DIY Payroll vs Hiring a Payroll Service

Managing payroll is one of the most critical back-office functions for any business, yet it’s also complex, time-consuming, and highly regulated. According to the American Payroll Association’s “Getting Paid in America” survey, over 50% of small business owners handle payroll functions themselves.

However, do-it-yourself (DIY) payroll comes with substantial effort and risks. Hiring an outside payroll service promises increased accuracy and convenience but also higher costs.

How do you determine what’s best for your growing company? In this blog post guide, we will examine the pros, cons, options, and costs to help you make an informed decision when choosing a payroll solution.

Defining Your Payroll Needs

Choosing between a DIY or outsourced approach requires clearly defining your needs and capabilities first. Key factors to examine include:

1. Number of Employees

As your staff grows, so does payroll complexity. More employees mean more data entry, tax calculations, and potential for errors. Even large, experienced HR teams can struggle managing payroll effectively beyond 50+ employees.

2. Payroll Complexity

Do you pay hourly wages or annual salaries? Provide sales commissions, bonuses, reimbursements, or special stipends? The more complex the compensation, the more intricate payroll administration becomes. Also consider if you have employees in multiple states or countries.

3. Compliance Requirements

Payroll laws and tax regulations are continually evolving. Are you fully aware of federal, state, and local changes that impact your filings? Can you dedicate resources to staying current?

4. Budget Considerations

What payroll-related costs can your budgets sustain? DIY options require software/tool investments. Outsourcing shifts the costs to a third-party provider but may offer more value.

5. Time Commitment

Payroll requires consistent, timely attention – typically 1-2 days per pay period. Do you have capable staff with capacity to take this on?

Asking these questions will determine whether DIY payroll or outsourcing better matches your resources and capabilities.

DIY Payroll: Taking Control In-House

For many small business owners, managing payroll operations in-house seems logical. You save on provider fees, retain control over data and processes, and can customize based on how your business compensates employees. However, DIY payroll requires significant effort, expertise, and risk mitigation.

1. Pros of DIY Payroll

Cost-Savings – Eliminates third-party fees, allowing you to reallocate budgets to other needs. Options like payroll templates and software can minimize expenses.

Control – Your company retains ownership over sensitive payroll data and full authority on processes, procedures, and tools used.

Customization – Configure payroll to exactly match how you compensate staff, including unique stipends, bonuses, reimbursements, etc.

Privacy – Avoid sharing confidential employee compensation data with an outside provider.

2. Cons of DIY Payroll

Time-Consuming – For small teams, payroll can require 1-2 full days per pay period for proper administration. As headcount grows, so does complexity.

Expertise Required – Properly calculating taxes, deductions, and filings requires extensive payroll compliance knowledge that takes time to build.

Error-Risk – According to the IRS, 1 in 3 small business tax returns contain errors, with payroll mistakes being most common. Just one penalty can erase DIY savings.

Complex Tax Compliance – Federal, state, and local agencies continually update regulations. Keeping current is difficult without dedicated staff.

Upfront Software Costs – DIY payroll software ranges widely, from basic Excel templates to integrated human capital management suites costing thousands per year.

Navigating DIY Payroll

If properly registered for federal and state payroll taxes, provided sufficient resources, and possessing necessary expertise, DIY payroll is manageable for many small businesses. Here are the main steps involved:

1. Data Collection & Entry Gather employee hours, salary changes, benefits enrollment, tax documents, etc. Manually input all data per pay period.

2. Process Payroll Make taxability determinations. Calculate earnings, deductions, tax withholdings, net pay per employee. Double check figures.

3. Tax Payments & Filings Remit payroll taxes to appropriate federal, state, and local agencies by mandated deadlines. Stay current on all compliance regulations and reporting changes.

4. Distribute Pay Print and distribute checks or payroll reports. Direct deposit employee net pay. Address any missing payments.

5. Payroll Reconciliation
Compare previous pay period reports and W-2s. Verify all payroll details and tax payments for accuracy. Resolve any discrepancies.

With each pay period, these steps must occur timely and error-free to avoid issues with employees or penalties from governing agencies.

For DIYers lacking specialized payroll expertise, numerous guides and calculators offer support:

• IRS Payroll Tax Tutorial
• Small Business Association Payroll Guide
• PaycheckCity – Payroll laws by state
• Free payroll templates
• Multiple DIY payroll software options

However, the DIY route only makes sense if properly registering for taxes, remitting accurate payments, meeting all deadlines, and staying current as regulations change. Otherwise, steep IRS penalties can quickly erase any cost savings.

Hiring a Payroll Service: Leveraging Expertise

Outsourcing payroll relieves business owners from its substantial administrative burdens. You gain access to specialized expertise and technology that ensures payroll processes happen accurately and compliantly. Employees get guaranteed and timely payments while you focus energy on higher-value aspects of operations.

Pros of Outsourced Payroll

Peace of Mind – Highly accurate payroll with guaranteed compliance across all tax jurisdictions.

Time Savings – Eliminates up to 1-2 full days per pay period for staff to administer internally.

Expert Support – Access to dedicated payroll specialists to handle complexity and answer questions.

