Analyzing the Cost and Savings of Payroll Outsourcing

Still hesitant to retain a payroll service? Conduct a cost-benefit analysis.

One of the main reasons that businesses turn to payroll outsourcing is that, in most cases, it saves them money. But, how do you determine if a payroll service will save your business money? Like any purchase, you need to comparison shop, determine the product or products you are looking for and compare what you currently have and spend.

Payroll outsourcing often saves employers both time and money. Hiring an outside company can save on salary costs, as well as saving employers from needing to offer employee benefits to an entire payroll department. A study conducted by PricewaterhouseCoopers confirms that payroll outsourcing is actually less expensive than handling it internally. In short, payroll services are usually cheaper than processing payroll yourself.

How do you determine if the price you are quoted for payroll processing is competitive? Payroll services typically charge a base fee plus $2 – $3 per check, $4 – $9 for tax filing/delivery for each pay period and extra costs for implementing direct deposit. Some companies offer these services in a bundle for $3 – $5 per check, depending upon how many checks your business processes annually, it might be beneficially to purchase this bundle. There are also fees for processing employees and some companies may not cover taxes and penalties for IRS filings.

How do you comparison shop for payroll outsourcing? First, determine what payroll services you are looking for in a company. Do you need a Professional Employer Organization, Business Process Outsourcing, or online payroll service?

Now, how do you choose a specific company within these different types of payroll services? First, is to make sure that the payroll service company is bonded and insured. Secondly, your small business needs to find out how quickly they will process your payroll and how responsive the payroll service is to your questions and problems. Thirdly, your small business wants to make sure that your payroll service is easy to use and easily accessible. By hiring a payroll outsourcing company, you want your payroll service to seem as if you had an in-house payroll department. Lastly, your small business should look into their efficiency and accuracy. Checking the company’s references is recommended to ensure that you get a quality payroll service. A current or former client who used their payroll outsourcing service would be an excellent resource for this. Be sure to ask them about their needs, experiences with the company, and the pros and cons of their provider.

The next step is to compare your selected payroll outsourcing company to your current payroll system. The best way to do this is to conduct a benefit-cost analysis. You need to compare the advantages or drawbacks of outsourcing your payroll services. This is usually analyzed in dollar terms and helps to analyze adding the service either individually or when you are proposing this to your partner or business owner.

You need to determine what your business currently pays for payroll service. You need to calculate the costs of payroll personnel (including benefits if applicable), software costs, office supply costs (checks, postage, etc.), error fees incurred on average, etc. You should also determine how much time is spent processing payroll and place a dollar value on that. You should also consider how much time your non-payroll specific employees are spending assisting in the payroll process and what time they are wasting focusing on administrative tasks rather than their job duties.