Payroll can seem simple when your business has only one or two employees. Calculate wages, withhold taxes, pay your employees, and you’re finished—right?

Not quite.

As your business grows, payroll can quickly become one of the most time-consuming and detail-sensitive parts of running a company. Employers may need to calculate wages, track hours, manage deductions, withhold and deposit payroll taxes, file employment tax returns, prepare Forms W-2, maintain records, and stay on top of federal, state, and local requirements.

At some point, many business owners start asking an important question:

Should we continue handling payroll ourselves, or is it time to outsource it?

Here are some signs that outsourcing payroll may make sense for your business.

What Does It Mean to Outsource Payroll?

Outsourcing payroll means hiring an outside payroll provider or professional to handle some or many of your company’s payroll responsibilities.

Depending on the services provided, outsourced payroll support may include:

• Calculating employee wages
• Processing payroll
• Calculating applicable tax withholding
• Tracking payroll deductions
• Handling direct deposit
• Preparing payroll reports
• Assisting with payroll tax deposits and filings
• Preparing Forms W-2 and other year-end payroll documents
• Maintaining payroll records

The exact services vary by provider, so businesses should clearly understand which responsibilities are included.

1. Payroll Is Taking Too Much of Your Time

One of the first signs that it may be time to outsource payroll is simple: you’re spending too much time on it.

Payroll doesn’t just happen on payday.

Business owners may spend time:

• Reviewing employee hours
• Correcting timekeeping mistakes
• Calculating overtime
• Adding bonuses or commissions
• Processing deductions
• Reviewing payroll reports
• Making payroll tax deposits
• Preparing tax filings
• Responding to employee payroll questions

If payroll is consuming hours that could be spent serving customers, managing employees, generating sales, or growing the company, outsourcing may be worth considering.

2. You’re Hiring More Employees

Payroll complexity often increases as your workforce grows.

Processing payroll for two employees can be very different from processing payroll for 10, 25, or 50 employees.

More employees can mean more:

• Timecards
• Pay rates
• Overtime calculations
• Bonuses
• Commissions
• Benefits
• Deductions
• Payroll questions
• New-hire and termination activity

Growth is exciting, but your payroll process needs to grow with your business.

3. Payroll Mistakes Are Becoming More Common

Employees expect to be paid accurately and on time.

A payroll mistake can create frustration quickly.

Common payroll problems can include:

• Incorrect employee hours
• Wrong pay rates
• Missed overtime
• Incorrect deductions
• Late payments
• Incorrect tax withholding
• Missed payroll tax deposits
• Late or inaccurate payroll filings

If you’re regularly correcting payroll after it has already been processed, it may be a sign that your current system isn’t keeping up with the needs of your business.

4. You’re Worried About Payroll Taxes

Payroll isn’t only about paying employees.

Employers generally have federal employment tax responsibilities that can include withholding federal income tax and the employee portion of Social Security and Medicare taxes, paying applicable employer employment taxes, making tax deposits, and filing employment tax returns.

Depending on the business, state and local payroll requirements may also apply.

Missing payroll tax deposits or filing requirements can potentially result in penalties and interest.

If payroll tax compliance is becoming difficult to manage, professional payroll support can help create a more organized process.

5. You’re Unsure About Payroll Deadlines

Payroll involves multiple deadlines throughout the year.

Depending on your circumstances, employers may need to manage:

• Employee paydays
• Federal payroll tax deposit deadlines
• Form 941 or other employment tax return deadlines
• Federal unemployment tax requirements
• State payroll filings
• Year-end Forms W-2 and W-3
• Other applicable reporting requirements

Trying to remember every deadline while running a business can become difficult.

An organized payroll process can help reduce the risk of important deadlines being overlooked.

6. Your Business Has Employees in Multiple States

Remote work has allowed businesses to hire employees in locations far beyond their main office.

But having employees working in different states can create additional payroll complexity.

Depending on the circumstances, your business may have to consider:

• State income tax withholding
• State unemployment taxes
• Local payroll taxes
• Registration requirements
• Different wage and hour rules
• State-specific reporting

If your workforce has expanded into multiple states, outsourcing payroll may help you manage the additional administrative burden.

7. You’re Struggling With Employee vs. Independent Contractor Classification

Paying someone as an independent contractor instead of an employee isn’t simply a matter of preference.

Worker classification depends on the facts and circumstances of the working relationship and applicable federal and state rules.

Misclassifying workers can potentially create issues involving employment taxes, wage requirements, benefits, penalties, and other obligations.

A payroll provider shouldn’t replace appropriate tax or legal advice regarding classification, but having knowledgeable professionals involved in your payroll process can help identify situations that may need additional review.

8. Payroll Is Becoming More Complicated

Even with a relatively small workforce, payroll can become complicated.

