Executive Summary:
- Performing your payroll in-house as a small business can help maintain strong communication and internal processes, but might prove costly when it comes to time and money.
- Outsourcing your payroll as a small business can help to alleviate the administrative burden of running a business, but requires a payroll provider with an intimate knowledge of your business.
- Small businesses should steer clear of payroll providers offering too-good-to-be-true deals and opt for providers who emphasize a people-first approach to customer service.
Telling a small business owner that running a small business is hard is a bit like walking up to Sisyphus, giving him a friendly little prod with your elbow, and saying something like, “Man, I just can’t imagine how hard it must be to roll a boulder up that hill, right?” Of course, running a small business isn’t as arguably pointless (save the philosophical discussion for later) as pushing a giant rock up a hill over and over again—it’s something that can be immensely satisfying and rewarding. Unfortunately, that doesn’t change the fact that it’s hard work, and finding ways to help take some of that work off of your shoulders often means spending a bunch of money or losing sight of why you started your business in the first place.
At Payday HCM, we’re very familiar with the struggles that small business owners face. Many of the clients we serve are small businesses, some being sole proprietors or businesses with only one or two employees. We receive questions from our clients all the time as to whether outsourcing their payroll is truly an effective way to save time or money. It’s a good question and one that, we imagine, many small business owners have.
That’s why, in this article, we’ll be going over the pros and cons of manual, in-house payroll processing versus outsourcing your payroll as a small business. We’ll dive into both manual payroll processing and outsourcing, dissecting the advantages and disadvantages of each one. We’ll also go over some of the things that small businesses should keep in mind when it comes to looking for a payroll provider.
In this article, you will learn:
- Manual Payroll Processing for Small Businesses
- Outsourcing Payroll for Small Businesses
- What Small Businesses Need to Look For in a Payroll Provider
Manual Payroll Processing for Small Businesses
First, we’ll go over the pros and cons of performing manual payroll processing in-house for small businesses.
Pros of In-House Payroll Processing for Small Businesses
If you’re a small business owner, you’ve likely either considered or currently have outsourced different functions of your business. As such, you’re likely familiar with the advantages and disadvantages of keeping things in-house. When it comes to payroll, manually processing in-house does still come with some benefits.
Firstly, as with any aspect of your business you might outsource, communication is generally better when you handle your payroll in-house. This is largely just the nature of outsourcing, as relying on a third-party payroll provider will require more effort to maintain consistent communication and alignment with your business.
Performing your payroll in-house also generally affords you a certain level of control. This is advantageous for experienced business owners who understand the ins and outs of payroll. If you also perform your other HR functions in-house, manually performing your payroll is a logical choice.
Cons of In-House Payroll Processing for Small Businesses
One thing we didn’t mention in the pros section is cost. Oftentimes, outsourcing can become more expensive than doing things yourself in-house. However, this is typically just considering monetary cost—when it comes to manually processing your payroll, an in-house approach might actually be costing you more.
This is largely because of the time and effort that it takes to perform payroll. For much smaller businesses with only one or two employees, this effort is often negligible. But even for businesses with only three or four employees, the time and effort spent each week or two weeks processing payroll is time not spent on growing your business.
Over time, this adds up. And, although outsourcing can seem more expensive than manually processing your payroll in-house, this isn’t always the case. If you need to hire a payroll specialist, that’s a salary, benefits, and other cost considerations. Outsourcing often helps reduce those costs while still maintaining the quality of service.
Outsourcing Payroll for Small Businesses
Next, we’ll take a look at the pros and cons of small businesses choosing to outsource their payroll.
Pros of Outsourcing Payroll for Small Businesses
As we mentioned above, cost is likely the first thing that comes to mind when considering outsourcing, often in a negative way. However, the common thought around cost when it comes to outsourcing as opposed to performing payroll in-house is a bit more of a myth than a fact, as outsourcing can actually help businesses save some money, as well as time.
But how can outsourcing help you save? Well, while outsourcing payroll may not mean direct cost savings (although in some cases it can), often outsourcing helps your money go further. Working with a payroll provider means gaining access to invaluable industry knowledge, helping to make your processes more efficient.
Not only that, but working with a payroll provider often also means gaining access to the latest in payroll and self-service technology, only making your business even more efficient and forward-thinking. These newfound efficiencies can help you to concentrate more resources on providing better service and improving your business.
Cons of Outsourcing Payroll for Small Businesses
Discussing the cons of outsourcing your payroll is tricky because a lot of the downsides largely depend on the provider you go with (which the process of choosing a provider itself could be considered a con). This is especially true for small businesses, where the effort to balance cost with service can be taken advantage of by larger big-box providers.
