September 30, 2022

Methods of Conducting Payroll: In-House vs Outsourcing

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Payroll is a set of processes that ensure an employee gets paid. Besides compensation, however, payroll involves tax and employment laws. For this reason, payroll is usually considered a core HR process. 

Payroll is arguably one of the most important functions of human resources. Employee livelihoods depend on it, and failing to pay employees properly and in a timely manner hurts the company’s reputation, damages employee trust, and can lead to litigation and fines.

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Who Is Responsible for Payroll?

Payroll processes don’t look the same across all companies. How payroll functions in any given organization depends on its size, location, and the composition of its workforce. For instance, companies with mostly freelance and contract workers will have different payroll processes and needs than an organization with mostly full-time, in-house employees.

A company may opt to do payroll in one of two ways:

  • In-house staff
  • Payroll as a service

Payroll and in-house staff

A company may opt to assign payroll to in-house staff, more specifically to accounting or HR. Each approach comes with its own benefits and drawbacks. 

Payroll as a function of accounting

Payroll understandably falls under the purview of accounting at some companies, since payroll pertains to the amount of money that a company pays to its employees. 

Accounting approaches payroll from a purely numbers perspective in balancing accounts receivable with accounts payable. It keeps detailed records of payments to employees and addresses any discrepancies or errors when accounting for money going out to employees.

Companies with a mostly contingent workforce — meaning contractors or freelancers — are likely to designate payroll as an accounting task, since the company does not have to account for tax, insurance, or other benefits-related deductions.

Pros

  • Accuracy
  • Cost control and close supervision

Cons

  • Potential for non-compliance with local, state, or federal tax and labor laws

Payroll as a function of HR

HR is responsible for payroll at some companies. Once an individual is vetted and hired, HR takes care of collecting necessary payroll documentation as part of the onboarding process. 

HR approaches payroll from a policy point of view. When an employee gets a raise or needs an extended unpaid leave, HR professionals are familiar with the external laws and internal corporate policies that regulate how and when an employee gets paid.

Organizations consisting mostly of full-time and part-time employees—who earn benefits and pay taxes on their wages—usually assign HR the responsibility of payroll. Also, companies with hourly workers should house payroll within HR, as hourly employees’ pay hinges on time tracking and scheduling, both of which fall under HR’s purview.

Pros

  • Compliance with local, state, and federal tax and labor laws
  • Pay that aligns with established internal policies

Cons

  • Less emphasis on accuracy
  • Room for error when payroll is just one of HR’s many functions

Considerations for in-house payroll

When keeping payroll in-house, consider cost and data access.

Cost of payroll software

Regardless of which department ultimately handles payroll, administering payroll in-house is the most expensive option. A company not only needs to pay its employees but also inevitably invest in software to help manage payroll processes. 

Due to their size and complexity, many medium and large businesses utilize an HRIS system that includes automated payroll tools. The good news is these software systems remedy the drawbacks related to accuracy and compliance.

BambooHR, GoCo, PeopleGuru, Namely, and Rippling are just a few examples of HRIS platforms that include payroll. 

Standalone payroll software tools are an alternative for companies that start out with accounting software but need to integrate it with payroll software. Tools specializing in payroll include but are not limited to:

Common data source through software

Payroll connects to accounting and HR, albeit in different ways. Regardless, the two departments will need to communicate with each other to ensure accuracy and efficiency. 

This means both departments need to be privy to the same data surrounding who is getting paid how much and when. Rippling, for example, unifies employee data across HR, accounting, and other departments that need access.

Pros of in-house payroll

  • Enhanced security and accuracy from software
  • More direct control
  • Efficiency between departments

Cons of in-house payroll

  • Cost
  • Software selection and implementation

Payroll services

Enterprise businesses are likely to have in-house staff that take care of payroll, but small businesses often lack the resources to dedicate full-time staff to the function of payroll. 

Small businesses therefore often turn to standalone tools like the ones mentioned above or to payroll services offered by a third party. 

However, large organizations operating in multiple locations and with different currencies may also opt for payroll services for complicated payroll needs.

Pros of payroll services:

  • Potential cost-effectiveness
  • Compliance
  • Expertise
  • Convenience

Cons of payroll services:

  • Potential incompatibility with time tracking and scheduling software
  • Potentially necessary manual entry of employee hours worked
  • Security concerns about sensitive employee data, such as social security numbers and banking info
  • Less direct control

Multiple Paths to the Same Destination: Payroll Accuracy

Accuracy is key with regards to payroll because employees’ livelihoods and a company’s reputation depend on it. Accounting and HR both have integral roles to play in ensuring payroll accuracy, even if they approach payroll differently. 

Companies may choose to outsource the payroll function entirely. Otherwise, using payroll software — especially a solution embedded in a broader HRIS — is a must for in-house payroll administration to ensure accuracy and compliance.

Read next: Best HR Software for Small Businesses

Top Human Resources Software Recommendations

1 JazzHR

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See why over 8,500 small and growing businesses trust JazzHR to find their next great hire. Try JazzHR commitment-free for 21 days (no credit card required!) and instantly access crowd favorite tools like one-click job posting to dozens of free and premium job boards, pre-screening questions with auto-reject features, integrations with all of the HR tools you need like Zoom video interviewing, and much more. Post your first job for free today.

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2 Rippling

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Rippling is the first way for businesses to manage all of their HR, IT, and Finance — payroll, benefits, computers, apps, corporate cards, expenses, and more — in one unified workforce platform. By connecting every business system to one source of truth for employee data, businesses can automate all of the manual work they normally need to do to make employee changes.

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3 Paycor

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Processing routine HR tasks by hand and entering data in multiple systems can be time consuming and risky. That’s why leaders depend on Paycor for a modern, adaptable, and unified system for all things HR. From engaging employee self-service, mobile push notifications and company updates to unlimited workflows, reminders, and notifications, Paycor‘s HR software helps you get out of the weeds so you can focus on bigger priorities like attracting, retaining and developing employees.

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