5 Signs It’s Time to Outsource Payroll: When to Make the Switch

It’s the night before payroll and you’re staring at a list of overtime hours for the fourth time that week. If you’ve ever missed a filing deadline, miscalculated a paycheck, or spent the weekend double checking hours instead of doing something else with your life, you’ve probably wondered if payroll outsourcing is right for you. Most small business owners start out handling payroll themselves and stick with it for as long as possible. Payroll outsourcing makes sense, right up until it doesn’t – it often takes until you’ve hired your tenth employee and are calculating time and a half for the first time. Maybe you still use the same spreadsheet you built when you had three employees. Maybe you pay for payroll software but spend more time figuring out how to enter hours in it than actually using it. The five signs below will tell you when you need to hand payroll off to the pros, what steps you should take once you decide to outsource, and what to say to the doubts that usually come up.

Payroll Just Takes Too Much Time

There’s a reason your office manager blocks off a chunk of her afternoon every two weeks – because it takes that long to enter hours, track withholdings, file forms, and answer the inevitable emails about why someone’s paycheck isn’t right. Payroll might take an hour for a five person company, but for a thirty person team spread across departments or locations, it can easily take an entire day, if not more. Other telltale signs include:

• Payday always seems to sneak up on you even if it falls on the same date every period
• You or your office manager find yourself having to re-enter hours from a time clock into another system
• It takes substantially longer than it should to make a change to one employees’ withholdings

None of these are deal-breakers on their own, but they’re all signs that payroll wasn’t meant to be your full time job. When you factor in the time for every federal, state, and local filing due every quarter, along with the time spent addressing every employee’s questions about their paycheck, it can add up faster than you realize. Payroll outsourcing is an investment, but you’ll likely find the time saved is worth it when you factor in the hours you or your office manager will no longer have to spend on it.

The Real Cost of Payroll Time

Let’s try a quick calculation – if your time or your office manager’s time is worth thirty five dollars an hour, and you spend six hours every other week on payroll, that’s almost nine thousand dollars a year in lost productivity on payroll alone, and that doesn’t include software costs or time spent fixing mistakes. Compare that to the average payroll outsourcing costs for a business your size and it’s easy to see why many small businesses choose to outsource.

Payroll Errors Are Costing You

IRS data shows that four out of ten small businesses pay a payroll tax penalty every year, with an average cost of around eight hundred dollars. That doesn’t include the time spent explaining to an employee why their paycheck was smaller than expected if you under-withheld or had to re-issue a direct deposit because of an error. Mistakes like these tend to become more common as companies grow:

• Time and a half pay rates for overtime hours that fall below the minimum wage threshold
• Changes to a remote employee’s state of residence without updating their withholdings
• Misclassifying 1099 independent contractors as W-2 employees or the other way around
• Failing to file year end forms on time or with the correct numbers

While one mistake may be annoying, a pattern indicates deeper problems with your current payroll setup, whether it’s a spreadsheet, out-of-date software, or a stretched thin employee. When errors happen, your employees are more likely to scrutinize their paychecks extra closely, creating unnecessary tension. This isn’t a cost you can easily quantify, but it’s still a price you pay every time an employee asks you to explain a discrepancy in their paycheck.

Your Payroll System Can’t Keep Up With Your Growth

Hiring more employees is usually a good problem to have, unless it means your payroll system can no longer keep up. The more employees you have, the more hours go into payroll. Payroll gets more complicated if you hire people in another state, add independent contractors, or bring on your first remote employee.

