Outsourcing payroll in 2023: A complete guide for small businesses

If you’re a small business owner paying one employee or many, it’s crucial to have a payroll processing system in place. Payroll can get complicated quickly. It involves a number of financial transactions associated with employee payment and benefits, such as calculating hours worked or overtime, paying and filing state and federal taxes, managing deductions for health benefits, and more. 

If you don’t have the time, money or expertise to handle it in house, payroll outsourcing can help. It allows a third-party payroll services provider to handle the administrative aspects of payroll so you can focus on running and growing your business. 

Outsourcing payroll can help businesses save time and money, but it’s important to understand the benefits and drawbacks before making a decision.

What Is Payroll Outsourcing?

Payroll outsourcing is the practice of using a third-party provider to manage the payroll system and administrative tasks associated with payroll. 

Payroll responsibilities are much more than just cutting checks for employees. Running payroll also includes filing annual or periodic government reports, calculating social security and medicare taxes (FUTA) and other payroll deductions such as insurance deductions, and updating employee information. Some of these services also help manage employee benefits. 

Benefits of Outsourcing Payroll

There are a number of benefits to outsourcing payroll, including:

1. Save money. By outsourcing payroll, small businesses can save money on the cost of setting up and managing their own payroll system, and then paying an employee such as a payroll specialist to manage it. 

2. Save time. Outsourcing payroll can save businesses time, as a third-party provider can handle some or most of the administrative tasks associated with payroll. This can free up staff to focus on other tasks.

3. Access expertise. When you hire an outside service to manage payroll, payroll is often their main or even sole activity. (Some bookkeepers and accountants also handle payroll, and while it’s not the only type of work they do, they usually do a lot of it.) This can help reduce the risk of errors and make sure you meet deadlines, and comply with government regulations. 

4. Scale payroll. Outsourcing payroll can help businesses scale their payroll operations up or down without having to hire or layoff employees who handle payroll. 

5. Help keep data secure. Reputable payroll providers will have strong security systems and processes to ensure the safety and security of sensitive payroll data.

Payroll errors can be costly, and serious ones can even shut a business down. Payroll services can provide the expertise and resources you need to do it right. 

Types Of Payroll Services Offered

There are several ways to outsource payroll, each with its own pros and cons. 

1. Payroll software. Today’s payroll software solutions can make it easy to manage employee payroll. Many of these services offer a variety of additional services including benefits administration and HR services, usually for an additional cost. The basic service can be inexpensive compared to the time it would take to do it yourself.

2. Bookkeeper, accountant, and/or CPA. Your tax professional may offer payroll services. Usually they will use payroll software to run payroll for you. The cost will likely run somewhere between payroll software you manage yourself, and full-service solutions. 

3. Professional Employer Organizations (PEOs). A PEO is a co employer for your business and its employees. The PEO will manage payroll and other administrative services, and will often also offer employee benefits. It may also offer services for employees in multiple states or even multiple countries. 

4. Full-service payroll company. You can hire a firm to handle payroll completely for your business. Similar to a PEO (but without the co-employer relationship) it may also offer benefits administration and HR services. 

Pros And Cons Of Outsourcing Payroll

Top Reasons To Consider Outsourcing Payroll

All the benefits of outsourcing payroll are also reasons to outsource payroll. Here are some questions to ask yourself if you’re wondering why you should use a payroll service or professional.

1. Do you have the time to manage payroll yourself or do you want to hire someone to do it for you?
2. If you hire someone what happens if they leave or need to take time off (especially at month-end or year-end)? Who will handle it in their absence?
3. How much expertise do you (or your payroll employee) have when it comes to payroll and/or HR requirements? How will your small business keep up with changes in tax laws, state and federal regulations and/or best practices?
4. Do you have employees in multiple states/countries, and if so, how will you make sure you comply with the requirements in those locations?
5. What are your plans for growth in the next 1—5 years? How will you manage employee onboarding for that growth? How about downsizing? How will you manage that?
6. Do you have adequate systems in place to keep employee data secure? Data security is essential when dealing with employee information. How will you test your systems to help prevent costly data breaches?

As your business grows, you may decide to bring payroll in house. That can be especially helpful for businesses with complex needs. You have choices, though, so you can decide what works best for your business. 

What To Consider When Deciding To Outsource Payroll

Here are some of the important considerations as you look into payroll outsourcing solutions. 

1. Cost: While this may be the first factor you consider, it shouldn’t be the only one. Sometimes you get what you pay for, so make sure when comparing costs you consider all the costs involved in using another solution versus bringing or keeping it in-house. 

2. Services. You’ll need to understand what payroll functions you need and what you’ll get from the service. Will the service pay state and federal taxes or simply provide you with the information you need to do your own tax filing? Don’t forget to ask about the costs for additional services such as human resources support, multiple state filings, or global payroll options, if you need them. 

3. Employee tools. How will your employees interact with the system (if applicable)? Will same-day or next-day direct deposit be available if needed? How will they be able to change or update their information (such as tax withholding) and whom do they contact if they need help?

4. Quality: It can be hard to judge the quality for the payroll service you’re considering, but look at reviews (such as TrustPilot) and ask questions about how long the provider has been in business and any guarantees it offers. 

