A typical in-house payroll department has many concerns. Besides the task of issuing paychecks, it may have to do so for many company locations, where tax rates differ, employees are paid on different dates, and tax deposits must be made to state governments by different means (e.g., direct deposit, bank deposit, or mail) and W-2 forms must be issued to all employees at the beginning of each year. Of all these issues, the one carrying the heaviest price for failure is a government tax deposit – missing such a payment by a single day can carry a large penalty that rapidly accumulates in size. All of these problems and costs can be avoided by handing over some or all portions of the payroll function to an outside supplier.
- Tax remittances. A supplier pays all payroll taxes without troubling the company. The savings from avoiding government penalties for late tax payments will, in some cases, pay for the cost of the payroll supplier!
- Multi-location processing. The supplier can usually process payroll for all company locations; several suppliers are based in all major cities, so they can handle paycheck deliveries to nearly any location. Other smaller suppliers get around not having multiple locations by sending checks via overnight delivery services – either approach works very well.
- Direct deposit. Suppliers can deposit payments directly into employee bank accounts, which is something that many in-house payroll systems, especially the smaller ones, are incapable of doing.
- Check stuffing. The time-consuming task of stuffing checks into envelopes is one that many suppliers will handle, thereby freeing up the internal staff for less mundane work.
- Reporting. Suppliers also provide a wide array of reports, usually including a report-writing package that can address any special reporting needs. Once again, many smaller in-house payroll systems lack a report-writing package, so this can be a real benefit.
- New hire reporting. Most states require a company to report to them whenever a new employee is hired, so they can determine if that person can be garnished for some outstanding court claim. Suppliers sometimes provide this service for free, since they can easily batch all new hires for all their customers and forward this information electronically to the state governments.
- Expert staff. Suppliers are staffed with a large team of experts who know all about the intricacies of the payroll process. They can answer payroll questions over the phone, provide specialized or standard training classes, or come out to company locations for hands-on consulting.
- Cost. A study commissioned by ADP and independently conducted by PriceWaterhouseCoopers shows that the total cost of outsourcing can be 30% less than the cost of having in-house payroll processing. The wide array of benefits has convinced thousands of companies to switch to an outsourced payroll solution.
- Backups. Though not usually considered a significant reason to outsource, suppliers back up their payroll systems at least daily, so there is minimal risk of lost payroll data.
- Other services. Some suppliers offer additional services, especially in the areas of benefits administration, 401(k) plans, and unemployment compensation management, that allow a company to not only outsource much of its payroll work, but also a great deal of its human resources functions as well.
However, before jumping on the outsourcing bandwagon, one must consider a few reasons for not using a payroll supplier. One is that outsourcing can more expensive than an in-house solution in some situations (despite the finding of the ADP study noted above!), because the supplier must spend funds to market its services as well as make a profit – two items that an in-house payroll department does not include in its budget. A supplier will usually sell its services to a company by offering an apparently inexpensive deal with a small set of baseline services, and then charge high fees for add-on services, such as direct deposit, check stuffing, early check deliveries, report-writing software, and extra human resources functionality. As long as a company is well aware of these extra fees and budgets them into its initial cost-benefit calculations, there should be no surprises later on, as more supplier services are added and fees continue to mount.
The other main problem with outsourcing is that the payroll database cannot be linked to a company’s other computer systems. Since its payroll data is usually located in a mainframe computer at an off-site supplier location, it is difficult to create an interface that will allow for electronic user access to payroll data. The best alternative (though a poor one) is to either keypunch the most important data in a company payroll database from payroll reports printed by the supplier or to download data from the supplier’s computer. Because of this missing database linkage, a number of larger companies prefer to keep their payroll-processing work in-house.
In short, there are many good reasons for a company to outsource its payroll function to a qualified supplier. The only companies that should not do so are those that are either highly sensitive to the cost of payroll processing or those that must link their payroll data to other company databases.