Experienced and meticulous professionals find payroll can be a headache.  You may be talking a full-blown financially-induced headache if you get hit with a stiff penalty for a tax filing omission.

For many businesses, payroll services offer an attractive and valuable alternative to in-house processing.  Chosen correctly, they provide a less expensive, simpler means of paying your employees, filing your taxes, and performing a host of other duties. However, choosing poorly is like starting a new job you weren’t right for in the first place—it’s a hassle to leave, but if you stay, you’ll be perpetually frustrated.

Why do companies often initially process payroll themselves?  For any number of the following reasons:

  • They consider in-house processing to be more cost-effective than outsourcing
  • They are protective of wage information
  • They want to maintain control over payroll data to handle last-minute changes

The truth of the matter is, smaller firms with a stable, salaried staff and minimal changes in tax obligations may well be better off processing internally; it can certainly be more convenient and efficient it your needs are straightforward.  Ultimately many discover it’s not all that cheap—especially when you factor in the time spent managing the process.

Without proper knowledge of payroll procedures and access to a sound payroll program, it is easy to make mistakes.  Employees as well as federal, state, and local tax collection agencies need to be paid in full, on time, and in the proper manner.  Usually, late payments are cause for monetary penalties.  The Internal Revenue Service has reported that one out of every three employers have been charged for a payroll mistake, with total penalties reaching into the billions of dollars.  Given the ever-changing nature of tax regulations, it’s easy to make an error that can grossly affect your bottom line.

When to Outsource

While many U.S. businesses process payroll internally, this is not always the most cost-effective.  At minimum, internal payroll processing requires the purchase of a computer or manual accounting program and extensive training to use it.  In addition, businesses need to keep up to date on changes in personnel, deadlines, and tax requirements on an ongoing basis.

Using a payroll service generally makes sense if your payroll changes with each pay period.  If your company has employees working varying amounts of hours each week or has a significant turnover rate or require the receipt of tips, a payroll service can be a time-saving and cost-effective alternative to internal processing.  Using a payroll service can also be helpful if you must pay payroll taxes in multiple states.  On the other hand, if your payroll expenses are quite stable, you may find handling payroll internally to be just fine for your needs.