What does this mean? Well, big-box payroll providers often will provide cheap, sometimes free pricing tiers aimed at attracting small businesses. However, these tiers will come with a lot of cut corners, leaving small businesses without the level of customer service and intimate knowledge of their business that is required of a good payroll provider.
As mentioned above, keeping your payroll in-house by hiring a payroll specialist can help to mitigate this (although it’s not a foolproof solution). Outsourcing requires a large amount of communication between you and your payroll provider, something that can prove difficult with larger, more corporate payroll providers.
What Small Businesses Need to Look For in a Payroll Provider
Now that we understand the pros and cons of outsourcing and performing your payroll manually in-house, we’ll go over some of the traits small businesses should consider when looking for a payroll provider.
Big-Box Providers vs. Local Payroll Providers
As a small business, choosing the right payroll provider matters just as much as the decision to outsource or keep running your payroll in-house—oftentimes, the pros and cons outlined in this article will vary quite widely depending on the provider you choose. As such, it’s important to understand the distinction between payroll providers, especially the larger big-box payroll providers and the smaller, but still national payroll providers.
Working with a big-box payroll provider often means working with an automated answering machine, online chatbots, and support articles. While on paper, big-box payroll providers will argue this means your business has access to more resources, in reality, it actually just means you have less access to actual service.
So, when searching for a provider, keep in mind the level of service you think you can come to expect. The best way to do this is by exploring a provider’s website: are there frequent and accessible “Contact Us” pages? Do any help sections automatically redirect you to online directories of help articles or chatbots? Can you request to talk directly with a salesperson, or are you redirected to an online form to request a quote?
Understanding the Cost of a Payroll Provider
Actually knowing how much a payroll provider charges for their services and software is both immensely crucial for a small business to know and equally hard to find. Most payroll providers will bury detailed pricing information under “Request a Quote” forms or difficult-to-find webpages.
In some cases, payroll providers will boldly advertise low-cost or sometimes even free pricing tiers directly targeted at small businesses. Unfortunately, these pricing tiers are often too good to be true, largely only providing you with the most bare-bones payroll service, often giving you more work as you try to communicate with your provider and navigate what services you have access to and those you don’t.
Finding the Payroll Process That Fits Your Business
Running a small business is one of the most rewarding things anyone can do—it’s also one of the most difficult things anyone can do. Between just the day-to-day tasks that are necessary to keep your business functioning, there isn’t a ton of time to spend finding new ways to innovate on the product or service your business offers, let alone time to run your payroll. But, as with most things in life, it must be done. Don’t worry, though; outsourcing your payroll can help you save time and money, helping to take some of the administrative burden off of your shoulders and freeing up your time (even if it’s not a ton) to focus on what matters most: growing your business.
Running a small business is no easy feat—a high-wire act where small business owners must balance service and product with cost. And, when it comes to cost, payroll can be one of the least thought-about, but most effective tools business owners have when it comes to controlling cost. Running payroll in-house has its benefits, but on the whole, it can lead to higher costs and increase the risk of your business falling out of compliance. But that being said, what is the true cost of outsourcing your payroll? Check out our article on the various costs associated with outsourcing your payroll to find out.
Frequently Asked Questions (FAQs)
Q: How much does it cost to outsource payroll?
The cost of outsourcing payroll varies depending on the size of your business, the services included, and the provider you choose. Most providers charge a base monthly or per-payroll fee plus a per-employee fee. Initial setup fees are common and can range widely. Additional costs may include year-end tax filing, direct deposit processing, garnishment handling, and HR add-ons. When evaluating cost, be sure to account for the time savings, reduced compliance risk, and the cost of errors that outsourcing prevents — many businesses find the ROI of outsourcing far exceeds the service fees.
Q: Should I choose a national/big-box payroll provider or a local one?
Both have their advantages. National providers often offer sophisticated software platforms with broad feature sets. However, they can fall short when it comes to personalized customer service — you may find yourself navigating automated phone trees and chatbots instead of a real person. Local providers like Payday HCM combine powerful HCM software with hands-on, dedicated support from people who understand your region's specific tax laws, labor regulations, and business environment. For many small businesses, that combination of technology and a human touch works best.
Q: What are the downsides of processing payroll manually in-house as a small business?
The main cost isn't monetary — it's time. Even for businesses with just three or four employees, the hours spent processing payroll every pay period add up and take time away from growing the business. It also raises compliance risk compared to working with a provider who stays current on payroll rules, and if you ever need to hire a dedicated payroll specialist in-house, that comes with its own salary and benefits costs.
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