Up-to-Date Compliance – Providers continually monitor regulation changes across municipalities.

Enhanced Capabilities – Many offerings include HR, benefits, reporting and other value-add platforms.

Cons of Outsourced Payroll

Costs – Services come at a price, typically $2-$20 per employee per month for basic payroll. Costs rise for added capabilities and employees.

Data Security – Sharing sensitive information with an external provider causes some data privacy concerns.

Lack of Control – Providers manage processes based on optimized practices, limiting customization.

Types of payroll services

With over 200 payroll technology vendors competing for small business clients, sifting through the options poses challenges. Payroll services generally fall into three main categories:

1. Basic Payroll
Smaller specialized firms focused specifically on payroll administration and tax remittance. Ideal for simpler needs with 1-50 employees.

2. Full Service Payroll Usually offered by leading human capital management (HCM) enterprises like ADP, Paychex, and Gusto. Includes payroll integrated with other HR capabilities like benefits, compliance, and analytics. Scalable for businesses up to 1000+ employees.

3. Specialized Payroll
Industry-specific providers tailored for unique needs like restaurants, franchises, nonprofits, global organizations, etc. Requires closer evaluation for specific requirements.

Guide readers on selecting a payroll service:

Examine each prospective payroll provider’s costs, reputation, accuracy, disaster recovery assurances, service capabilities, and compliance record. Vetting questions to consider:

• How many payroll clients have you serviced? What size clients do you specialize in?
• Which system(s) do you use for payroll processing? How often are they audited?
• Can you provide industry or client references to contact?
• How do you guarantee accuracy and tax compliance? Do you cover penalties?
• How long does it take to onboard a new client? Can we integrate our HR/finance platforms?
• What are all the fees entailed? Are there setup costs or annual contracts?
• What level of customer service and support is included?

Securely outsourcing payroll hinges on finding the right provider match given your business requirements, resources, and risk tolerance.

Making the Payroll Decision: DIY or Outsource?

In assessing these options to determine what works best, focus most on your capabilities and capacity to handle payroll effectively in-house. Truthfully consider the risks you assume relying on non-specialists to execute such a critical business function.

If willing to dedicate resources to payroll administration, ensure you first:

• Research specific federal, state, and local compliance regulations
• Determine all needed payroll capabilities (time tracking, tax calculations, reporting, etc.)
• Vet DIY software options matching required features and budget

Alternatively, outsourcing to a proven payroll provider generally makes most sense when:

• Managing 50+ employees across multiple regions
• Operating with tight staff capacity unable absorb payroll
• Lacking expertise across evolving compliance landscape
• Experiencing high growth or other HR functionality needs

For perspective, small business industry benchmarks show:

• 50% of companies with 1-20 employees use a CPA or payroll service provider.
• 75% of medium-sized businesses with 21-50 employees outsource payroll for guaranteed accuracy and efficiencies.
• When deciding between keeping payroll functions in-house or outsourcing, examine this decision matrix:

Factor	DIY Payroll	Outsourced Payroll
Cost	No provider fees, but requires software/tool investment	$2-$20 per month per employee fee
Accuracy & Compliance	Highly dependent on internal expertise and time commitment	Guaranteed by payroll provider
Time Commitment	1-2 days per pay period	<1 hour per pay period with provider managing
Control & Customization	Fully customizable aligned to compensation policies	Limited control and personalization
Data Security	Full control but still vulnerability to theft/hackers	Must rely on provider security assurances
Scalability	Challenging beyond 50+ employees	Most services easily scale over 1000+ employees

Addressing Common Concerns

When weighing these options, a few reservations give small business owners pause:

Cost – “I simply cannot afford $2,000+ per year for an outside payroll service.”

• Reality – Between software, your staff time investment, indirect costs of errors, and IRS penalties, DIY payroll costs likely exceed a basic provider service. Break even is typically 3-6 employees.

Security – “Payroll contains highly sensitive employee information.”

• Validity – Leading payroll systems enable encryption, access controls, activity tracking, data backups, and redundancy to ensure security and availability. Require providers detail their measures.

Inflexibility – “Outsourced services won’t support our unique incentives and payroll policies.”

• Configurability – Many payroll systems allow tailored earning/deduction codes, special inputs, and custom reports aligned to specialized compensation structures.

No option eliminates payroll complexities entirely. However outsourcing to a proven provider makes the process smoother and more reliable, especially as your small business scales.

Final Recommendations

Managing payroll keeps small business owners awake at night. Mistakes negatively impact employee sentiment, financial controls, and regulatory standing. Although no law requires outsourcing payroll, for most SMBs struggling with limited bandwidth, the DIY approach proves challenging.

Payroll services eliminate heavy transactional workloads so you can focus on big-picture functions that drive revenue and growth. The seemingly small 2-5% fees translate to 20+ hours regained monthly from your highest value managers. And guaranteeing payroll accuracy and compliance provides peace of mind.

Still assess your internal capabilities and determine if available resources justify keeping payroll functions in-house. But generally, letting a proven payroll provider manage this mission-critical facet pays clear dividends.