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In-House Payroll Vs Outsourcing Payroll. Which is Best Suited for your Business

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Mohammed Faizan N
December 10, 2020

What is the one factor that drives employees to keep working hard?

If you guessed salary, then you earn a brownie point from our side!

An integral responsibility of every HR department is payroll, especially when it is the driving force for your employees.

But for many HR managers of small businesses, the process can be really complicated and tiresome. The paperwork and following up can get to you, doesn't it?

It is understandable as to why managers would find it burdening as the process only excites accountants as it involves a lot of complex calculations and in-depth understanding of the latest tax laws.

Before you lose interest in your businesses’ payroll process, hear us out once.

Understanding the nitty-gritty of the payroll process can help a business foresee their expenses and effectively utilize their resources for future growth.

Need some affirmation? Try this!

According to JP Morgan's research survey, the payroll payments for a small business rose to 8.5% in 2017, thereby indicating its importance for the smooth functioning of a business.

So what is Payroll?

In a nutshell, it involves computing a list of your employees that need to be reimbursed for their services. It also includes tracking their working hours, holidays and leaves, ensuring payment is delivered timely and keeping a tab on the payroll expenses.

For more information, have a look at this blog: What is Payroll. A Complete Guide.

Easy right?

At first, the process might seem manageable to you. However, in practice, it gets complicated depending on the industry and size of your business.

Let us explain the process to you broadly!

Typically, the payroll process for your company begins with defining the company's pay policy per industry standards. The next step would be to create various salary components that are a part of the compensation structure, followed by collecting information from correlated teams. After this comes the computing of individual salary and distributing the payslips to your employees.

Lastly, you have to compile tax reports that include TDS, PF and ESI for your future records.

We are sure the process might make you feel stressed when you think of your business. Well, you're not the only one.

Due to the various complexities involved in the computation, many businesses opt for either in-housing payroll by hiring a well-trained HR Manager or by outsourcing payroll to a professional team to reduce their costs.

You might ponder what benefits a payroll process brings to our business.

For starters, it ensures we keep a record of your employee payroll and their salaries.

Moreover, it impacts the business income by hiring the right candidates that drive revenue for your business. Also, payroll laws make it compulsory for all to comply with these regulations legally and ethically. Failure to comply with an effective payroll process indicates unstable management and lack of financial stability of your business.

To ease their lives, managers use payroll software that effectively compiles and computes calculations of pays for your employees.

The rise in digital technology has given rise to various E-payroll software in the market that professionally and effortlessly calculates extensive data that is customizable according to your needs.  

Additionally, it can compute the payroll tax in a separate column making it is easy to understand. From the business, we only need to provide the required information. It is cost-effective and time-saving; hence we can focus on activities that require greater attention.

So without any further delay, let's dive in deeper to understand the two alternatives available as your disposal for a payroll process. Understanding your business and its needs can help you make an informed decision for the same.

In-housing vs outsourcing payroll. A Guide for SMEs

In-housing Payroll System

You may ask what is In-housing payroll?

Well, it refers to the task wherein a dedicated team is hired within the organization to manage and execute the payment of wages and salaries by a company to its employees. You can accomplish this by hiring experts in payroll within the company and making use of payroll software systems. This would mean that the team maintains timesheets, wage-calculations, payslip printing, distribution and tax calculations.

So how can I as an HR manager benefit from In-housing Payroll?

HR is a complicated function that requires a thorough understanding before a choice is made.

Here are the possible benefits that will help you understand if in-housing payroll processing is the best choice for your company.

  • Control

Are we all not asking all the time how much functions should be outsourced to improve ease of management?

With the availability of advanced payroll software at their disposal, we believe that companies can choose not to relinquish the system and have better control of its payroll processing without worrying about how the data is used and who all has access to it.

It brings us to the next point, Privacy.

  • Privacy

How is your company data used?

What if there is a breach?

Confidentiality has become a matter of grave concern for every business and process.

In-Housing payroll processing not only allows you to manage payments of your employees effectively but also increases data security of employees' payroll and the company's data is not provided to third-parties, hence reducing the risk of any breach.

Remember, the privacy of your data is the most important!

  • Economical

Hiring an in-house specialist to manage employee payroll might seem an expensive deal; however, this brings long-term benefits as the company grows and employs more employees.

We can enjoy economies of scale whilst avoiding hefty monthly fees of outsourcing payroll that is dependent on the number of employees working in the company.

If you have a small business that doesn't have trained payroll staff, then you can opt for payroll software such as one of sumHR's that provides practical solutions to all your HR needs.

  • Flexibility

Don't we all feel the rush to make changes at the last moment?

In-housing payroll processing provides us with the flexibility to update or change data for last-minute corrections for deductions or bonuses at any given time. How great is that?

As the system is highly integrated to employees' data and performance, we can make changes at the 11th hour without having to make rounds with an outsourced payroll provider.

You can now be on top of your game!

  • Accuracy

Companies often face huge penalties if they fail to calculate and report actual costs and payroll taxes.

You might ask how can payroll software or outsourcing payroll fail if they are made to avoid such costs?

This is highly based on the data available to them or the system. In-housing payroll grants more access to accurate data of all employees to the payroll department with lesser efforts and discrepancies.

  • Ease for employers and employees

I haven't received my salary?

Why this delay?

Can I get an increment for the coming month?