Your company may have:

• Hourly employees
• Salaried employees
• Overtime
• Bonuses
• Commissions
• Paid time off
• Retirement contributions
• Health insurance deductions
• Garnishments
• Multiple pay rates

The more variables involved, the more important it becomes to have a consistent and accurate payroll system.

9. You’re Preparing to Hire Your First Employee

You don’t necessarily have to wait until payroll becomes overwhelming before outsourcing it.

Hiring your first employee can actually be a good time to establish a professional payroll process.

New employers may need to address matters such as:

• Employer registrations
• Employee tax forms
• Payroll tax withholding
• Employment tax deposits
• Payroll reporting
• Unemployment taxes
• Workers’ compensation requirements
• State new-hire reporting

Starting with an organized payroll system can be much easier than trying to repair a disorganized one later.

10. You Want More Time to Run Your Business

There’s an opportunity cost to doing everything yourself.

Suppose you spend five hours every pay period reviewing hours, processing payroll, fixing problems, preparing reports, and managing payroll taxes.

Ask yourself:

Is payroll the best use of those five hours?

Your time may be more valuable when it’s spent:

• Meeting with customers
• Generating revenue
• Managing your team
• Improving operations
• Developing new products or services
• Planning for growth

Outsourcing doesn’t mean you’re giving up control of your business. It can mean delegating a specialized administrative responsibility so you can focus on the areas where you’re most valuable.

What Are the Benefits of Outsourcing Payroll?

Depending on the provider and your business’s needs, outsourcing payroll can potentially provide several advantages.

More Time

You can spend less time processing payroll and more time operating your business.

Consistent Payroll Processing

A defined payroll system can help ensure payroll is processed consistently each pay period.

Better Recordkeeping

Organized payroll reports can make bookkeeping, tax preparation, and financial reporting easier.

Support With Payroll Tax Administration

A payroll provider may assist with applicable payroll tax calculations, deposits, and filings, depending on the services you’ve selected.

Easier Business Growth

A scalable payroll process can make adding employees easier as your company expands.

Does Outsourcing Payroll Remove the Employer’s Responsibility?

No—and this is extremely important.

Hiring a payroll provider doesn’t automatically eliminate an employer’s federal tax responsibilities.

The IRS warns employers that they generally remain responsible for ensuring federal tax returns are filed and federal tax deposits and payments are made, even when they outsource payroll duties to a third party.

Business owners should therefore monitor their payroll activity and use a reputable provider.

Employers should also maintain access to important payroll records and review payroll reports regularly rather than completely disconnecting from the process.

Questions to Ask Before Choosing a Payroll Provider

Before outsourcing payroll, consider asking:

• What payroll services are included?
• Who handles payroll tax deposits and filings?
• Which federal, state, and local filings are covered?
• How are payroll corrections handled?
• How are Forms W-2 prepared and distributed?
• How will payroll integrate with my bookkeeping?
• What reports will I receive?
• How is sensitive employee information protected?
• Who do I contact when I have a payroll question?
• What happens if a filing or payment problem occurs?

The cheapest payroll option isn’t necessarily the best option. Consider the service, support, accuracy, security, and responsibilities included.

Payroll and Bookkeeping Should Work Together

Payroll affects more than employee paychecks.

It also affects your company’s:

• Profit & Loss Statement
• Balance Sheet
• Cash flow
• Payroll tax liabilities
• Labor costs
• Tax preparation

When payroll and bookkeeping aren’t properly coordinated, financial reports can become inaccurate.

For example, payroll expenses, employer taxes, employee withholding, and payroll liabilities need to be recorded correctly in the company’s books.

Having payroll and bookkeeping working together can give business owners a much clearer picture of their true labor costs and financial performance.

So, When Should You Outsource Payroll?

There isn’t a specific number of employees or amount of revenue that automatically means you need to outsource payroll.

Instead, consider whether payroll has become more complicated, time-consuming, or risky than you’re comfortable managing internally.

It may be time to consider outsourcing if:

• Payroll is consuming too much of your time
• Your workforce is growing
• Payroll mistakes are occurring
• You’re concerned about payroll tax compliance
• You have employees in multiple states
• Your compensation structure is becoming more complicated
• You want payroll integrated with your bookkeeping
• You simply want more time to focus on your business

Make Payroll Easier With PFGTAX

Payroll is too important to become an afterthought.

PFGTAX provides payroll services designed to help small businesses simplify payroll processing, maintain organized payroll records, and better coordinate payroll with their bookkeeping and tax needs.

Instead of spending valuable time calculating payroll and worrying about administrative deadlines, you can focus more of your attention on running and growing your business.

Wondering whether it’s time to outsource your payroll? Contact PFGTAX to learn more about our payroll services and determine what may work for your business.

This article is intended for general educational purposes and isn’t individualized tax, payroll, accounting, financial, HR, or legal advice. Payroll requirements vary based on the employer, employees, jurisdictions, and other circumstances. Employers generally remain responsible for their federal employment tax obligations even when payroll duties are outsourced.