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Why Do Some Employers Outsource Payroll While Others Do Not?

BY: Simon Worsfold | 01/28/21

I read recently that 70% of the revenue that flows into the IRS every year comes from employment taxes. In the previous financial year, this added up to almost $2.5 trillion, according to the latest IRS data book. So, it’s fair to say that the IRS has a keen interest in making sure employers don’t fudge their employment taxes.

This alone is a compelling reason for employers to ask an expert to handle their payroll for them. It eliminates the worry—but not the responsibility.

The need for accuracy still starts and ends with the employer. Research shows that employers benefit from training workers and giving them easy, efficient systems to use—especially for nonexempt employees. This ensures that everything will be as it should be—from the timesheet to the paycheck to the audit you hope will never come. For some, COVID-19 suddenly made it much harder to track all of this, with millions of workers moving to bedrooms and kitchen tables overnight to work. I work for a technology company, so you are probably already two steps ahead of me, but there are very good solutions out there for exactly this kind of situation—making it easy to store and share information securely. And, as you know, these solutions can help businesses manage payroll whether they outsource it or not.

Putting technology aside for a moment, I suspect many businesses end up keeping their payroll in-house more by accident than design. We’ll look at some reasons for this later. But first, let’s consider the pros and cons of outsourcing in more detail.

Why Outsource Payroll?

Of course, it’s not just the IRS that is interested in the accuracy of workers’ wages. Last year, a record $322 million was recovered by the DOL’s Wage and Hour Division. More than $186 million of this was recovered for unpaid overtime, while another $39 million was awarded to people who were found to have been paid less than the minimum wage.

Despite this, my guess is that most people’s decision to outsource payroll is far more mundane—more carrot than stick, if you will. It’s simply easier and faster to not do it yourself.

This is particularly true for small businesses that don’t have a payroll specialist on their team. For them, outsourcing can help restore a few hours in a weekend that can now be spent with family instead of their books or, worse, their employees’ timesheets. After all, the last thing you want to be asking yourself the night before paychecks are due is, “Which days did she work last week?”

Payroll providers can bring added benefits to these businesses, too. They might recommend new technology that helps their client to record workers’ hours more easily, which not only leads to easier payroll processing but faster invoicing and, potentially, more accurate cost estimates as well. They can also provide things like paystubs or help clients navigate HR laws and regulations.

Why Many Businesses Don’t Outsource Payroll

I’ve never owned a business, but I imagine paying people feels like something you should do yourself when you have employees. It’s part of the job description. You hire them, you pay them. Plus, it’s one less thing to have to pay for if you keep it in-house.

This may be fine when you are just starting out, but as the business grows, I think for some this habit gets stuck, and as a result, many business owners end up holding onto their payroll operations far longer than they otherwise would. If they had stopped to ask themselves, “Should I really be doing this?” or “how much is my time worth?” they might have made the decision to outsource long ago. In fact, in a recent QuickBooks Live survey, payroll was found to be the last operational process that small-business owners are likely to give up. Almost half (49%) of them said it’s something they still manage personally.

But why? Unlike you (probably), these people didn’t go into business so they could run payroll every week.

I have two theories about what’s holding them back. The first is that some don’t realize how easy it is to outsource payroll---that it’s worth the effort to tear up their homemade system. The other is that some business owners secretly enjoy running payroll. Sure, they are not experts, but they either love running the numbers or just prefer to be in control. In any case, from time to time, they are going to need an expert’s advice. And as we’ve seen, they’re going to need a payroll system that is robust, easy to use, integrates with their other systems, keeps good records, and has their back. That’s why some also now provide HR services, benefits support, or protections against payroll tax penalties.

The Best of Both Worlds

Whether or not payroll is outsourced, there is a strong argument for every business staying close to it. Not because of the IRS—most businesses do the right thing by their employees, after all, and prosecutions are rare—but because labor costs are usually such a high proportion of overall business costs. That’s especially true for service-based businesses.

Ignoring the insights in this data can carry a lot of risks for businesses. The data can tell you about a business’s overall productivity and profitability. It can identify trends over time that may need to be addressed. And, on a more everyday basis, it can help the business to make more accurate price estimates on future projects, potentially helping to win new contracts or avoid bad ones.

Ultimately, payroll reflects how people perform and how they spend their time, so this data is incredibly valuable—not just to the IRS, but to the business as well.

Simon Worsfold leads the content strategy team at QuickBooks, based in Boise, Idaho. He is also a member of the Board of Contributing Writers for PAYTECH.