Should your small business outsource payroll?

two hands in a handshake over a document

If you don’t have reliable payroll, you don’t have a team. No amount of vision or commitment on the part of leadership can make up for late or incorrect payments made to employees. Make the same mistake with contractors, and word will eventually get out that your business is an unreliable client.

Your payroll process should be one of your first priorities, even before you hire your first worker. As you scale, you must ensure that your payroll solutions not only keep up with your business but allow you to anticipate future needs. 

Managing payroll well can be challenging, though, even for experienced professionals. Add in remote work and a global team, and payroll evolves from hard to nightmarish. How do you know when to invest more resources into in-house payroll and when to go with outsourced payroll instead?

Each choice has its advantages. Consider your situation carefully before making a commitment to one over the other.

What to keep in mind for in-house payroll

With outsourced payroll, you pay a fee to a third-party provider who then handles some of your HR duties. If you decide to keep your payroll operations in house, you save some money, but you also become responsible for the upkeep of the process.

Payroll processes are not limited to payments made. You must also treat each employee’s tax status appropriately, handle garnishments if authorities demand them, keep up with legal documentation, and maintain the security of your workers’ sensitive information. Founders with extensive leadership experience or HR backgrounds may feel confident enough to handle that on their own, but most small business leaders either bring in an HR pro or outsource.

What to keep in mind for outsourced payroll

Outsourced payroll costs more than the in-house alternative, but the advantages often outweigh the drawbacks for smaller businesses. Your outsourced payroll provider can guarantee compliance with local laws and ensure that your employees’ payments always go through on time and in full.

Adding a payroll partner means releasing your employees’ data to a third party, so evaluate potential partners carefully before signing up. If you aren’t sure whether your internal controls are sufficient, outsourced payroll can provide additional security for your team. You may also want to speak with support staff before you sign up to see what kind of customer service you and your workers will receive. 

Common payroll situations and the best option for each

Only you know your specific situation, so only you can say whether in-house or outsourced payroll is the right option for your business. To get started, think about whether you fall into any of these common categories.

Paying your own full-time local team members

This is perhaps the simplest situation and one of the most common for businesses with only a few employees. If you have a small team made up of nothing but your own full-time employees, you may not need much help to process payroll. As long as you feel confident that you have filed your paperwork correctly and you know how to withhold and submit payroll taxes, in-house payroll will probably work for you.

Paying your full-time team members and a few contractors

Things get a little trickier when contractors enter the picture. Legally, you must exercise caution to ensure you do not accidentally put restrictions on your contractors that would cause them to meet the definition of an employee. Setting specific work hours, for example, may entitle contractors to certain protections. As long as you understand how to manage contractors, you can still keep payroll in house. Just make sure you pay those invoices on time.

Managing a large network of contract workers

While it’s true that most large companies keep their payroll in house, small businesses with lots of contractor partnerships are a special case. Contractor invoices can get complicated quickly, making it difficult to keep track of how much you owe to whom. When payroll changes dramatically from one month to the next, which is a guarantee with contractors, an outsourced payroll service may be the wiser choice. 

Hiring international workers as full-time employees

To hire workers in another country as full-time employees, not only do you need an outsourced payroll provider, but you also need an employer of record, or EOR. A business cannot legally hire an employee in another country unless that business owns and operates a local legal entity in the country where the employee lives. An EOR that specializes in small business services (like Remote) can help you employ and pay international workers in full compliance with local labor laws.

Hiring international workers as contractors

Sometimes, small businesses choose to hire international workers as contractors to avoid the headaches that come with formal international employment. That strategy comes with its own dangers of misclassification, though. If you hire one or two international contractors, you may be able to get away with keeping payroll in house if your contractors bill you on a third-party platform, like PayPal. Without an outsourced payroll provider, though, you must remain vigilant to avoid unintentionally breaking labor laws where your contractors live.

Outsourcing payroll comes with a number of questions, so don’t take the decision lightly. Think about your own capabilities as you look at provider options. What kind of benefits can you offer on your own? Could outsourced payroll allow you to expand the support you offer your team?

Whichever path you choose, keep the needs of your workers top of mind.

Build your team,
anywhere in the world.