Small Business Tips: Advantages and Disadvantages of Outsourcing Payroll Services | Magic Assistant Blog

Small Business Tips: Advantages and Disadvantages of Outsourcing Payroll Services

Franchesca Palattao
Franchesca Palattao
June 5, 2022
A business owner checking her online business

Payroll may not have a direct impact on revenue, but overlooking it can have dire consequences. Fines for breaking regulations are quite hefty, after all. Spend too much time on it, though, and it cuts into productivity.

This is where payroll service providers come in. According to the National Small Business Association, 45% of small businesses outsource payroll. Doing so allows them to perform their core functions while accomplishing their payroll and tax requirements.

What happens when you outsource payroll?

Payroll doesn’t just refer to one activity. Here are some of the functions that are generally outsourced: 

  • Employee payroll account set up
  • Depositing employee paychecks
  • Remitting payroll taxes
  • Applicable employee deductions
  • Managing end-of-year tax forms and declarations

Benefits of Outsourcing Payroll Services

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  • Controlled costs

According to a PricewaterhouseCoopers (PWC) report, companies that handle payroll in-house spend 18% more than those who outsource it. In-house payroll processing comes with many costs that small businesses might not be able to sustain: cost of hiring, payroll software subscriptions, payroll processing, and more. All of these can increase as your company scales up.

Outsourcing your payroll reduces these costs. Payroll service providers are equipped with trained staff and software to handle all of them for you. Plus, with a third party dedicated to your payroll management and regulatory compliance, you lower the risk of incurring tax penalties.

  • Regulatory compliance

Regulatory compliance is one of the most challenging aspects of payroll. You need a comprehensive understanding of various regulations on top of labor, tax, and insurance laws. The IRS is also stringent when it comes to following deadlines. 

Some common payroll mistakes that incur fines include: 

  • Late payroll processing
  • Errors on tax forms
  • Submitting the incorrect amount of payroll tax
  • Misclassifying employees
  • Incorrect employee details
  • Not maintaining employee and payroll records
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By outsourcing your payroll, you can avoid unnecessary audits and penalties for non-compliance. Payroll service providers are knowledgeable about the laws and regulations concerning payroll whether local, regional, or national. A trusted service provider will ensure that you not only comply with the current rules but that you have a sufficient understanding of them as well.

  • Time-saving

Payroll is typically a non-core function of a business. Spending time and resources on it means you spend less time focusing on your core business activities. 

When done in-house, you would need a team dedicated to monitoring all the intricate details of payroll—new hires and terminations, paid time off, benefit deductions, state and federal regulations, and more. A small business may not have the resources to do these on its own.

You can get these tasks done efficiently without compromising your internal team’s operations with a payroll service provider. Most payroll providers are equipped with automated technology and teams that specialize in managing them. With these tasks delegated to a third party, you and your team will have more time to focus on their main tasks and formulate future strategies.

Disadvantages of Outsourcing Payroll Services

problematic business owner
  • Loss of control

When you delegate tasks as comprehensive as payroll to a third party, you often have to work under their terms and conditions—from how they store your data to the services they provide you with. State and local regulations may also change over time. When these require new calculations, you often follow your payroll service provider’s schedule on when they will implement these changes, which may affect your internal operations.

For instance, if your payroll service provider doesn’t pay your business’ taxes on time, you will still be on the receiving end of the non-compliance penalties.

  • Delays in payment delivery

Delays in payroll processing often occur in businesses that have employees overseas. There are instances when third parties don’t receive the necessary information to process their payroll on time. Holidays, technical glitches, and the weather are possible interruptions as well. So, when you’re outsourcing payroll, you need to plan in advance and work in tandem with your payroll provider.

  • Lack of flexibility

Depending on your contract, the payroll provider may be too rigid to accommodate change. For example, in the case of an emergency, you may have to pay additional costs to get the work done. Plus, it may also take a longer time to accomplish unlike in an in-house team where you can stay on top of your request.

It’s important to weigh the advantages and disadvantages of outsourcing payroll services—and of specific service providers⁠—before ultimately making your choice.

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