Should You Manage Your Own Payroll Or Outsource?
Payroll should be much more than a line item on your quarterly financial report; it represents the way your company keeps promises. If you take out the wrong amount for taxes and benefits or file payments late, you run the risk of losing your employee’s trust in addition to violating regulations that could come with expensive consequences.
The intricacies of the payroll process lead many small companies to consider outsourcing. Business owners quickly outgrow the stage where they can devote hours to payroll every other week and ignoring more imminent business needs and operations. Deciding whether to manage your own payroll or outsource depends a lot on how much time, knowledge, and money you’re willing to spend.
This article is designed to provide a better understanding of your options, but you’ll still need to do some soul-searching and make a few difficult decisions on your own.
Option 1: DIY
Think of this option as your bare-bones paper and pencil or spreadsheet option. It’s not going to cost much on the front end, but you may go crazy trying to learn and track everything.
Time
You will spend significant amounts of time working on payroll every week with any option, but doing it yourself will take the most time. When you DIY, you’ll spend more time adding up employee hours, calculating taxes, writing/printing checks, and filing.
Knowledge
This option only works if you spend time familiarizing yourself with the tax codes and benefits procedures. Also take into account financial factors regarding hours, overtime, and 401k contributions, not to mention bonuses and sales commissions.
Money
This is the lowest-cost option, if you don’t include the opportunity cost of a longer process. You save money by handling everything yourself, probably on a spreadsheet.
Only consider a DIY payroll system if you are time-rich and revenue-poor. If you have a small staff, an uncomplicated payment structure without a lot of benefits, or lots of extra time to bring the information together, go for it. The opportunity-cost here can be expensive, especially for small business owners with tight schedules.
Option 2: DIY + Payroll Software
Hopefully you already use some sort of software to collect employee time cards and manage your accounting. Many of these options offer payroll processing for an additional fee per employee, with customer support. If your current vendor does not offer payroll, you might consider a standalone solution.
Time
You’ll still need to manually enter or check your numbers to make sure they’re correct, but payroll software will automate many of the more tedious aspects, saving you time and headaches. Most payroll programs remember changes and settings you put in place from pay period to pay period, so you can “set it and forget it” for the most part. Many systems also offer electronic filing, which means you can pay your taxes and do all your deductions from the same interface you’re already using.
Knowledge
Payroll customer support specialists don’t just fix bugs and answer questions. They’ll also keep you from messing up your payroll, because the more you mess up, the less you want to use their software in the future, and the more likely you are to give up and pay an outside firm. If your vendor provides trained payroll experts as a resource, use them.
Again, running a payroll program in-house will take a lot of learning, and you’re going to need to invest plenty of time in learning how to use the software, plus general accounting principles that apply to your payroll.
Money
This is the least expensive option in terms of time and money, especially if you choose a lighter, cloud-based option. Calculate the expense of a perpetual software license or a monthly subscription, and possibly customer support. Check the terms of service carefully, as many payroll software options require a fee per-employee. If you decide to hire an in-house payroll specialist to manage the process, you’ll need to factor in that employee’s hourly or salaried wage, of course.
Buying a payroll software is usually the best option for most small business owners who need to spend more time growing their business. If your business is more established, you can hire an employee who will take care of the administrative work.
Option 3: Outsource
Companies that have grown quickly or have minimal internal accounting expertise may find that outsourcing solves a lot of problems. While this option does take careful planning and follow-up with the payroll professional or agency, many companies outsource to simplify their processes and many end up reducing overhead.
Time
This option will save you lots of time, as you’ll only need to sign off on the final totals each pay period.
Knowledge
You will want to have a general knowledge of the accounting ramifications of payroll outsourcing before you choose a provider. Pay attention to location and experience when choosing an outsourced payroll service; these factors can impact the level or ROI you do or don’t achieve. You want an accountant who is familiar with your state’s tax code and your company’s industry. Deductions and overtime also vary from industry to industry, so it’s important for both you and the accountant to invest some time in getting to know these.
Money
Contract for savings. A really good accountant will be able to tell you how they’ve helped other companies run more efficiently or save money. Ask for specific stories from the accounting firm or individual. While a payroll/accounting contract will cost you significantly more than the other options here, the overall savings of not getting audited can pay dividends.
If you don’t have enough time or knowledge of accounting to go it alone, but you have the funds to pay for an expert, outsourcing may be a good option. A good payroll provider will:
- Make sure your tax filings are correct and on time
- Make sure your employees are paid correctly and on time
- Explain any complications or inconsistencies
Whether you manage your own payroll or outsource to an accountant, you’re going to need a centralized system for managing all of your time, pay, benefits, and tax information. This can be as basic as a spreadsheet (which will still be pretty complicated and error-prone) or as advanced as a fully integrated accounting/ERP system. If you can’t afford to outsource your payroll, consider a time clock app and a stand alone accounting solution to simplify your process.
How should I run my payroll?
Though it is possible to perform payroll yourself with low-cost software, or hire someone to do it in-house, this can have disadvantages. Payroll can be onerous for a non-specialist to handle, leading to wasted time and potential mistakes. Similarly, if payroll is the sole responsibility of someone on your staff, you will have to work out what to do when they are off sick or on annual leave.
If you have a very small number of staff (say, five or fewer) and feel confident managing it yourself, this may be more cost effective. For a larger organisation, however, an outsourced payroll function may be preferable. The cost of payroll is relatively low for the level of security it provides, and it can free you up to grow at the pace you want. Be sure to choose a reputable accountant (beware of ultra-low cost online services as these may fall foul of the PAYE regulations). Payroll may well be included in the wide range of services that your accountant can provide.
What do you need to have before running manual payroll?
Okay, you’re finally ready to run payroll! But before you do, it’s helpful to have a few things handy.
- Employee’s W-4: You’ll use this to reference your employee’s withholding allowance, which impacts how much taxes you’ll withhold.
- Federal payroll tax withholding tables: The withholding tables are located in Publication 15-T.
- State or local payroll tax withholding rates: If you’re required to withhold state or local income tax, then you’ll also need your state’s tax tables or withholding rates.
Payroll checklist
Now that you know the basics, it’s time to set up payroll. Depending on your business, you’ll need most of the information on this checklist to complete the paperwork and pay your new hire. Your employee will have to provide some information on a Form W-4 and direct deposit request form. The rest will come from your records or federal and state agencies.
This checklist can help you prepare all the necessary information to run payroll successfully. Here’s an overview of the items you’ll want to prepare:
- Company details, including contact and tax information
- Employee details, including personal information, earnings, benefits and deductions, and applicable direct deposit information
- Tax details like your Federal Employer Identification Number (FEIN) and deposit schedule
- Bank details, including account information and the principal officer’s Social Security number
- E-signatures from the principal officer
- Prior payroll information, including previous payroll tax payments made during the year
On or before your employees’ payday
Every time you pay your employees, use your payroll software to:
- Record their pay – include their salary or wages and any other pay.
- Calculate deductions from their pay, like tax and National Insurance.
- Calculate the employer’s National Insurance contribution that you’ll need to pay on their earnings above £183 a week.
- Produce payslips for each employee (you can use different software if yours does not have this feature).
- Report their pay and deductions to HMRC in a Full Payment Submission (FPS).
If you pay an employee less than £120 a week, you usually only need to record and report their pay (unless they have another job or receive a pension).