, when I had four employees. When our firm merged with another, and we went to a different structure (partnership/associate partnership), we stopped. But recently we returned, and looked for a new firm via a Google search (payroll services + our city name).

Using a local firm has been particularly beneficial for Siegle's team. Even though Tria Design & Marketing employs two people and is a small business, its payroll firm has made the process very simple, even to the point of allowing Siegle to handle most details online. Siegle says:

We found a local firm, out of a neighboring city, that offered completely online services, yet personal service. The owner came to visit us for our first engagement meeting, which we loved. We've been using them now for about a year. The entire payroll run takes me approximately ten minutes per two-week cycle to enter time for our staff and process. Everything — the payroll checks (direct deposit) and reports to us — can be handled online. If we had more staff, it might take longer, of course, but it's still far faster than handling these tasks in-house, particularly year-end reports.

Crafts also notes that the company has helped her avoid problems:

A Plus has saved me more than once when I was about to do something stupid or wrong. They're aware of all the laws and regulations that go into these issues and have a long term, big picture approach to managing these aspects of the business. Their approach has saved me thousands and thousands of dollars.

While working with a local firm may be a good fit, it isn't the only option. There are numerous payroll outsourcing solutions that are entirely online or are run regionally. If you work with a CPA, he or she may be able to recommend a good firm based on your needs, but you can also go online and look for companies that fit your business.

The Cost Savings

For Siegle's team, outsourcing payroll has made a significant difference in administrative costs:

When we first started the process of using an online payroll service, we calculated just the weekly internal prep work for payroll was 3 to 6 hours per pay run with a partner and a bookkeeper both involved in setting up, running, reporting and reviewing payroll. This would have to be done twice per month. Our online service takes 10 minutes and costs us on average $60 per month. This results in about a 90 percent cost savings, not to mention an enormous hassle savings. In the past, we've had up to five on payroll at any one time. Cost savings for a larger firm would be even greater, though I suppose there is a crossover point where having someone in-house to perform this task would make more financial sense. For smaller firms like ours, under 10 employees, it's absolutely worth it to outsource payroll.

Eliminating the hassle can be worth more than you might think. Siegle's firm is made up entirely of graphic designers and, while they are comfortable running a business, they simply aren't accountants. Having an expert handle the details not only speeds up the process but insures that no one at Tria Design & Marketing has to worry that they aren't handling the paperwork perfectly.

When Outsourcing Doesn't Make Sense

There are situations in which keeping your payroll in-house does make more sense. The most common situation is if you have a high number of employees: Most payroll companies base their rates on how many employees you have. If you have a high number of employees, your costs with a payroll firm may be enough that bringing in a part-time bookkeeper would be more practical. There isn't a magic number for determining whether it would be cheaper to do your own payroll, though. Most payroll firms will provide you a free quote, so getting a variety of estimates (along with a few estimates from bookkeepers) can help you narrow down your options.