The Cost of Payroll Outsourcing

Many businesses use outside payroll providers like ADP to avoid the hassle of handling payroll themselves. But what is the true cost of payroll outsourcing?

Today, 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 complications that arise from dealing with local taxes, overtime hours, and other variables. Even though these companies provide a valuable service, business owners should consider the true cost of payroll outsourcing before securing their services. Running a thorough cost/benefit analysis on payroll outsourcing can save you major headaches later, especially if the payroll service wants to lock you into a long term contract. To help you reach an informed conclusion, we’ve broken down the costs you’ll face below.

Payroll Outsourcing Cost Breakdown

You’ll quickly discover that many different costs come along with 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. Many payroll service companies offer multiple tiers of service, ranging from the most basic (simply calculating and depositing employees’ checks) to the most sophisticated (offering prepaid cards, managing state unemployment insurance, and handling wage garnishments). Here’s what you should pay attention to:

Basic Payroll Outsourcing Costs

The vast majority of outsourced payroll companies charge a basic package fee, ranging from $20 to $250 per month. The cost of outsourced payroll includes direct deposit, paycheck processing, standard tax filing, and an online portal accessible by both employers and employees. The costs associated with a basic payroll package take into account all of your company’s pertinent details, such as state of residence, the complexity of your jurisdiction’s payroll tax, pay period frequency, and employee quantity.

For example, a company of 25-35 employees that uses well-known payroll processing companies pay up to $1,500 a month for basic services. In many cases, larger companies will receive discounted package fees, bringing the per capita payroll cost down for large employers. For small businesses—like many field service companies—this cost can make a bigger difference.

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 (since you’d pay for a service that occurs 4+ times a month instead of just once). Of course, while reducing the frequency of payroll benefits the employer, changing pay frequency often negatively impacts employees. Many workers count on getting their paychecks on a predictable schedule. Ultimately, they’ll have to live with your decision if you change payroll frequency, but you should still carefully consider the fallout.

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 apply.

Payroll Tax Assistance

Although most basic packages cover tax assistance, many payroll 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 here, 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.

One-Time Fees

Even if you do payroll in-house, you must consider certain one-time fees. Some of the biggest payroll costs come from setting up a time tracking system to record employee hours, then implementing updates to that system as time goes on.

Additional Fees

If you’ve already decided to outsource payroll, you may have to budget for some additional fees that you won’t find included in the basic package cost. 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 choosing to outsource payroll.

Benefits of Outsourcing Payroll Processing

Sounds like a lot so far, right? Don’t worry, there’s good stuff, too! Although payroll outsourcing costs can quickly pile up, the time and stress you’ll save by outsourcing still counts 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. That should give you some peace of mind, so long as the company isn’t so big that you run the risk of becoming “just another account.” Seek out reviews from other clients to make sure that a payroll company consistently does good work. How easy of a time will you have reaching your account representative when you have an issue? Keep an eye out for newer payroll businesses that may not have quality systems in place to prevent errors.

After you’ve made the decision on whether or not to outsource, you should continually revisit the issue. The realities of your business will constantly shift. Have you grown? Downsized? Does it make more sense for your company to start/stop outsourcing now than when you first made the decision? Remember, 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. This could change the calculus considerably!

How to Save Money on Payroll Processing

Payroll outsourcing costs can add up, especially for tasks or services not covered by a provider’s basic package. However, you’ve got some tools at your disposal to decrease your payroll costs, such as streamlining business processes, using field service management software, and adjusting pay periods. We’ll take a look at these below.

Streamline Business Processes

When you bring your payroll processing in-house using business software for field service management, you want to make sure that the software you choose has as much functionality as possible. This makes your investment more worthwhile. If possible, streamline your payroll processing along with other internal processes. The QuickBooks-integrated software Smart Service, for example, can tackle scheduling, work orders, billing, and more. Many payroll companies only offer payroll services, making them inferior investments.

Direct Deposit

Using a professional accounting software can give you the ability to make direct deposits into your employees’ bank accounts. QuickBooks, for example, can facilitate direct deposits with just a small fee for each paycheck. Currently, their fee stands at $1.75 per paycheck. 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.

Payroll Periods

If you pay your employees on a weekly basis, consider changing your pay periods to biweekly. 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. As we mentioned previously, if your employees count on weekly paychecks, disrupting your current system can create some serious tension. If you make this switch, you should give your team plenty of advance warning so they can plan their finances accordingly.

Avoid Penalties

Payroll processing accuracy means avoiding 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 amounts to $845 per year. Making even small mistakes while calculating your company’s payroll can lead to penalties when tax time comes. No matter what type of payroll solution you use, always double check the numbers to ensure you won’t incur payroll penalties.

Consider Interns

For many companies, the opportunity to teach applicable industry skills to college students seems 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 while also getting work completed at a lower cost. If your business is located near a college, university, or trade school, a nearby internship coordinator will likely jump at the chance to put your company on their roster of potential internship providers.

Temporary Workers

For many tasks, temporary workers represent a great resource to tap into to reduce your payroll costs. You don’t have to calculate payroll for these workers. Instead, you simply receive a bill from the temp agency for their work. Because the staffing agency takes care of payroll for these employees, you can get more work done without agonizing over payroll considerations. However, you should bear in mind that staffing agencies often charge a markup above the normal market rate for labor. Also, you’ll want to screen these workers before allowing them to contribute to projects, as mistakes made by new, temporary workers reflect poorly on your business.

Final Thoughts

No matter what, you will have to pay fees associated with payroll, whether internally or externally. Still, you’ll want to perform 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 field service management software to help streamline the payroll process and bring your payroll costs down.