Benefits of outsourcing your payroll process

8 MIN READEditorial Policy

Key Takeaways

  • If you’re a small business, your HR team may be overextended and understaffed (if you have an HR team in the first place).

  • Outsourcing payroll can keep your HR team focused on core functions.

  • Payroll specialists are experts in the field—and that may be precisely who you need to guide your business.

For many businesses, the Human Resources (HR) department is a catch-all for its operational odds and ends. While larger businesses may have entire departments staffed by specialists, smaller businesses may get by with a small team (or even a team of one). And many times, these teams are overextended.

Regardless of where your business falls, payroll is among the most essential HR duties. It’s not unusual for growing companies to outsource HR processes to a third party until they build in-house resources. Outsourcing payroll is especially popular. One source reports that the market growth of payroll outsourcing services will likely increase by more than $7 million between 2023 and 2027. 

As the name suggests, payroll specialists are payroll experts, and that’s precisely what you may need to help guide your business. Factor in fines and other disruptive effects of payroll, tax, and compliance errors—and the choice to outsource payroll may become evident. Let’s review how outsourcing payroll can help both your HR team and your entire organization.

How does payroll outsourcing work?

There are more than 33 million small businesses in the United States, and ample options exist for those who engage in outsourcing operations to help lighten their workload. As often as they roll up their sleeves, SMB decision-makers engage in the strategic handing-off of transactions and undertakings.

Outsourcing payroll services streamlines, foolproofs, and structures important employee compensation data in a way that requires little time or attention from the company’s operations teams or leadership. Options abound for those who choose to outsource payroll—and the market is packed with vendors that offer features suitable for companies of all sizes, budgets, and individual needs:

  • A simple plan is often sufficient for those with basic needs or limited budgets. These essential payroll services generally focus on time tracking and wage information, calculating gross and net wages, executing payments, and preparing tax filings.

  • A partnership with a vendor who provides more extensive services may be preferable for those with more complex needs, like paying employees in multiple locations. These services can include features like regulatory compliance, global payroll, employee classification, enhanced data security, and retirement planning.

  • Payroll providers may offer customizable plans with unbundled features, while others may bundle features. Some are built to scale rapidly in time with team expansion, while others are intended for business with a slower growth trajectory.

Reasons to outsource your payroll

Payroll is among the most critical of HR duties. Below are a few reasons why some small businesses choose to outsource payroll. 

  • Save time: Time saved in daily upkeep can quickly be overshadowed by time lost handling a payroll error, which can eclipse time lost addressing a compliance issue. 

  • Minimize payroll errors: For companies specializing in payroll, reputation often depends on accuracy. For SMBs, the fallout from a simple payroll error can be immense. The most dangerous aspect of payroll errors is the potential fines. In 2021, the IRS collected more than $5 billion in penalties for employer payroll errors. 

  • Improve security: Unless you already use an internal payroll product or Human Resources Information System (HRIS), your payroll process may involve multiple data handoffs between internal departments or third-party vendors. Consider the sensitivity of the information and the number of steps required to establish payments for a new hire. Critical banking and tax information must be paired with personal details like compensation and marital status. Security may fail at these touchpoints, especially if there is a less-than-secure link between them.

  • Maintain compliance: Easy to overlook, but laden with hefty repercussions, compliance mistakes can be disruptive. Failure to comply with labor laws like the Fair Labor Standards Act (FLSA), Federal Insurance Contributions Act (FICA), Equal Pay Act (EPA), and Federal Unemployment Tax Act (FUTA) can result in fines and other penalties. 

  • Integrate data: Payroll is more complex than tracking time and writing checks. Third-party payroll systems integrate with your existing tech ecosystem and can connect employee data, even if not stored in a central location.

  • Facilitate employee self-service: Many outsourced payroll providers enable employees to access compensation information independently rather than tying up your already tied-up HR department.  

  • Reduce costs: Even a minor tax, compliance, or payroll error can be a big-ticket mistake for a small business. 

What is 401(k) and payroll integration?

Integrating your payroll with a 401(k) plan requires synchronized interactions between employee data streams. At its core, 401(k) plan administration involves eligible employees making deductions from their paychecks into their 401(k) plans. 

Some plans may also include an employer match or profit-sharing contribution. Employee contributions are deducted during each payroll cycle, and these funds and any employer match or profit-sharing contributions are added to their 401(k) accounts. 

Beyond processing contributions, however, each of these events must be executed:

  • Tracking employee eligibility

  • Enrolling and communicating with employees

  • Keeping records of employee and employer contributions

  • Calculating and depositing employee contributions

  • Reporting payroll data each pay period

In insolation, all of the elements are simple, but there are many moving parts. That’s why it’s easy to understand why so many small businesses choose to outsource their payroll. It’s a one-stop solution that can keep them on the safe side of “better safe than sorry.”

The benefits of integrating payroll and 401(k)

There are several advantages of integrating payroll and 401(k) plan administration. Technology can help eliminate administrative burdens and ensure employee contributions are accurately applied. Payroll integration can also help reconcile employee data. Syncing your census data helps ensure your plan is up-to-date and compliant. Finally, integrating payroll can help ensure deductions are automatically set up and updated when changes are made.

In summary, 401(k) payroll integration can help make it easier for businesses to:

  • Streamline employee onboarding

  • Process 401(k) contributions

  • Sync employee details

If you’re looking to outsource your payroll processes, consider a provider that integrates with a Human Interest 401(k). At Human Interest, we integrate with hundreds of leading payroll providers. Contact us today to learn how you can save time by integrating your 401(k) plan and your payroll process.

*Amy Johnson is an independent contractor commissioned by Human Interest to help contribute to this article.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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