In-House Payroll Software or Outsource?

PayrollThere are many considerations in deciding whether to process payroll in-house or outsource it to a service or PEO company.  Staffing resources, organization size, and the complexity of the payroll all have an impact.  In addition, there are clearly cost-benefit considerations.

Staffing Resources

Insuring payroll is calculated correctly, that withholdings are properly calculated and handled, and that taxes are accurately calculated and submitted require special skill sets.  In addition, the constantly changing environment of HR benefits and taxes require close monitoring and timely response.  Do you have the internal capability to manage that task? 

Keep in mind that even if you are using a payroll service your HR and finance staff are ultimately responsible for providing timely and accurate information to the payroll provider, especially as it relates to employee wages and benefits.  You are relying heavily on their professionalism already, and in most cases any penalties and fines, as well as additional taxes caused by incorrect information provided to the service, are your responsibility.  Usually the service’s responsibility is limited to their maintaining of the correct tax rates and timely and proper report filing.  Your assessment of your staff’s skills, and their ability to perform the payroll given their workload, should give you an initial measure of the feasibility of processing payroll in-house.

Organization Size

The number of employees is another consideration.  There are economies of scale in payroll processing, both from the providers and the employer’s standpoint.  The greater the number of employees, the more fixed costs (set-up and maintenance) that are spread over the total number of transactions, reducing per transaction cost.  Therefore, an employer with 5,000 employees would expect to pay less on a per check cost than an employer with 500 employees.  But the cost of internally running payroll is likewise reduced, with proportionally less additional staff required internally to support marginal increases in transaction levels.  Traditionally more employers with 500 employees outsource, and those with more than 5,000 provide payroll in-house.


Complexity in the payroll and benefit transactions is often the determining factor.  When shift-differential, specific time keeping for job costing, or other cost allocation measures are required, it is often most efficient to handle the payroll in-house.  If expense calculations generated by the service need to be reworked in order to provide the ultimate account entry, it may make sense to acquire an application that provides that functionality and perform it in-house.  In addition, if “after the fact” cost allocations are required, that too, may lead one to look at the increased flexibility an in-house system provides.

Increases in payroll software functionality (such as integration with HR functions), and competitive pricing from software vendors, has made in-house a more feasible option for even the smaller employers.  In turn, the services have been reducing their pricing and thus continue to make the decision difficult.  Just as with other areas of the overall ERP solution, when evaluating payroll solutions careful consideration should be given to your needs versus what the solution can provide, be it in-house or outsourced.

To see what is available from many of today’s ERP systems visit our accounting resource library or utilize our Software Selection Tool.  That will give you a good start in refining your search, and make sure the decision you make is the best one for you and your organization.