Tax Withholding Gets Complicated When You Hire Someone in Another State

All states have different rules for income tax withholding, unemployment insurance, and paid leave. Hiring one employee in a new state means figuring out those rules for that state and making sure you’re following them correctly. If you hire multiple employees in different states you’ll need to do this for every state, and it’s easy to make a mistake when you’re just starting out. Other signs your payroll system can’t keep up with your growth:

• You’ve hired employees in a new state within the past year
• You’re bringing on your first remote employee or adding independent contractors
• Your current payroll software wasn’t built for the size or scope of your business
• New hire onboarding takes substantially longer than it used to

If you’re already outsourcing other operations, it makes sense to outsource payroll as well. The best payroll outsourcing services for small businesses can handle multi-state payroll, so you won’t have to spend extra time researching each state’s rules just to comply. Hiring a remote employee or adding independent contractors often means adjusting your payroll process to account for their status, which brings us to our next point.

Can You Keep Up With All the Changes to Payroll Compliance?

Changes to minimum wage requirements, time and a half rules, sick leave laws, and tax brackets are just a few of the payroll compliance issues that come up every year. Payroll compliance keeps changing, and it can be hard to keep up if you’re not focused on it full time. If your state passes a new law about paid sick leave midway through the year, you could be out of compliance if you’re not already tracking employee sick leave balances. That’s just one example – there are dozens of potential changes that could require you to update your payroll process and notify your employees. Other signs you’re struggling to keep up with payroll compliance:

• Learning about a new payroll law after the effective date
• Not sure if your current payroll process complies with your state’s pay stub requirements
• Payroll compliance updates aren’t prioritized or aren’t assigned to a specific person

While none of these are emergencies on their own, they’re all warning signs that you’re stretched too thin to stay on top of payroll compliance changes. An experienced payroll outsourcing service should be able to keep up with changes to payroll compliance for you, so you’ll always be in the best position to avoid penalties. That alone can save you time and money in the long run. Payroll compliance often involves multiple agencies, including the IRS and your state revenue department. These agencies update their requirements independently throughout the year, and it can be overwhelming to track them all on your own.

Only One Person Knows How the Payroll Process Works

It’s easy to ignore as a small business, but payroll has a single point of failure – the person who knows how it works. Whether it’s the owner handling payroll on the side or an office manager handling it full time, the payroll process can come to a halt if they’re unavailable. Asking yourself the following questions can help you determine if payroll is too dependent on one person:

• Could someone else handle payroll right now if they needed to?
• Does someone other than the person handling payroll know how to do it?
• Have you missed a payroll because the person who knows how to do it wasn’t available?

Unless you have clearly documented payroll procedures it’s easy to fall into this trap, especially if you grew your team quickly. When someone who knows how to handle payroll becomes unavailable, it’s disruptive to your employees and stressful for your management. If you outsource your payroll needs, this never has to be an issue. Outsourced payroll providers have an entire team and robust systems in place for payroll, which means your payroll will always get done even if your regular person isn’t available for any reason. You can probably relate to the frustration of trying to handle payroll without clear, easy to follow instructions. That’s why most payroll outsourcing providers use standardized systems, backed up by a team of experts. This makes switching to an outsourced provider an easy transition, especially if you’re worried about losing control over payroll. Transitions are usually the most difficult time to learn a new system, so it’s not surprising that this is when many small businesses discover how little they really knew about their payroll process. An employee who’s handled payroll for five years suddenly leaves, and you’re left scrambling to keep everything running smoothly. The next time you’re in a similar situation, remember that an outsourced payroll provider has a documented system in place that anyone can follow.

What Payroll Outsourcing Usually Includes

The phrase “payroll outsourcing” can mean different things to different providers, so it’s important to understand what it typically includes. Most payroll services cover the following:

1. Payroll calculations and payments according to your needs and schedule
2. Payroll tax withholding and deposit
3. Filing quarterly and year end reports, including W-2s and 1099s
4. Direct deposit and pay stub management
5. Compliance with payroll laws and regulations
6. New hire reporting and state registrations when you begin operating in a new state

For a small business, each one of those points represents a time consuming task with potential room for error. That’s why most companies choose to outsource payroll to a provider that handles all of them on an ongoing basis. You can think of it as a bundled payroll service designed to minimize mistakes and eliminate confusion around payroll deadlines for everyone involved. Some providers cover additional services, like HR management or workers’ compensation reporting. It’s always a good idea to find out what’s included before committing to a provider, since what’s listed as “full service payroll” can vary from company to company. Setting up payroll outsourcing usually involves reviewing your existing payroll records to determine things like employee withholdings and tax details. Once a provider has access to your employee data they can either start fresh or work in parallel with your existing process to make sure everything matches before making the switch. It’s always a good idea to request this verification step, since it gives you peace of mind that everything will continue to run smoothly after the transition.

