Question

A small family-owned business is rapidly expanding. Payroll is currently processed by the owner's wife but she can no longer keep up. You've been hired to evaluate whether or not the company should outsource the payroll function. What questions must be answered for you to make a recommendation? What are the advantages and disadvantages of outsourcing payroll? What factors should be considered in outsourcing payroll to a payroll service bureau? Discuss the advantages and disadvantages of using a payroll service bureau to process a payroll.

Answer 1

Things to be considered when outsourcing Payroll:-

1. Comparison of Outsourcing cost Vs In house payroll Team- Big businesses can afford to maintain big payroll departments. For smaller businesses, however, an in-house payroll service is a money burner. Total cost incurred by the in house payroll team should be compared with the outsourcing cost to derive at the results.

2. Accuracy of Employee Payroll-Payroll mistakes can be painful as they put the business at risk of fines. A good payroll provider is far less likely to make a serious error than in-house staff

3.Productivity- Payroll management is a time-consuming activity.Employees can focus on doing more productive things for the business. Staff numbers can also be reduced resulting in further cost savings.

4. Security of Payroll Data-The sensitive nature of the data held to run payroll and the potential for fraudulent activity mean that there is need to ensure that there are tight controls and systems in place to ensure the security.

5.Speed of Payroll Processing -As outsourced payroll providers are specialists they have the technical resources at their disposal to ensure that even the most complex payrolls are processed quickly and efficiently.

Advantages (Pros) & Disadvantages (Cons) of Outsourcing Payroll:-

Pro: It's a Time Saver-Outsourcing payroll saves a business time it would otherwise spend calculating pay and deductions and remitting checks to employees and taxation authorities. The printing costs of pay stubs might also be reduced. Some payroll companies offer a clock in/out function for employees, so you also save time calculating how many hours are owed each pay period.

Pro: It Calculates Taxes Accurately-Business owners know the deductions involved with employee payroll can be complicated, state and federal taxes among them. A payroll company often is better equipped to calculate these deductions accurately and consistently. The company also ensures taxes are paid on time.

Con: The Wrong Company Can Produce Errors-A payroll company that has never dealt with unique aspects of a company's payroll, such as unionization and restaurant employee tips, can introduce errors into the payroll unknowingly, and undoing the mistakes can be costly and an administrative headache. A payroll company that does not have an interface that allows businesses to enter their employees' hours directly & therefore requires the payroll company to input the information & can introduce mistakes in pay through simple human error.

Con: Business Owners Ultimately are Responsible-If a company fails to pay the taxes the business owes on time and accurately, the business still is responsible for those taxes. Even if the IRS prosecutes the payroll company for not properly handing over the tax money, the business might be left owing taxes to the IRS after having paid money to the payroll company. This might be the case if the payroll company has an unscrupulous employee with the ability to embezzle funds.

Con: Paying for Services Businesses Don't Need-Many payroll companies offer other services and entice businesses to subscribe to them by offering all-inclusive packages. This increases the cost of outsourcing payroll, and it's possible the additional services offered are not of true benefit to the business.