In-house payroll vs outsourcing: Which is best for SMEs?

Payroll is an essential part of every company’s operations and a foundational part of employee engagement. If you have a well-oiled payroll process, your staff will love you, but if you run payroll inconsistently, you risk major upset.

Since bookkeeping and payroll processing is an admin-heavy task, it’s understandable that some business owners believe it’s easier to use outsourced payroll. However, bringing this process back in-house can give you greater control.

What a company ultimately chooses depends on a number of factors. We’re here to make the decision between in-house and outsourced payroll a little easier, by breaking down the benefits of both.

What is in-house payroll?

In-house payroll is when a company has a team or individual in their organisation who is in charge of running payroll.

What are the benefits of having in-house payroll?

Bringing payroll in-house can be transformational for your business, but it has to suit your set-up and preferences. Here are just a handful of scenarios where in-house payroll could be the right choice for you.

You’d like to have greater control over the payroll process

Do you need to change a payroll rule? Do you need to enter a new employee into the system? Are permissions of pay reporting changing hands? When you’re outsourcing payroll, these changes could take some time to take effect.You’re waiting on someone external to complete what might be urgent changes.

With in-house payroll, you can make instant changes to your processes and start actioning them right away. It takes the middleman out of managing your payroll.

You’re interested in utilising technology

These days technology can do a lot of things, and one of them is supporting payroll. Payroll software is a great way to minimise the time your in-house team spends on payroll. It can also provide greater clarity on the trickier parts of payroll, and automate a number of processes, including payroll taxes.

If you’re thinking about bringing payroll in-house but are concerned about the time-cost, introducing payroll software can be a great way to provide extra support.

You’d like to instantly and confidentially access important data

When you’re outsourcing to a payroll provider, important employee data is being shipped out to an external company to manage. While they might have great security and processes, there’s nothing like having peace of mind in knowing that your data is securely held in-house and easily accessible to those with the correct permissions.

Sometimes urgent reporting is required, or an employee needs to access their details quickly. When the data sits directly within your company, it can save so much time and stress for your administrative and payroll team.

You want to connect timesheets and rostering

By using technology like payroll software, you can easily connect timesheets and rostering directly to payroll services. With everything living on the same platform, approved timesheets automatically feed through to payroll. Rostering is also a breeze, with templates, dynamic rostering and budgeting tools.

Integrating these critical HR processes is another way that you gain more control over your business operations. With software solutions that speak to each other, you can easily manage your employees’ time and payment from one single source of truth.

Employees want control over their own information

While we’re on the topic of human error… Most administrative staff will know the pains that can be caused by one small data entry mistake. Something as small as typing an illegible number incorrectly into a system can cause hours of headaches to fix down the track.

When you use an in-house system like Employment Hero Payroll, employees can enter their own payroll details into the self-service platform. They can easily view and manage their personal details, making updates as their life circumstances change.

You’d like to control reporting

Is your company growing and evolving? Maybe you’re looking to do a detailed audit of your finances and need specific information to do so?

Controlling your own payroll reports can give you back the flexibility to do things your way. You can pull reports instantly, easily sourcing any information you need.

What are outsourced payroll services?

Outsourced payroll services are when you hand over payroll management to an expert. While they’re not a part of the business, they can take over all the manual tasks that take up critical time.

What are the benefits of outsourcing payroll?

If you suspect that the time you’re dedicating to running your payroll in-house is affecting your bottom line, or you’re struggling to keep up with the constantly changing regulations, it might be time to outsource. We’ve outlined some common scenarios where outsourced payroll would suit you better than in-house payroll management.

The team are spending too much time on payroll tasks

Ask yourself how much time you’re spending on payroll and tax calculations, keeping on top of payroll compliance, cross-checking details and training new employees to use your tools. Then there’s time spent updating HR information in the system, including new hires, leave and award information.

Are you managing these processes manually or on spreadsheets? You’re probably frustrated by the inefficiency. If your business is growing, your in-house payroll processes will start taking up more and more valuable time. Outsourcing payroll can cut down wasted processing time by taking it out of the business’ hands entirely.

You’re finding that payroll costs are too high

IT infrastructure isn’t cheap, especially when you include staffing costs for managing a secure payroll platform. Software updates won’t suddenly stop coming, and neither will payroll costs. A study done by PwC showed that Australian employers make payroll errors that exceed $4.4 million every year. If you’re looking at cost per head, an outsourced payroll model could be the right move (and might not be as expensive as you think).

Just make sure you are careful when selecting payroll services. Incorrectly paying people can come with hefty fines and you don’t want to find yourself in this position.

You’d like more focus time for running and growing your business

If you think about it, you already outsource a bunch of critical functions – your internet, your accounting software and maybe your inventory management. It’s pretty standard for small and medium businesses to hand these vital tasks over to the payroll providers, so you can get on with what you’re supposed to do.

If you’re spending time training up new staff, chasing up timesheets and running reports, you’re not focused on revenue-generating activities, increasing sales or writing your business plan. And all the other people who were helping to manage payroll? They’ll also get time back to focus on their own areas.

You’re struggling to keep up with compliance

Compliance. Every business owner’s favourite word. Have you looked at each detail in your workplace agreements? Are you on top of the latest legislation? There’s leave entitlements and tax obligations to consider.

If all this gives you the fear, you’re not alone. If you make a mistake, there are often significant penalties and as a business owner, it will be your legal and financial responsibility. Outsourcing payroll means that you can be sure that an expert is taking the lead.

You aren’t sure that your data is secure enough

Do you know if your payroll data is prone to hacking? It’s not just the banks that are at risk anymore. Your payroll system has sensitive identity information that cybercrime would just love to get their hands on. And it’s not just external threats. Your data can be at risk from internal staff too if the system isn’t adequately protected.