The Objections Holding People Back From Payroll Outsourcing

Most small business owners who hesitate to outsource payroll have similar objections, usually based on a concern that doesn’t have a solid foundation in reality. Here are a few of the most common ones and the best ways to address them: “It’ll probably end up costing me more than it’s worth.” In most cases, it won’t. Payroll outsourcing costs are usually bundled at a reasonable rate based on how many employees you have and how often you pay them. When you factor in the time you or your office manager spend on payroll, along with potential penalties for errors, it’s often less expensive than you might expect. “I’ll lose control over something this important.” On the contrary, you’ll likely have more control than you do now, since you’ll have the ability to make changes to your payroll process at any time. The only thing you won’t have control over is the actual payroll math and tax calculations, which is why most payroll outsourcing providers operate as a team. “It sounds like such a hassle to switch providers.” It usually isn’t as bad as you’re expecting, especially if you time the switch to a new quarter or year. Switching providers in the middle of a pay period is always more work, but it’s rarely necessary. “My payroll needs are too simple to need this.” This is a common misconception and doesn’t take into account potential changes in your payroll needs. If you’re planning to hire more employees or expand your operations. It’s almost always more efficient to set up payroll outsourcing ahead of time rather than waiting until things get more complicated. Now that you’ve seen the signs it’s time to outsource, the realities of switching, and the objections most people raise, you’re probably ready to get payroll off your plate. Accounting Assist Pro serves small and mid-size businesses looking to outsource payroll, which means you can enjoy the flexibility of an outsourced payroll service without losing control of your process. Contact us for a brief consultation and we’ll walk through your options for payroll outsourcing without any pressure.

Your Time Is More Valuable Than Payroll Administrative Tasks

Payroll outsourcing is often a great solution for small businesses that want to spend less time on administrative tasks. The sooner you recognize the warning signs, the sooner you can reclaim that valuable time and use it to grow your business, instead of spending it on tasks that could be done by anyone. You don’t need to see all five of these signs before it makes sense to switch, especially if you’re spending too much time on payroll in general or are concerned about payroll compliance. Think about how much time you spend entering hours and double checking calculations. That’s time you could be spending doing something only you can do. It’s likely that your business has changed substantially since you first set up payroll, and some of these signs might seem like common sense. That doesn’t mean they weren’t worth considering, because they usually are a sign that it’s time to move on. Payroll outsourcing is an investment in your time, which means it pays off in the long run. For more details, you can connect with Accounting Assist Pro Team.

Frequently Asked Questions

Is payroll outsourcing safe for sensitive employee data?

Payroll outsourcing services use secure systems to store and process sensitive employee data, often using encryption at rest and in transit. Always ask potential providers about their specific security and privacy practices and certifications.

What’s the difference between payroll outsourcing and payroll software?

Payroll software helps you manage your payroll needs on your own, while payroll outsourcing means delegating your payroll needs to another company. Payroll software still requires you to enter and approve payroll information, while payroll outsourcing handles those tasks for you.

Can I outsource payroll if I have employees in multiple states?

Yes, in fact, you’ll likely find it much easier to outsource payroll if you have employees in multiple states, since a reputable payroll outsourcing service will manage multistate tax registration, withholding, and compliance on your behalf.

How long does it take to switch to an outsourced payroll provider?

Switching to an outsourced payroll provider usually takes two to four weeks, depending on your needs and how prepared your current payroll system is. It’s always best to plan a transition around the start of a new quarter or year, instead of in the middle of a pay period.