Small business payroll: To outsource or not?

Small Business Guides

5 min read

No matter who handles the payroll for your business, it’s never going to be a walk in the park. Payroll can be complicated and expensive and needs to be well managed. So how do you decide whether it’s best to outsource your payroll or do it in-house?

Payroll challenges for small business

Small businesses can be overwhelmed by the responsibilities that come with payroll. Tax requirements need to be considered and the fines for failing to meet them are usually hefty.

Another common issue for businesses is scale. With revenue growth often comes an increase in staff – and they can end up being based in several locations.

If you’re a small business owner you may relate to this feeling:

Doing the payroll can be frustrating for many small business owners because it can take lots of work to complete and has so many moving parts. There are also many ways to make errors, and tax requirements can be a minefield. Confidentiality is vital – data needs to be kept safe and secure. It’s a fact that preparing payroll is one of the more complex aspects of small business accounting.

However, technology advances mean that payroll software has come a long way in the last few years. Small business accounting software can have payroll built into it. Often there is no need to outsource payroll because the software does most of it for you. Small businesses can choose from a range of options available for payroll, so it’s important to explore the best tools and research the latest technology.

Processing payroll can often be like trying to herd cats through a windmill!

Small business payroll: Seven points to consider

  1. Money savings – think long term vs short term. Do you have people in your organisation already who have the skills to process payroll? Often you’ll end up doing lots of the work yourself even when you outsource.
  2. Time spent – hours spent liaising with a third party can often be more expensive than spending a few of your own staff hours on it. However if the work is very complex, this may be time well invested to avoid fines.
  3. Staff needs – how many staff and locations do you have? How complex are the payment requirements of your staff? How frequent are the transactions? Are there benefits and packages that you offer which require more effort and time spent?
  4. Flexibility – if you did payroll in-house could it scale to grow with your business when it expands?
  5. Accessibility – do you get instant access to staff details when you outsource or will there be a barrier between you and your information?
  6. Integration – do you want to integrate payroll with your business software or do you want it separate? Do you need to import or record data like wage details from your payroll software into your accounting software? Often this can streamline many aspects of your business.
  7. Sensitive data – do you mind giving your information to a third party? Lots of small businesses are uncomfortable with their data being in the hands of another business.

It often comes down to what’s most efficient and cost-effective for the size of the business. Only you can decide, but it pays to do your homework and assess your business needs before making a decision.

Outsourcing payroll

When small business owners are deciding whether to outsource payroll to someone else, the pros and cons need to be weighed up.

Outsourcing can incur costs that are far more than a small business can afford – especially in the early stages. It can also mean losing control of one the key elements of your business.

There is also a very real risk that if communication lapses, mistakes will be made. For example, communication over when a staff member leaves.

You also won’t have direct or instant access to payroll if it has been outsourced. This makes it harder to check it when you want to, or add anything that’s missing.

Confidential and sensitive staff information is often hard for many business owners to agree to lose control of. When you outsource, you will also need to allow for additional time between submitting the date to the outsourcer and when your employees will be paid.

There are some benefits to outsourcing payroll. When you outsource to a specialist, it can put your mind at rest that a professional is handling the bulk of the work and taking care of the tax obligations. It can sometimes save your own staff time (although the high costs associated need to be weighed up).

Cost savings with in-house payroll

The last few years have seen a real shift in payroll software technology. Lots of processes that were once manual have now been streamlined. This makes in-house payroll a much more appealing and cost-effective option.

If you have people with the right skills on staff, and payroll software that can handle the basics, you can potentially save thousands. Payroll applications should be able to calculate smart and speedy pay runs and automatically calculate the required tax for your employees.

Some software offers employee portals where staff can enter time sheets, apply for leave, and view payslips online. Often this turns a three hour job into a three minute task.


The benefits of in-house payroll

  • Cost savings – it’s usually cheaper to do it in-house, with no expensive third-party fees and hidden costs.
  • Time savings – in most cases you will save time by using payroll software and the right skills in-house. When payroll is integrated with accounting software it means less time spent on data entry.
  • A real-time accurate financial view – no liaising with payroll firms about staff salaries and tax requirements.
  • You’ll have more control – if you need to make payments on the spot, you’ll be able to. You won’t have to hand over sensitive company information and you will also be able to control the amount of time spent on payroll and monitor the cost savings.
  • You’ll have instant access – if your software is cloud-based, you can access your data whenever you want. Cloud-based software gives you the freedom to log in anytime you want, from anywhere. You can see pay runs and pending leave applications at a glance.

Making an informed decision is key

The decision to outsource payroll or do it in-house is often easy to make when you can make an informed choice with all the facts.

It’s clear there’s lots to weigh up when you’re considering whether to outsource or not. As any of your staff will tell you, anything involving their pay is a very important part of the business to get right. And no doubt it will be one of the first things to be noticed if it’s not done well!

When the payroll process is streamlined, you’ll spend less time worrying about things like payroll tax requirements and more time doing what you love.