The Costs of Payroll Outsourcing
More and more business owners turn to payroll providers like ADP to avoid the hassle of handling payroll themselves. Payroll service providers can help mitigate problems that arise once you factor in local taxes, overtime hours, and other variables. Even though these companies provide a valuable service, one should understand the true cost of payroll outsourcing.
Evaluating the cost of a payroll service can help you improve your cash reserves for expansion, marketing, or other important business activities. A cost/benefit analysis can save you major headaches later, especially if the payroll service wants to lock you into a long-term contract. Learn more about the costs and benefits of outsourcing your payroll below.
Breakdown of Payroll Outsourcing Costs
Many different costs go into outsourcing your company’s payroll. From one-time fees, tax-preparation fees, and the monthly cost of the service itself, the total amount that you pay per month can vary widely depending upon the service you choose. Many payroll service companies have several tiers of service, ranging from the most basic (simply calculating and depositing employees’ checks) to the most advanced (offering prepaid cards, managing state unemployment insurance and wage garnishments). However, across all payroll companies, several common costs exist, including the following:
Outsourced payroll companies typically charge a basic package fee that can range in cost from $25 to $200 per month. The basic payroll outsourcing cost takes into consideration your company’s state of residence, the complexity of payroll tax, pay period frequency, and the number of employees. For example, a company of 25-35 employees that uses well-known payroll processing companies like ADP can pay up to $1,500 a month for basic services. In many cases, larger companies will receive discounted package fees, bringing the cost down for large employers. For small businesses—like many field service companies—this cost can make a bigger difference.
The basic package typically includes direct deposit, basic tax filing, online portal access, and paycheck processing. However, these services vary by payroll company.
Frequency of Pay Periods
Many companies who outsource their payroll have to change their pay periods to avoid additional costs to process payroll transactions. If your company pays weekly or biweekly, you could incur additional costs compared to a business that pays monthly. Changing pay frequency can negatively impact employees. So, before engaging with a payroll company, ensure you can afford the additional costs. Carefully weigh the benefits of changing your pay periods.
Many payroll services charge the basic fee, regardless of the pay periods, and adjust the cost accordingly based on the frequency of payroll transactions. For example, you may experience $20 weekly, $30 biweekly, or $40 monthly fees. For weekly pay periods, you could end up spending double the cost for monthly pay periods. These fees on top of your basic package cost can add up.
If your payroll company mails paper checks to your business, you may incur additional fees for printing and delivery. Even if you get free standard delivery, additional charges for expedited or out of state deliveries may exist.
Payroll Tax Assistance
Although most basic packages cover tax assistance, many companies will charge extra for end-of-the-year processing to get ready for tax season. The additional payroll outsourcing can cost an extra $25 to $75 per employee, as can W-2 printing, mailing, and reporting. Additionally, the complexity of your payroll becomes a consideration, just as it does with the basic payroll package. If you have employees in multiple states, payroll companies will often slip in extra fees to handle their taxes. If you outsource your payroll, note the existence of such fees before choosing a company. In some cases, you can save a lot of money managing payroll yourself.
Even if you do payroll in-house using a service software, you must consider certain one-time fees. Some of the biggest payroll costs comes from setting up a system to record hours, then implementing the necessary system upgrades and updates. Some payroll processing companies will charge you to upgrade these systems.
If you have already decided to outsource payroll, ensure you budget for additional fees that aren’t always included in the basic package cost. Many such fees are necessary for proper and efficient payroll management. These fees typically include services such as direct deposit, check signing, per-envelope stuffing, new employee reporting, and more. Additional fees can apply for payroll adjustments or emergency paychecks, so plan accordingly when outsourcing payroll.
Benefits of Outsourcing Payroll Processing
Although payroll outsourcing costs can become burdensome, the time outsourcing saves can still count for a lot. Depending on the size of your company, employee garnishments, contractor/employee designations, the location of employees, and other factors, payroll processing and the associated tax management can eat away at time you don’t necessarily have.
Payroll processing services employ experts in the field, professionals less likely to make errors. However, depending on how much capacity they have, you run the risk of becoming “just another account.” Ask for reviews from other clients to make sure that a payroll company’s quality of work is good. Find out how easy it is to get access to your account representative. Keep an eye out for new start-ups that may not have quality systems in place to prevent errors.
