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Pros & Cons of Using Third-Party Payroll Service Providers

There are many factors for SMBs and nonprofits to ponder before outsourcing their organization’s payroll to a third-party processor.
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Small and midsize businesses (SMBs) and nonprofits face myriad challenges when it comes to managing their payroll cycle, let alone complying with evolving government regulations. One answer to these challenges is outsourcing payroll to a third-party processor, but how do you know if this is the right decision? There are many factors to consider, and this article will break down the pros and cons for SMBs and nonprofits to consider before engaging a third-party payroll provider. 

Pros of Third-Party Payroll Providers

  • Timesaving – Payroll service providers can remove much of the burden of payroll preparation, processing, and compliance. Some specific ways they do this include:
    • Managing employee data in a secure technology platform
    • Facilitating employee access to paystubs and W-2s
    • Providing simple and efficient processes and reliable technology for timesheet tracking
    • Preparing and facilitating payments to employees and remitting payroll tax liability payments
    • Assisting with human resources tasks
  • Compliance – Staying compliant in today’s ever-changing world is a major challenge for business owners. Payroll providers help confirm your payroll taxes are remitted in a timely manner and typically automate many of the governmental reporting requirements. This helps save time and can mitigate the risk of penalties and interest exposure.
  • Potential Cost Savings – Compared to onboarding and training an in-house employee, let alone managing the turnover of your internal payroll staff, outsourcing costs and stress savings can be significant over the long term. Outsourcing also helps reduce the time required with your current internal team, providing management with a better opportunity to deploy this talent for higher-level needs. There are many options for outsourced payroll providers with a wide range of pricing and service options to consider. We encourage you to work with a professional to guide you through this process.
  • Technology – Payroll providers continually invest in their platforms to keep them up to date for compliance purposes, but this investment can also provide enhanced operational conveniences. Benefits can include the ability for employees to view their paystubs and update withholdings on their laptops or even on their phones with an app. Another time-saving benefit is that many major providers have designed their platforms to synchronize the reporting of transactions directly into many cloud-based accounting systems.

Cons of Third-Party Payroll Providers

  • Remote vs. In-Person Service – When migrating from in-house payroll to a third-party processor, you will no longer have on-site support to answer payroll questions or troubleshoot challenges. Although payroll providers offer digital support, this will be a change in process, and you possibly might not obtain as quick of a response. In addition, your agreement with the third-party processor might not include review, response, and resolution of payroll-related notices. You can help mitigate this risk by performing proper due diligence when interviewing a potential payroll provider. Our Outsourced Accounting Services team can assist you with this process.
  • Hidden Costs – Always read the fine print as you may find that you bought a package you believed met your needs for the right price, but then you learned of additional charges for ad hoc services such as termination of an employee, registering and withholding in a new state, or facilitating an off-cycle payroll, e.g., bonus. Even if you are aware of these ad hoc fees on the front end, we encourage you to include these potential fees in your total annual budget.
  • Loss of Control – When you outsource, you lose the ability to control every aspect of your payroll cycle, including the ability to keep confidential data in-house. We encourage you to investigate the provider’s data protection measures on the front end. In addition, payroll data functionality might be limited to the provider’s standard reports or an ability to build reports. Keep this in mind if you track employees by department or service line. Inquire about the provider’s report-building functionality—this is another example of due diligence we suggest before engaging a provider.
  • Internal Staff Timesheet Processing – Although time savings were noted above as a positive, you cannot outsource review and oversight. Not having any responsibilities for payroll is a common misconception SMBs and nonprofits believe when they consider engaging a payroll provider. To be clear, the management function of approving timesheets will remain your responsibility. A provider will offer varying degrees of timekeeping services, but some employers choose to keep this process in-house, leaving data entry as an in-house process as well. Similar to this concept is the management function of approving employee time off, changes in hourly or salaried compensation models, receipt of garnishments, and overall employee benefit management. Note that providers often offer tools to assist management with tracking and processing these needs, but that doesn’t mean you can set it and forget it.

There are many payroll providers in the market offering a variety of services to help meet your organization’s needs, and we recognize it can be challenging to effectively navigate this market. If outsourcing payroll makes sense to you or you just want to learn more, please reach out to your Outsourced Accounting team member at FORVIS.

Looking to learn more about payroll processing and vendor selection? Read this related FORsights™ article to learn the top 10 considerations to have as you select your vendor. 

Related FORsights

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