A good outsourced payroll provider will have secure payroll systems and processes to keep your data safe and give you one less thing to worry about. If you’re considering outsourcing payroll, check that their systems are:

• Hosted on secure servers
• Password protected
• Able to encrypt your data
• Hosted in the cloud for secure access
• Backed up with redundancy in place

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Questions to ask prospective outsourced payroll providers

This blog will help you with what to look for in a payroll service, questions to ask when implementing a new payroll system as well as questions to ask payroll providers.

1. Can we meet our dedicated outsourced payroll professional?

This is perhaps the most critical and often overlooked question. Meet with the professional who will be your outsourced payroll officer at least once or twice so that you can pick their brain and assess how knowledgeable they are. Pay attention to cultural fit.

It’s important that your outsourced payroll provider knows and understands your business and industry so they can handle any challenges that may arise. You also want to make sure it will be easy to work with your payroll provider meaning you’ll want to ensure your organisations share similar values and work in the same ways.

Generally, larger providers don’t offer you direct access to a payroll specialist. Instead, your account is managed by a system specialist who helps you with technical and operational issues and often redirects your payroll questions to a third party

This style of working might be perfect for your business or not. This is why it’s important to ask this question!

2. Are you using the most advanced and up-to-date payroll platform?

What technology will your outsourced payroll provider use? When was this technology developed? What can it offer? Many external payroll providers use software developed decades ago. This can make it difficult to customise, costly to implement and limit its ability to integrate with other platforms.

Take the time to evaluate an external payroll provider’s technology. Does their chosen system demonstrate functionality? Is it a stand-alone system or scalable? Does it have functionality that enables you to use it in your internal payroll system?

The most advanced payroll platforms are cloud-based and offer an Application Programming Interface (API) which means they interface with other systems such as KeyPay, Xero, MYOB, and QuickBooks Online.

3. What support can my business expect from my outsourced payroll provider?

Some low-cost outsourced payroll services only help to calculate the wages and basic income tax and then provide you with a bank file.

Others collect timesheets, apply pay rule conditions, calculate wages, taxes and superannuation and then distribute all payments to the relevant agencies, authorities and clearing houses.

Other payroll providers just offer you their online payroll system disguised as an outsourced service.

Ensure you ask exactly where your external payroll provider’s services start and stop.

4. Can you manage payroll compliance by interpreting wage agreements and pay rule information?

It’s more important than ever for all businesses to use payroll software that automatically interprets wage requirements. We’ve seen businesses big and small get caught out making major payroll errors. The solution to compliance issues is a smart technology that helps ensure nothing falls through the cracks.

One of the most difficult and time-consuming parts of payroll is applying a set of complex pay conditions based on minimum wage and enterprise agreements.

Ask whether your outsourced payroll provider uses software that automatically interprets wage agreements and has other procedures in place to help you remain compliant and simplify the payroll process.

5. How do you manage time and attendance?

Collecting time and attendance data is a critical component of payroll, however, not all external payroll providers have a time and attendance system. Ask your payroll provider if they collect time and attendance data and if they do, ask how it’s done.

Nowadays your payroll provider should be able to provide you with a fully integrated online rostering and time and attendance system.

Making it easier for everyone to access one set of verified data to conduct an accurate payroll.

6. Does your payroll system include General Ledger (GL) integration with accounting software?

Unless your payroll system is already integrated with your accounting system you’ll either need to pay for integration, manipulate CSV files or manually enter your payroll data for your accounts.

7. What add-on services do you include?

Some payroll providers can integrate with a wide range of add-on services such as accounts, time and attendance and HR. If you look around you can find a single platform that provides a full HR, safety, performance and payroll solution.

Your payroll provider should also provide your employees with a complete Employee Self Service (ESS) module and employee benefits.

The best-outsourced payroll service providers also include a broad range of in-house employment management services including employment law, migration, human resources, recruitment and workplace health and safety experts.

8. Do you offer transparent pricing?

Don’t get caught out by hidden costs. Many payroll services appear to be cost-effective but contain a pile of additional costs for regularly occurring payroll activities. These hidden costs can significantly increase the cost of managed payroll.

Ask questions about all potential costs before you sign on with any outsourced payroll provider.

9. What are your service levels?

Your outsourced payroll provider should provide a clearly defined service level agreement, with turnaround times and implementation strategy. It should be flexible enough to adapt to your changing needs.

A good payroll provider will offer various choices and be able to provide support every working day.

Assess how quickly they respond to calls and how long it will take to correct an error. Also, be careful about locking yourself into a long-term payroll service contract. Anything over 12 months is unnecessary.

Your preference should be for month-to-month agreements that keep your payroll provider on their toes.

10. What experiences and results have you achieved?

Ensure your payroll provider can provide you with a range of referees who are willing to promote their services just as much as they are.

Many external payroll providers include success stories on their websites, this can be a good place to start.

11. Do you have an exit strategy?

Before signing on with an outsourced payroll provider, you need to have a proper understanding of your exit strategy. We’ve all seen cases in the news where a business or person has had a hard time getting out of an unfair agreement.

There could come a time when you decide to take payroll back in-house or change providers. In this instance, it’s worth ensuring that your service provider has an exit strategy where they can hand the keys over to your payroll officer so you can continue processing.

Alternatively, they should be able to offer you your data in a database or CSV. This should occur at no extra cost.

The wrap-up

Whether you outsource payroll or bring it in-house, the choice totally depends on your business and capabilities. While outsourced payroll can take a lot of the weight from your team, with a software system like Employment Hero Payroll, you can bring payroll in-house without any stress or struggle.

To find out more about how software can support your payroll function, book a demo with one of our business specialists today.