Are you tired of endless queries from your employees about their payrolls?

Well, E-payroll and outsourced payroll can avoid the hassle for employers as employees can get all information from an external profession and access employee payroll details on the software.

How great and flexible is that?

Just like a coin has two sides, in-housing payroll does have some drawbacks that we must consider before making a decision.

  • Resources availability

Establishing a payroll process team can be an extensive task and can tie up the resources of the company.

This is especially prevalent if the company is an SME or has no prior knowledge of payroll processing.

Having a small number of employees in the company would mean that your company could benefit financially and management wise by outsourcing payrolls for a fee and utilizing resources to generate revenues.

  • Establishment of a payroll department

Establishing a payroll process team can be an extensive task and requires hiring specialists to manage the processes.

This would also need you to invest heavily in Training and Development to ensure robust compliance of rules and regulation. This can be easily avoided by using payroll software or e-payroll, and you can additionally save on time and efforts.

  • Minimization of Errors

Haven't we all faced non-compliance penalties due to minor errors?

That can be a major problem if you are relying on one person handling your payroll process!

In such cases, outsourcing payrolls to professionals can help avoid the risk of errors in calculations with concerned authorities. Employee payrolls are often delayed because of errors, and professionals can help to rectify these on time with little to no hassle.

  • Tax Compliance

Have you ever wondered, what is the best way to respond to a tax enquiry, so you do not look incompetent?

Well, outsourced professional payroll providers possess the required knowledge and skills to avoid downward risks with authorities with on-time and accurate responses. This saves you from unwanted fines and in-depth investigations as well.

Reaching out to experts means you can focus your energy on core work and be worry-free!

Outsourcing Payroll

According to a survey by Price Waterhouse, businesses that maintain an in-house payroll spend 18% more than the average spending of firms who opt for outsourcing payroll.

That isn't an encouraging number right?

Outsourcing includes hiring an external company to manage and handle all your payroll activities to save your executive time and cost in the long run. It helps in reducing the need to train your employees as payroll staff or using costly software to stay in line.

However, the decision depends on the complexity of the payroll function of your business.

Advantages of Outsourcing Payroll

  • Hassle-free experience

Who does not envision running a convenient and hassle-free business?

We are sure you would love to run one!

And having an integral business function like payroll in the hands of an expert ensures that we are guaranteed no complaints and additional efforts. When you are outsourcing payroll, you need to explain your requirements and provide them with the right information.

And voila! Leave the magic for the experts as they are well aware of the process and its complexities. They make sure to effortlessly work on this front so you can focus on the core functions of the business.  

  • Cost-effective and time-saving

If you are running a business with more than 1000 employees, then keeping a tab on every employee payroll can be a daunting task.

Imagine all the documentation and paperwork needed!

Imagine missing out or making a mistake while computing these figures.

That doesn't sound good to me!

Moreover, the process would be time-consuming and cumbersome to rectify your mistakes repeatedly.

Opting for outsourcing ensures you save time and boost your productivity at work. Additionally, several companies offer affordable and economical payroll services that can fit your budget.

  • Authenticity and accuracy

Trusting an expert ensures authentic and accurate data as your disposal.

They thoroughly compile and review reports before providing their clients with data hence ensuring error-free information.

Moreover, it is more likely to adhere to newly added policies and regulations as they are well-aware of the industry changes.

  • Complying with laws

Employee payroll laws are susceptible to updates and changes regularly that might be difficult for you to keep track off.  

Outsourcing payroll can ensure an expert is keeping track of any changes that come up in the new accounting year and make the necessary changes for your business.

It will reduce our cost that you may incur in making these rectifications.

Drawbacks of Outsourcing Payroll

  • Privacy

Imagine waking up to this horrifying news that all your employee data is leaked in the market by your payroll service provider!

Outsourcing involves sharing confidential information with a third party that could inherently put your company in a risky situation, especially for smaller companies.

You may be wondering why? This is because they do not have the resources and investment to rectify this mistake.

  • The costly affair for SMEs

Are you running a SMEs?

If you are running a company of fewer than 500 people, then outsourcing can be a hefty investment for you. You would be better off handling your payroll through payroll software that can provide the same job through affordable rates.

  • Deadlines and Coordination

Coordinating back and forth between your payroll service provider would not be any less than a headache.

The situation would worsen if they miss out deadlines and fail to follow up with you. It would reflect ill on the management of the company and its incapability towards its employees.

So what to choose?

Still in a fix as to what you should go ahead with?

Like we mentioned above, the decision depends on the size of your company and which industry you are competing in.

We would also like to emphasize this point for small and medium-sized enterprises that find it challenging to drive cash flow for their business.

In such scenarios, we recommend opting for hassle-free and convenient payroll software that is readily available in the market. They are reliable and easy to use, especially if you are a beginner. The flexibility offered by E-payroll software makes them the friendliest option for SMEs.

SumHR is a one-stop solution for all your HR-related needs. They offer a concrete HRIS that lets you organize, view, track and customize your data according to your needs.

So, the next time you are in a fix with anything related to HR, then we would recommend you to reach out to these folks for any guidance!

Book your free demo now

Written by
Mohammed Faizan N
Faizan is an SEO Specialist at sumHR, a passionate marketer with 3 years of experience in building a website, establishing organic visibility on Google and building an online presence on Social Media.
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