Talk to your accountant to determine what services you need for payroll processing, how much time the processing will take, and the associated fees involved. This will determine if the payroll outsourcing costs are worth it.
Additionally, you should continually revisit the possibility of outsourcing your payroll or switching to an in-house payroll process as your business grows. Different size companies pay different rates with most service providers. For processors like ADP, the more employees you have, the less it costs for each employee’s payroll.
How to Save Money on Payroll Processing
Payroll outsourcing costs can add up, especially for tasks or services not covered by the basic package. For smaller companies, this can force a make or break decision for the bottom line of your company, as the benefits don’t always outweigh the costs. A variety of ways exist to decrease your payroll costs, such as streamlining business processes, using business management software, and adjusting pay periods.
Streamline Business Processes
When you bring your payroll processing in-house using service company software, you want to make sure that the software you choose assists with other business processes. This will make your investment worthwhile. Streamline your payroll processing along with other internal processes when you choose to handle payroll internally. Many payroll companies only offer payroll services, leaving you to find other companies or software options to manage accounting, taxes, and other business procedures.
For field service companies, investing in field service software not only helps bring down payroll outsourcing costs, but can help streamline other processes such as scheduling, dispatching, communication, and accounting.
Using a business management software can enable you to create direct deposits into your employees’ bank accounts. QuickBooks, for example, can integrate direct deposits with a small fee for each paycheck. Currently, the fee is $1.75 per paycheck. Meaning that if you pay your employees bi-weekly, the fee per employee would only be $45.50 per year. When compared to the fee many payroll service companies charge (between $4 and $9) this can save you up to $188 per employee per year. For a company with 25 employees, this translates to an additional $4,700 per year. That amount could come in handy for upgrading equipment or trying new marketing tactics.
If you pay your employees on a weekly basis, consider changing your pay periods to bi-weekly. Instead of paying direct deposit fees (or postage) 52 times per year per employee, you will halve the cost. Using the numbers provided by QuickBooks, this can cut your fees from $91 per employee per year to $45.50. 45 dollars may not seem like a lot, but when you consider the higher fees payroll services charge for direct deposit, this can reduce your spending by up to $234 per employee per year.
However, use extreme caution when using this strategy. If your employees count on weekly paychecks, this can cause some serious tension. While you can save even more money by switching to monthly paychecks, your employees may start shopping around for a new company should you do so.
Payroll processing accuracy can allow you to avoid payroll penalties. The IRS estimates that 40% of small to medium-size businesses pay a penalty for failing to deposit withholdings, miscalculating withholdings, or making incorrect filings. On average, the penalty for these businesses amounted to $845 per year. Making even small mistakes while calculating your company’s payroll can lead to penalties when tax time comes around. No matter what type of payroll solution you use, always double check the numbers to ensure that you won’t incur payroll penalties.
For many companies, the opportunity to teach applicable industry skills to college students may seem like a costly proposition. However, internships can provide your company with valuable work from students interested in your field. Setting up an internship program can allow you to altruistically contribute to the budding careers of young professionals, but also get work you need completed at a lower cost. If your business is located near a college, university, or even technical school, there is a very good chance that a nearby internship coordinator would be thrilled to have your company on their roster of potential internship providers.
For many tasks, temporary workers make a great resource to tap into to reduce your payroll costs. As opposed to spending time calculating the appropriate payroll for these workers, you simply receive a bill from the temp agency for their work. Because the staffing agency takes care of payroll for these employees, your process becomes more streamlined. However, this method requires caution, as staffing agencies will have a markup above what you would normally pay someone hourly. Screen these workers before allowing them to contribute to projects, as mistakes made by new temporary workers reflect poorly on your business.
Payroll outsourcing costs are hard to avoid if you can’t manage the processing in house. No matter what, there will be fees associated with managing payroll, whether internally or externally, so it’s important to conduct a cost-benefit analysis to ensure the route you take will save your company money in the long run. Take advantage of the features offered by business service management software to help streamline processes and bring down your payroll outsourcing costs.