5. Expertise: Consider the expertise of the outsourcing company. Who’s behind the company? What professional qualifications do they have? In the case of PEOs, consider one one that is certified by the IRS as a Certified Professional Employer Organization (CPEO). Becoming and remaining certified as a CPEO means that a PEO has fulfilled specific requirements, such as background checks, experience, business location, financial reporting, tax compliance, and bonding requirements. The IRS can’t make the decision for you, but it can help you narrow down your choices.

6. Support. When is customer support available? Is it just available by email or chat, or will you be able to talk with someone if needed? Consider how the availability of support matches your business needs. 

7. Legal: Outsourcing payroll doesn’t relieve you of your legal responsibilities as an employer of ensuring you administer payroll on time, make payroll tax payments on time, and pay employees properly (following state minimum wage or overtime laws, among others). You’ll want to be confident that the outsourcing company will comply (and help your business comply) with all applicable laws and regulations.

8. Integrations. Will the service integrate easily with your accounting software? Are there other integrations you need such as employee time sheets, time tracking, employee survey tools etc?

9. Training. If you will be doing some of the work yourself, what kind of training is available to your employees? 

10. Employee tools. Will your employees have access to the system? If so, how easy will it be for them to access and use self-service tools, upload documents etc?

11. Reporting. You may need reporting tools for internal use. How will you access them? Will they integrate with other systems you use for reporting, such as your accounting software?

How To Determine If The Cost Is Worth It

For smaller businesses, outsourcing payroll through a payroll solutions software solution will almost always be cheaper than DIY solutions. More importantly, it lets you focus on what you do best. 

Before you can shop pricing for these services, you need to think about what you need. Make sure you know:

• Current number of employees 
• Projected number of employees 
• Types of payroll
• • Tipped
  • Hourly
  • Salary
  • Overtime
  • Commission
  • Bonuses
  • Contractors
  • Time off (vacation, sick pay, maternity or paternity leave)
• Frequency of pay periods: weekly, bi-weekly, monthly or semi-monthly
• States/countries where employees live and work
• Benefits administration
• • Insurance: health, dental, vision, life, disability, pet insurance
  • 401(k) or retirement plan
  • Flexible spending accounts
  • Fringe benefits (meals, company car, commuter benefits)

With many services you will pay a monthly fee plus a per employee fee. There may be add-ons for additional services. 

How To Setup Payroll Outsourcing Services

The solution you choose should make onboarding simple. You will need to let all your employees know what service you are using, and they may be required to enroll for self-service tools. 

Expect there to be a learning curve, both for you and your employees. However, the service you provide should help you with that process to ensure a smooth transition. 

Here are some great payroll services to consider. You’ll find an even more extensive list of payroll services providers here:

Bundle payroll and bookkeeping

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Online Payroll by Intuit

Payroll services that go beyond a paycheck. Pay your team and access HR and benefits with the #1 payroll service provider. With tax penalty protection, same-day direct deposit, and more, Quickbooks will take payroll off your plate, so you can focus on the big picture.

Pricing

Starts at $45/mo + $6/employee per month

Payroll Run Limit & Frequency

Unlimited

Key Features

• Workforce portal
• Health benefits for your team

All-in-one payroll and HR

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Paychex

Paychex makes it easy to pay and manage employees. Easily expand Paychex Flex beyond payroll by turning on HR modules — from recruiting and hiring to time and attendance and benefits — as your business needs change. You’ll have the option to work with a dedicated payroll specialist, plus 24/7 support from highly trained, U.S.-based specialists. Request a quote today and get three months of free payroll processing!

Pricing

• Starting at $39/month + $5 per employee
• Request pricing & get 3 months free

Payroll Run Limit & Frequency

Unlimited

Key Features

• All-in-one payroll and HR
• Dedicated, responsive service

Tips For A Smooth Transition To Payroll Outsourcing Services

Unless you’re setting up payroll for a brand new business, you’ll need to transition from your previous payroll solution to the new one. Here’s how to help make that transition bo smoothly: 

1. Establish a timeline: Establish a timeline for the transition to payroll outsourcing services and communicate this to all stakeholders. Allow enough time for everyone to carry out their required tasks, but don’t make it so far in the future that they procrastinate. (Be sure to check if key employees will be out on planned leave or vacation.)

2. Communicate with your team: Make sure that your team  is aware of the transition to payroll outsourcing services. If your employees will be using self-service tools (such as loading income tax forms), or if they need to take actions to verify or update  their employee information, make sure they are in the loop and have enough time to complete those taxes.

3. Train your team: Make sure that your team is properly trained on the new payroll outsourcing services. This will help ensure that the transition is smooth and that everyone is up to speed on the new system.

4. Monitor the transition: Monitor the transition to payroll outsourcing services to ensure that everything is running smoothly. Set up an easy (perhaps confidential) system for employee feedback. Spot-check for accuracy. There may be some hiccups, and you want to catch and correct them right away. 

Nav’s Verdict On Outsourcing Payroll Services

Many small businesses can benefit from outsourcing payroll, by using payroll software services or other solutions. This can help the business save both time and money as well as stay in compliance. 

The growth in payroll outsourcing solutions and improvements in technology mean that business owners should be able to find a payroll service provider that works for their business needs.