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Thursday 10 Feb 2022

In-House Payroll Vs Outsourcing: Which Is Better For Your Business?

As a business owner, one of your responsibilities is managing your internal team. After all, your employees are the people who keep your business in motion. Ensuring they get paid on time and accurately should be one of your top priorities.

When managing your payroll, you have two options: an in-house payroll department or outsourcing your payroll to a third party. But the question remains – which is better for your business?

The professionals at MenaITech have put together this comprehensive guide to help you determine which option is better for your business.


What is in-house payroll?

An in-house payroll department manages all of your organizational payroll activities. They are the employees who process payroll and often manage employee benefits (such as overtime and paid vacation). Whether distributing paychecks or setting up direct deposits, payroll processing is typically handled by your internal financial or human resource department.


How does in-house payroll work?

At its core, in-house payroll is the collaboration between your payroll processing team, your employees, and the tools you use to complete your payroll activities (such as direct deposit). Typically an in-house payroll department completes the following tasks:

  • Establish a payroll bank account to pay all of your employees.
  • Create and implement a system for your employees to track their hours (salaried employees are paid a standard rate for each pay period).
  • Create a payroll schedule; every week, two weeks or every month.
  • Collect and approve timekeeping data for each employee during the pay period to determine gross pay.
  • Manage deductions for each employee, such as retirement contributions, healthcare deductions, social security, tax deductions, and payroll taxes.
  • Track and manage overtime, sick leave, and vacation pay.


Advantages and disadvantages of in-house payroll.

As you contemplate which system to use for your payroll, it’s essential to understand the advantages and disadvantages of each option. Depending on the size and nature of your business, keeping your payroll in-house can offer several benefits for your company.


Advantages of in-house payroll

By keeping your payroll in-house you can maintain 100% control over your payroll processes.  However, this requires a dedicated team of professionals who understands the many aspects of payroll, including tax codes, payroll taxes, and other areas of compliance. Hiring and paying employees is a large cost of conducting business. And while some may argue that hiring experts to run your in-house payroll department can prove costly, there are many cost-effective innovative technologies which empower small businesses to run every aspect of their payroll with an inhouse team.

Anyone who’s managed payroll knows all too well that changes to payroll in the 11th hour are a matter of “when” not “if.” Maintaining in-house payroll also allows you more flexibility for last minute change while ensuring payments are on time and accurate. Not to mention bonuses and changes in salary or deductions can be made quickly and accurately, even when they are last minute changes to routine payroll.


Disadvantages of in-house payroll

In-house payroll requires a team of dedicated professionals to run payroll activities. Not every company wants to dedicate the manpower or resources to running an in-house payroll department. Not to mention, adding and maintaining an internal payroll department is a time-consuming task, even if you aren’t managing it directly. Even when you hire a fulltime in house payroll specialist, you will need to oversee their actions. Depending on your needs, these employees/resources might be better served elsewhere in your organization.

Additionally, an in-house payroll department manages a great deal of data, such as employee data, birthdates, bank accounts, and other sensitive information. Therefore, accuracy and compliance are extremely important. Employing an individual who lacks experience with compliance rules and payroll tax requirements can ruin your employee relations and finances.


What is outsourcing payroll?

Outsourcing payroll involves partnering with a third-party to manage all of your payroll responsibilities. This involves researching reputable and experienced payroll software providers to ensure you are working with a company that can provide the highest caliber in payroll services.


How does outsourcing payroll work?

Outsourcing your payroll will range depending on the size and needs of your business. However, most solutions follow the below general guidelines:

  • Your company will partner with a payroll service provider.
  • Follow the instructions provided by your payroll provider to gain access to their services.
  • Your provider will manage and process employee data, timesheets, payroll taxes, deductions (i.e., retirement or healthcare), and much more.
  • Your external payroll provider will designate a team to approve all payroll activities and authorize payroll processing.


Advantages of outsourcing payroll

As mentioned above, managing payroll can be time-consuming and outsourcing payroll allows your employees to focus their attention on other important business matters, such as strengthening competitive advantages and driving growth. Depending on the size of your company and your specific needs, payroll technology can prove costly to implement and update. Outsourcing payroll allows your company to access the newest payroll solutions for a fraction of the cost. Additionally, payroll professionals dedicate 100% of their time to learning the intricacies of payroll activities. When you partner with professionals who focus solely on payroll, you’ll reduce the chances of mistakes and costly penalties. Not to mention, payroll providers are dedicated to understanding the legislation and tax codes. This ensures your company is up to date on any changes in compliance.

Depending on the size and scope of your payroll activities, calculating payroll can be costly for small businesses. Outsourcing payroll can save your company the costs associated with managing your payroll internally, such as managing benefits, distributing paychecks, and preparing payroll taxes.


Disadvantages of payroll outsourcing

Like with any outsourcing, when you outsource any organizational operations you lose some control over your payroll operations. Some may worry about security and confidentiality threats pertaining to outsourcing payroll, particularly when it comes to having their data pass through a third-party system. Ultimately, when you outsource payroll, you still retain complete oversight for all payroll activities. Reputable payroll companies have various security measures in place to keep your data safe and secure.

Choosing a payroll provider

Before you determine whether or not to switch from an in-house team to an outsourced payroll provider, you need to consider what will work best for your business. As you make your decision, consider the following:

  • The size of your business, as well as any mitigating factors that may complicate your payroll processing.
  • Your budget and the potential cost savings for each option.
  • Compliance and security policies to keep your payroll and employee data secure.
  • Your internal payroll activities accuracy (if applicable).
  • The time and resources you currently allocate to your payroll processing.



At MenaITech, we offer our clients complete end-to-end human capital information technology solutions and services, including payroll and personnel management, HR dashboards, data and analytics, time and attendance, and many other services through web-based, mobile, and cloud technology. 

Our latest innovative payroll solution, Freemium is a free-of-charge payroll and personnel system with all the features any startup and small enterprise needs. With the ability to add up to 10 employees to your account, this innovative system allows your business to securely store data, accurately calculate salaries, manage transactions such as overtime, leaves, and vacation requests, and much more! Additionally, your human capital management can be fully outsourced by our subsidiary SourceitHR. Regardless of the size of your business. We’ve got you covered.


Contact a member of our team to learn more.