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What is the Cost of Outsourcing Payroll?

What is the Cost of Outsourcing Payroll?

Payroll is a necessary headache for small business owners and HR personnel. You may use accounting software and that's certainly necessary to give you a clear picture of the financial health of your business. But it doesn't do much to help your in-house HR team run payroll faster. They still need to manually process payroll and tax remittances.  

But there's a way to relieve that headache, reduce your employee's stress and time focused on mundane tasks, while saving money — payroll outsourcing. Not all payroll outsourcing options are a good fit for your business, though. Pricing models vary and selecting the right partner for your business requires some understanding of what you really need.  

Why Outsource Payroll Services? 

Payroll takes time. Plain and simple. And that's time you and your internal HR team don't have. You could spend that time on your core business needs, and your HR staff could focus on providing a better experience for your employees, creating a contagious culture that helps attract higher-quality talent. Outsourcing payroll serves your employees by taking that mundane and repetitive task off their plate, letting them focus their talents on more important matters. 

Besides time, outsourcing payroll can also save your company money. Even innocent payroll mistakes can lead to costly fines and penalties from government agencies, not to mention potential employee lawsuits. Many employees say that after just one incorrect or late paycheck, they start looking for a new job because they're worried about the stability of their employer. 

How do Payroll-Only Services Charge Your Company? 

Your company has options when looking for an outsourced payroll service. One option is a payroll-only service. This is a great option for companies that need only payroll services. Understanding how they charge you, though, will help you make the right decision. 

Basic Fees 

Every payroll-only provider charges a basic fee. This is the fee you pay to join their service and can be as low as $25 and as much as $200 per employee per month. Here's what's included in this basic fee: 

  • Payroll processing
  • Online access to paystubs for employees 
  • Online access to payroll reports for employers 
  • Direct deposit 
  • Basic tax filing 

Add-On Charges 

Payroll tax is an important step in every payroll run. Federal and state taxes must be paid, and it's the company's job to ensure both the employee's and employer's taxes are remitted to the right agencies. 

But not every payroll-only service includes tax remittance in their basic fee. You may end up paying extra for W2's at the end of the year, mailing of 1099's, as well as additional reporting that may be necessary to file your company taxes. You may even pay extra fees for employees in other states. These add-ons rise quickly. 

Pay Frequency 

Depending on your pay frequency, that may increase your basic fee or the payroll-only provider might add fees for running weekly, twice monthly, or monthly payroll for each employee. The more frequently you run payroll, the higher your additional fees may be because the payroll-only service has more costs associated with more frequent payroll runs.  

What is the Problem with Payroll-Only Services? 

Payroll-only services can provide benefits to a company that only needs payroll support and understands this may add weight to their budget. If your company is more cost-conscious then you may want to consider the problems with payroll-only services. 

Negative ROI 

You will not come out ahead. Even if your in-house HR team can refocus their time and energy on revenue generating activity, you're still going to be spending more money to run payroll. Even then, your in-house payroll team will likely need to review the payroll before it's finalized and record reports in your accounting software. 

Higher Cost Per Employee 

Small businesses will pay more per employee than larger companies. Payroll-only services offer discounts to larger companies, hurting small businesses. Usually, a company with fewer than ten employees will end up paying more per employee than much larger companies. 

Add-On Fees 

Payroll-only providers may seem like a good financial deal, but you get end up feeling like they nickel and dime you. The basic fee may seem enticing. But once you factor in all the add-on charges, the cost quickly rises and becomes a drain on your budget. 

Why Use a PEO? 

For a more comprehensive payroll solution, consider a Professional Employer Organization (PEO). A PEO provides comprehensive HR support, including payroll and tax remittances, with no hidden fees. 

Besides payroll, a PEO can support your business with: 

  • Enhanced employee benefits 
  • High quality and affordable healthcare 
  • Lower cost workers' compensation insurance 
  • HR policies and guidance 
  • Risk management 
  • Safety training 
  • Compliance training 

A PEO provides your company with a higher level of service that includes much more than payroll. The best part is that with a PEO partnership, you can see a positive ROI. 

Comprehensive Outsourcing Provides the Best ROI 

It may make sense to outsource payroll services. You may need the support and your in-house HR team may need the extra time. But the only way it really makes good business sense is to outsource payroll to a more comprehensive HR service. 

With a positive ROI, you can make your PEO partnership not only good for your employees but also good for your company's bottom line. 

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