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What Are the Advantages of Outsourcing Payroll?


For small or medium-sized businesses, outsourcing payroll makes considerable sense-and lots of cents-in many circumstances. The decision could have extensive and long-lasting effects and should never be made lightly.

Decision Factors

When a decision of this magnitude-one that could affect finances, liability, and standing in the community-needs made, a business owner should give careful consideration to several factors including but not limited to:

Expertise. How much knowledge does the business owner have regarding payroll processing, taxes, withholding, tax payment forwarding, filing statuses, exemptions or allowable expenses?

Time. Does the business owner have the time on a regular basis to sort through, document, track, and process payroll, including issuing proper checks?

Audits. Conjunctive with expertise and time, does the business owners possess enough of either to defend payroll actions against IRS audits?

Cost. Can the business owner afford employee overhead for a payroll clerk, including training, wages, and benefits, as well as office space? What about possible IRS penalties if errors are made or payments are late?

Replacement. Can the business owner, through immediate hire or self-assumption of duties, replace a payroll employee if he or she leaves the company with or without notice? What about covering during illness or time off?

Technology Updates. With the US Tax Code changing often, does the business owner have the latest software that incorporates those changes?

Awareness. Is the business owner aware of local, state, or federal tax structure changes and how it affects payroll? Does the business owner have time to track them down and study them?

Expense Deduction. The business owner claims the outsourcing cost as a business expense and gains tax benefits.

Outsource Timing

Most business owners chose an effective date for outsource operations as January 1, enabling full tax benefits for the business. The contracted payroll organization takes over with a clean annual slate, reducing chances of miscalculations within assumed paperwork in the middle of the year.

The business owner transfers only the W-4 forms for employees and W-9 forms for independent contractors, wage information and hours, and employee identification data, and the payroll professionals assume the responsibility and headaches involved in payroll processing from that point on. The business owner is freed of the time, attention, and worry restraints and can concentrate on running and expanding products or services and the customer base and market share.



Department of the Treasury, Internal Revenue Service;

South-Western, Cengage Learning; “Payroll Accounting 2009,” ©2008 and 2009; by Bernard J. Bieg and Judith A. Toland.

Wiley Publishing, Inc., “Outsourcing for Dummies,” © 2008; by Ed Ashley.

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