Should You Manage Your Payroll In House - Why or Why Not?

Most people would pay a premium for a pill that would take their migraine headache away, which is what small businesses have been doing for years in outsourcing their payroll. More recently, however, businesses have been keeping their payroll in house, due largely to the advent of more sophisticated software programs that can streamline the process for internal bookkeeping staff.

Programs like Quickbooks, Peachtree or NetSuite offer both internal and outsourcing solutions giving business owners more flexibility in how they address their payroll. They also offer “hybrid” solutions allowing businesses to handle the hands-on functions of payroll while outsourcing the reporting and filing to the software provider.

Why In House Payroll Makes Good Business Sense

The decision to keep payroll in house or outsource will always come down to cost, which will vary widely depending on the type, size and growth trajectory of a business. Recent studies have found that smaller businesses – less than 10 employees – could save tangible costs by keeping it in house. But, once you begin adding additional factors, such as, multiple locations, qualified plan benefits, and variable compensation (union, exempt, non-exempt, bonuses, etc), it can increase the time needed to process even the smallest payroll.

Still, there are a number of reasons why small businesses will prefer to keep their payroll in house:

Less Expensive: The argument against in house payroll has always centered on the costs – both tangible and intangible – of a dedicated staff person and the hard resources needed to meet a payroll every week or two weeks. However, many businesses find that the net costs can be less after factoring in the time spent in the “back and forth” that occurs with a provider to ensure the data is correct, fixing errors, and when changing the status of employees.

More Efficient: In addition to reducing the time in having to communicate back and forth with a provider, data entry is simplified because it is done just once, and its accuracy can be controlled. Also, in house payroll processes can be integrated with the business’ cloud accounting software providing an easier way to sync the financials for end-of-the-month bookkeeping.

More Accurate View of the Business: When the payroll function is synced with the accounting system, you’ll always be able to take a more accurate snapshot of your business and know instantly if any issues are arising. Equally important, you’ll have a greater capacity to see into the future as you forecast for growth or any changes in your employee count.

24/7 Access: When processing a payroll, it’s not at all uncommon for mistakes to occur. While a payroll provider will make corrections, it usually involves a process which can consume more time and resources. An in house payroll process allows for constant oversight of the data in process and the ability to make immediate corrections.

Control over Data: Many businesses are concerned with the transfer of highly sensitive data, even with the advancements in cyber security. Data breaches are becoming too common even among the largest of companies. By keeping the data in house, a business can create its own security layers to protect it, while having control over its access when it is needed.

How Much Downside?

Of course, the decision to do payroll in house doesn’t come without some challenges, which have the potential to weigh down operations. There’s the initial cost of software and integration with existing accounting systems. There’s the learning curve for operating the software. It will require a dedicated staff person (perhaps only part-time) who must become fully conversant in the compliance side of payroll. However, by selecting the right software program, which should come with real-time support, a business should be able to quickly leverage the power of the cloud and technology to achieve a certain degree of efficiency.

Business owners who have successfully managed an in house payroll might agree on one key piece of advice: Keep your bookkeeping and payroll functions separate. Giving one staff person the responsibility for the business’ cash management (payables and receivables) along with payroll increases the chances of mistakes, and it’s not recommended that one person have that much control over all of the business’s financials. Keeping payroll and bookkeeping separate can allow for checks and balances between them, while fostering greater efficiencies in these two important and distinct functions.

No one goes into business for the purpose of managing a payroll; however, they quickly realize that it can be one of the most important functions in its operation. With cost and control as the primary considerations, many small business owners will prefer to look for an in house solution for payroll.

Although the learning curve for installing and managing a payroll software program can be steep initially, the benefits of convenience, efficiency, and access to data often pay off relatively soon.