Outsourcing: In Search of Cost Efficient Payroll Processing

Outsourcing: In Search of Cost Efficient Payroll Processing

The requirements for effectively, efficiently and legally managing a payroll of any size can overwhelm a business. It may be time to outsource your payroll, so here’s what to consider as you weigh your options.

It’s one of the essential functions of operating a business; and, in fact, it’s a key indicator of the health of a business – the employee payroll. If it’s growing, it means your business is growing; but then so is your overhead, and, at some point, growth can overtake efficiency, especially in the area of payroll processing. That means, for small, growing businesses, pay roll processing can become a double-edge sword.

Regardless of whether a business has one employee or 20 employees on its payroll, the payroll function is laden with dozens of record keeping, reporting, filing and deposit requirements that can strain even the most skilled payroll staff. And that doesn’t even include the weekly or bi-weekly machinations of calculating, creating and distributing the paychecks.

That’s why payroll processing is one of the most outsourced functions for businesses of any size. Payroll processing providers offer the scale, expertise and capabilities that most small to medium sized businesses can never achieve cost effectively. While it does give up a degree of control over the process, most businesses will not miss the long litany of tasks and requirements that can consume an inordinate amount of time and resources.

What To Expect From A Payroll Processing Service

Many payroll process providers offer a range of services that can be tailored to the size and nature of your business. At a minimum a complete payroll service will include:

  • Maintaining current employee records for exemptions, withholding, benefit plans and other deductions
  • Calculating, writing and distributing payroll checks, or initiating direct deposits through electronic funds transfers
  • Depositing payroll taxes utilizing the Electronic Federal Tax Payment System (EFTPS)
  • Preparing and filing quarterly and annual tax documents
  • Compiling and preparing reports on payroll expenses for company financials
  • Assist in the on-boarding process for new hires

Payroll Freedom: At What Cost?

Payroll processing services are typically billed as a monthly service with a flat fee and/or a per-employee charge. While most packages are all-inclusive for basic services (as listed above), providers will also offer an al la carte menu of additional services such as handling early retirements, workman’s comp, and other complex or unusual needs.

Depending on the size and complexity of your payroll situation, the cost of outsourcing can mount up; however, no matter how you slice it, the actual, hard dollar expense of a third party provider will almost always be more cost effective than the hard and soft dollar expenses of maintaining payroll processing in house.

Outsourcing the payroll function can have an immediate impact on operational efficiency and costs in a number of ways, including:

  • Eliminating the need for specialized staff . The payroll processing can be a demanding function in the business, requiring specific skills and knowledge that must be obtained by dedicated staff. Any staff turnover in this area can be especially costly.
  • More options and flexibility. Third party providers have access to more methods for payroll processing and payments including direct deposit.
  • Minimize error and penalties. Payroll providers are steeped in experience and expertise with IRS and state requirements so penalties and late fees don’t have to be a concern for the business.
  • Increase operational efficiency. Payroll processing is staff intensive, by outsourcing the function, valuable staff time and resources can be allocated to other, essential functions.
  • Cost savings. Eliminating the staff function for payroll results in immediate savings. Other costs associated with payroll, such as technology, materials, and fees are eliminated as well. Even if the cost of outsourcing is equivalent to the cost of payroll processing internally, the business can realize savings through increased operational efficiency.

Through a very basic cost-benefit analysis, you can determine whether your business would be better off outsourcing the payroll function. The analysis should include a projection of payroll management costs in accordance with the growth plans of the business.

Taking the First Step

The best place to explore your options for outsourcing payroll processing is with your business banker. They are most familiar with your circumstances and have greater insight into your overall banking needs, now and in the near future.

Many business banks offer payroll processing systems that can easily be integrated with your other banking products. For instance, your bank’s payroll service could be linked to your working capital account to facilitate the transfer of funds and tracking of account balances.

If your bank doesn’t offer payroll services, your business banker should be able to recommend a third party provider that not only offers a range of services compatible with your needs; but that also has the capability of integrating your payroll system with your banking platform to facilitate cash flow management, fund transfers, and automatic accounting.

As a very first step, you and your business banker should explore your payroll servicing options to identify which would best fit your business needs.