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In-House vs. Outsourced Payroll: Pros and Cons

Are you a business owner, work in HR, or deal with your business’s finances regularly? If so, you’ve probably questioned whether you should choose a payroll service once or twice, rather than managing payroll in-house. In fact, there’s a debate among businesses today over in-house vs. outsourced payroll, and which is the best option. 

The truth is, there are pros and cons to both in-house payroll and outsourced payroll services. The best choice for your business depends on your team’s needs and preferences. Take a look at the top pros and cons to in-house vs. outsourced payroll, according to industry experts.

In-House Payroll

In-house payroll involves a lot of responsibility and diligence from your employees. Businesses that do their payroll in-house often hire bookkeepers, accountants, or an HR team to fill the role. Keep in mind that in-house payroll is a time commitment and is subject to error. Bearing that in mind, consider these pros and cons.

Pros

1. More control and oversight over payroll process

Some businesses enjoy the fact that they have more control over the payroll process when handling it in-house. Rather than letting an outside provider control the process, performing payroll needs in-house lets you understand and own the process more closely. 

There is also some concern from business owners about granting outside providers access to sensitive data. For instance, you have to give providers access to employee social security numbers, employee salaries, business banking information, and more. While payroll providers will agree to keep this information private, there’s always the chance of a security breach.

2. Avoid learning curve of new software and integrations

If you are used to managing payroll and finances in-house, you may be comfortable with your business’s regular software and platforms. Most payroll services require you to switch over to their payroll software, which means your team will have to take the time to learn how to use it. 

Additionally, you may already have accounting, bookkeeping, and/or time and attendance tracking software that you prefer using. Most payroll providers offer a robust list of integrations with accounting software and other tools. But if your preferred platform is not on their list, this may cause some frustration among your team. 

3. Take advantage of employee expertise

You may already have a full-time employee who’s great at payroll and tax calculations. If so, you might ask yourself – “why hire a payroll company when I have an expert in-house?” This is a fair question to ask, and it’s worth considering making the most out of the resources you already have.

However, it’s also important to ensure those in-house employees aren’t overworked. Are there any other responsibilities they are managing? How feasible is it for them to manage payroll full-time? Always remember the time and effort that goes into producing an accurate payroll system. 

By the way, if you’re wondering whether or not you need a payroll service, review these 8 key signs.

Cons

1. Time-consuming and complicated

One huge disadvantage to managing payroll in-house is that it is very time-consuming to do it accurately and on time. According to Quickbooks, payroll teams spend around 5 hours to accurately calculate payroll per pay period and almost 300 hours per year. This can be overwhelming for small HR teams trying to manage payroll on their own

Not to mention, payroll and tax calculations are complicated. Tax compliance laws are one of the top reasons that businesses choose to outsource their payroll. Compliance is only getting more challenging year over year as regulations change. For instance, according to ADP, 54% of small to midsize business owners said that compliance with the Affordable Care Act was a top concern at their business. 

2. Run the risk of errors and penalties

Doing payroll in-house, rather than automating it, makes your business’s payroll subject to human error. In fact, ADP reported that one third (33%) of all businesses incur an average of 6.4 penalties and fees due to non-compliance with government regulations. Interestingly, a majority of these hard-hit businesses were ones who did payroll in-house. 

Additionally, did you know that submitting late can cause you to incur penalties and fees as well? If your in-house HR team is already bogged down with other responsibilities, you might not want to risk paying more for missing deadlines.

3. Saves you less money than you think

Many businesses decide to manage payroll in-house to save money. But it is a misconception that in-house payroll costs less than outsourced payroll overall. 

In-house payroll requires costs such as paying salaries or hourly wages to bookkeepers or HR teams, software costs, and the cost of your employee’s time and effort. 

When using outsourced payroll services, you end up saving tons of money on wages, salaries, software (everything is integrated for you), and indirect labor costs. In fact, Paycor found that most businesses who outsource payroll spend around 30% less on overhead costs compared to those who do it in-house. Learn more about how much payroll services cost.

Outsourced Payroll

Outsourcing payroll means you are partnering with a professional payroll service provider to oversee the payroll process. Most outsourced payroll providers help you automate your payroll process, which saves you the hassle and time of managing it day-in and day-out. Take a look at the top pros and cons to outsourced payroll.

Pros

1. Cost savings

As we mentioned, a majority of companies today actually save money overall when outsourcing payroll. ADP found that almost 50% of the businesses they surveyed cited cost savings as a #1 priority when they switched to outsourcing. 

When looking into budgeting, it’s important to look at all the costs involved when determining whether in-house or outsourcing payroll is cheaper. Accupay Systems reported that a majority of businesses pay between $100-$500 total per month for outsourced payroll. Compare this to paying the salaries of accountants or bookkeepers in-house – you will be paying much less for an outsourced service. 

Source: Accupay Systems 

2. Time savings

Automated payroll services are known to save businesses tons of time and resources internally. Using a payroll service is like having an additional full-time employee that works around the clock, doesn’t take holidays or time off, and gets everything done accurately and on-time. 

If you currently do payroll in-house, it’s important to ask yourself who is currently doing your payroll? Could their time be better spent on other tasks? If yes, outsourcing payroll is the best way to make the most use out of your employees’ time.

3. Convenient integrations

Outsourced payroll services offer lots of convenient integrations for businesses, which allow them to manage multiple tasks all in one place. Streamlining related tasks such as payroll, accounting, HR, onboarding, benefits, and more, can save your team tons of time in the long-run.

 According to ADP’s recent study, 41% of companies who chose to outsource payroll said that integrations – such as time and attendance and HR/benefits – were a major influencer in their decision. 

Cons

1. Less oversight over payroll process

When using an outsourced payroll service, most of the time payroll processing will be automated. You are allowing the payroll provider to own the majority of the payroll process, which can be convenient and time-conducive for some businesses. 

However, the potential downside to this is that you have less of an understanding of what is going on with the payroll process. If you run into confusion or need the provider to clarify something, you will have to contact customer service and wait for a response. 

Additionally, you will have to grant them access to business and employee data to accomplish payroll. This may be uncomfortable for some businesses. 

2. Paying for features you don’t need

Another potential disadvantage to using a payroll service is that there are usually only a handful of pricing plans available for each provider. Most payroll services offer a base-level subscription, in addition to higher-level subscriptions with more robust features. 

Some businesses might look at the base-level subscription and think – “I don’t need all these features!” If your business has a more simple payroll process and you’d rather not pay for the features included in the subscriptions available, you may be better off managing payroll in-house.

3. Limited to payroll service’s available integrations 

Most payroll providers offer a list of integrations they support under their service. For instance, Paychex, a popular payroll service, integrates with accounting software such as Quickbooks and Sage. This is great if you are comfortable with these softwares and integrations, as it can help you streamline your workload. 

On the other hand, your team may use a different software that is not on the provider’s list of available integrations. In this case, you’d have to make the switch to a new software and face the challenges of a learning curve. 

Next Steps

If you are considering in-house vs. outsourced payroll, we recommend also looking through our Payroll Service Buyer’s Guide, as well as these 7 best payroll providers. 

Looking to compare prices now? Our free and convenient online service matches you with the best payroll service providers that match your business’s specific needs. Get started by filling out our payroll service form. 

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