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When should you outsource your payroll and what are the benefits of doing so?

March 23, 2016

One of the first things new business owners often say to me is how bewildering it can be getting their heads around all the different aspects of running a business.

From marketing and IT to tax and finance, it’s a case of having to quickly get up to speed on a huge range of things. For many small businesses the only way to make sure that everything gets done right is to outsource some of the tasks.

The type of functions that are frequently outsourced by small businesses are ones that either don’t add any value, or require specialist skills and knowledge that are not viable to employ someone to conduct in-house.

The administration of the company’s payroll is one such function. With a variety of outsourcing options available, from large established payroll providers to smaller competitors, outsourcing your payroll can offer a number of short-term and long-term benefits.

In this article, we look at some of the benefits of outsourcing your business’s payroll function and when is the best time to take the plunge.

1. Cost savings

When considering reasons for outsourcing any business activity, cost-cutting is often what comes to mind first. The immediate savings could be greater for startups that haven’t already purchased payroll software or trained and recruited staff with the necessary skills.

There are still significant savings to be made over the long term for companies who have invested to a degree in in-house payroll functionality though. When the ongoing costs of good payroll software, the time required for processing wages and managing paperwork and tax liabilities are considered, however, it becomes clear that most SMEs will be able to save by outsourcing.

Ultimately, the extent to which payroll outsourcing will cut your costs depends on how efficiently you have been administering payroll in-house. In the longer term though, outsourcing removes the variable costs associated with staff recruitment and training, as well as updating your own payroll software to meet compliance changes.

2. Saving time and resources

Cutting costs may be a primary factor for outsourcing payroll administration, but many businesses also benefit from the freeing up of time and resources.

A recent US survey found that among those small businesses it surveyed who handle payroll taxes internally, 27% report spending more than 6 hours per month and 10% report spending more than 10 hours per month on payroll.

As well as the potential costs of software, business owners also have to consider the staff time being spent on payroll administration.

Due to the nature of small businesses, senior staff need to be particularly efficient with how they are spending their time, especially if the business is growing rapidly. Outsourcing allows SMEs to refocus the attention of key individuals onto more strategic areas of the business that directly affect profitability, such as performance, client retention and expansion.

3. Compliance and accuracy

Payroll errors are a surprisingly common occurrence. Even a well-trained and competent employee will inevitably make mistakes due to human error. These mistakes then have to be rectified, using more resources.

It can also be difficult to find experienced payroll administrators – the role requires a lot more than writing pay slips, and requires a thorough knowledge of tax regulations, due-dates and changes in HMRC legislation.

Indeed, with a constant stream of new legislation, keeping abreast of changing requirements can be extremely taxing.

As an example, Real Time Information for PAYE, introduced in April 2013, obligates employers to send a Full Payment Submission to HMRC before every payday alongside a monthly Employer Payment Summary. If your business runs weekly and monthly payrolls you must make 76 online declarations to HMRC every tax year, and if you get things wrong you could face fines for non-compliance.

Outsourcing to highly qualified and experienced experts not only minimises the time spent dealing with errors, it means that if there are any accounting errors, business owners can usually seek compensation for any fines incurred.

4. Flexibility and efficiency

Payroll isn’t directly value-producing, but it is a fundamental aspect of business operation. Unpaid employees are not going to remain employees for very long, and regular incorrect payments have a profoundly negative effect on staff motivation and morale.

In SMEs particularly, it is likely that a single member of staff will be responsible for payroll, creating an additional vulnerability if that employee takes leave or is off sick. Outsourcing to a trusted provider allows owners to effectively wash their hands of these worries.

Additionally, certain payroll providers can offer information management and reporting services, allowing for unforeseen potential efficiency increases that come from more accurate management information.

5. Employee benefits

Some payroll service providers offer benefits to employees that small businesses may not have access to under their own in-house system or that they’re just unable to provide due to a lack of any economy of scale.

These benefits include employee retirement plans and tax assistance to help them understand the finer points behind their income and taxes, including breakdowns of wages.

Even if employees don’t take advantage of such offers, the fact that your business is offering them will help create a positive image of you as an employer, whilst helping increase staff retention and morale.

To outsource or not to outsource

The benefits for SMEs of outsourcing payroll go far beyond simply reducing expenditure. A fully outsourced payroll will allow you to free up valuable resources that can be redirected elsewhere as well as reduce the risk of fines from HMRC for non-compliance with tax laws.

Perhaps the most powerful benefit is the flexibility an outsourced payroll gives your business to rapidly grow and expand its workforce, without the worry of recruiting, training and retaining in-house payroll staff and rolling out new systems.

So if you’re a startup or a young business looking to grow, then it may be time you explored the option of outsourcing your payroll.

About the author

Nick Brown is a partner and Head of Charity Audits at Brighton Accountants Plummer Parsons. He has been a chartered accountant since 1983 and, as well as being a member of the Information Technology Faculty of the Institute of Chartered Accountants, he is also an expert on the charity and not for profit sector, holding a diploma in Charity Accounting.

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