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[Part 2 of 2]

The Differences between In-House Payroll vs Outsourced Payroll

Welcome to Part 2 of Sparkrock’s three-part series on In-House vs Outsourced Payroll. If you haven’t done so already, please feel free to read Part 1 to get a basic understanding of the difference between the two methods of payroll.

Today’s blog analyzes the difference between In-House vs Outsourced Payroll in greater detail, and how each method handles the following payroll areas:

  • New Employees
  • Paying Employees
  • Payroll Funding
  • Remittance
  • Recording to Your GL
  • Analyzing the Data

New Employees

The payroll cycle begins after an employee is hired. A new hire involves a great deal of paperwork to sign and data to manage – the employee fills out a number of tax and benefit forms; and HR sets up a new record, reviews documentation, get approvals, completes more forms, and then inputs all of this information into the payroll system. Fortunately, both outsourced and in-house solutions can be set up to allow an employee to enter much of their information through self-service access.

This entire process involves work by the new employee and the HR staff, and the amount of effort required is the same if the payroll system resides inside the company or with a third-party provider. While the effort is equal, you can expect to pay additional charges if you opt for an outsourced provider.

Paying Employees – Hourly vs Salary vs Piece-Rate

There are 3 ways to pay employees: by the hour, on salary, or on piece-rate.

Managing time for hourly employees can be a lengthy, error-filled process. Fortunately, you can use automated time-keeping tools by both in-house and outsourced applications. The more complex your payroll requirements are, the more you will want to integrate your time-keeping and payroll systems. With proper integration, both outsourced and in-house applications reduce the burden of paying your hourly employees correctly.

Paying salaried employees is usually less time-consuming since salaried employees generally have fewer changes to their pay. Salaried payroll should be exception-based so that entries are only required for special occasions such as paid time off. Furthermore, most payroll solutions allow you to enter changes that take effect on a future date if they have an “effective date” feature

For piece-rate workers, you need to capture and record per-piece data and enter it in your payroll system. Whether you pull data through an automated feed or re-enter it in your payroll system, you need to know if your solution is equipped to manage this form of payment, and if so, what additional charges are involved for integration.

Regardless of payment method, payroll processing requires time and attention from your HR or Payroll team. While minor adjustments can be made by an employee through self-service, changes to hours worked or salaries must be managed by authorized staff. These changes must be updated on the payroll solution so that payroll can be processed properly.

Both outsourced and in-house solutions require equal amounts of time and effort to ensure that employees are paid accurately.

Payroll Funding

Both in-house and outsourced solutions help you determine the required funding amount and reduce the burden of sending the correct amounts to the proper authorities. The more options you offer for employee benefits, garnishments, bank account types, etc, the more complex the funding process will be. However, when you use an outsourced provider, these additional options can incur greater charges.

The type of payroll option you choose has a direct impact on your cash flow. For most outsourced solutions, you are required to calculate and fund the full gross payroll before the pay date. For in-house solutions, you can generally transfer funds for the net pay amount on the pay date and then make additional transfers to cover tax and benefit payments when due.

Finally, outsourced solutions generally involve a single-funds transfer while in-house solutions support multiple transfers of funds, but only when payments are due.

Remittance

Withheld amounts must be sent to proper authorities after employees are paid. Outsourced providers normally manage remittances to federal and state (or provincial) authorities, but they may not automatically make payments to your benefit providers, credit unions, or specific vendors. Many in-house solutions automatically create payroll-related remittances for use in making payments from your AP system. You will then need to produce checks and send payments.

Both in-house and outsourced solutions help you capture amounts withheld and payable. Outsourced providers can also manage your remittance directly, thus reducing the effort needed to generate checks. Conversely, in-house solutions generally require additional steps to print and send checks to payees.

Recording to Your GL

Labor charges typically represent a large chunk of operating costs. The next step is to migrate those costs from your payroll system into your GL so they can be tracked on your financial statements.

Most outsourced solutions offer limited integration capabilities or provide you with a printed list of transactions by GL account number. Your team must then make manual journal entries to update your system. There are normally limits on the level of detail provided and on the number of departments supported.

An in-house solution will simplify the process of getting transactions from payroll to your GL. Transactions automatically flow to your GL, and you have control over all details, the ability to create as many cost categories as needed, and receive timely updates.

Analyzing the Data

After paying your employees, you can capture information that helps you manage your business. You might need to analyze your labor costs, compare costs by week or charges by employee, watch your benefit costs, or monitor worker’s compensation insurance. Regardless, having full access to your payroll details with an in-house solution can make the difference between being in control of your labor costs and having a bottom line that is out of control. With an outsourced provider, the information obtained is less detailed and receiving this data can involve additional charges and more hassle.

Conclusion

Continue Reading: The Benefits of Inhouse vs Outsourced Payroll Part 1

If your organization is curious about how an in-house payroll solution can make your payroll process easier, visit our Payroll page to see more details about our solution’s functionality, or contact us to learn more.

What’s your opinion on in-house vs outsourced payroll? Follow us on social media to join the conversation: Facebook | Twitter | LinkedIn

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