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Payroll – to outsource or not

Provided by Business Partners Ltd, South Africa's leading investor in SMEs


Many small businesses do not have a dedicated Human Resource manager or an in-house accountant. This, and the administrative headache that goes with the payroll process, makes it a business function that is most often outsourced. There is, however, some 'homework' you need to do before you outsource your payroll.

Payroll processing can be a complicated process, even in a small business with a minimal number of employees. With a large number of service providers targeting SMEs, outsourcing your payroll may be the best option, depending on your budget and the type of business you are running.

The benefits of outsourcing

The most obvious factor to consider is the financial cost of doing your own payroll vs. hiring a service. Calculate how much money you would spend to do the payroll in-house. Include training costs (of the person doing it), man-hours, printing pay-slips, documents needed for tax compliance and so on. Compare this with prices quoted by potential service providers.

But, it's not just about the money.

  • Resources: Would you have to employ someone to manage the payroll? Or would it take up most of an existing employee's time, when they could be better utilised somewhere else?
  • Responsibility: It's important that your payroll is done correctly and accurately every time. Mistakes affect your employees and can get you into trouble with the tax-man. Independent providers have measures in place to avoid this and have to take some responsibility if mistakes are made. You also have legal recourse if the service is found to be negligent or fraudulent.
  • Consistency. With an employee doing your payroll, you have to hope they don't call in sick or take leave. They must know the system well and be able to make adjustments as needed. Payroll services have systems in place to ensure your work is done on time and with all variables accounted for, without too much hassle.
  • Compliance: Without you having to pay for training, good payroll service providers keep up to date with the relevant tax laws and compliance issues. This also makes it important to have a company that deals with small businesses.
  • Security. Employee files contain personal information that has to be kept confidential. If you are handling your own payroll, you must have proper systems and security measures in place to protect the privacy of your employees. Payroll service providers are legally bound to do this.
  • Less hassle: With someone else being paid to do your payroll, you can get on with the business of doing business, without worrying that everything will get done properly and on time.

Staying on top of your payroll

If outsourcing your payroll is more practical and cost effective for your business, the next step is to find a reputable service provider.

  • When sourcing quotes, give the service provider some information about your business and be clear about what you expect
  • Find out who your colleagues are using and if they are happy with the service they're getting
  • Does the service provider guarantee the security and confidentiality of your payroll information? And how do they do this?
  • Find out exactly what the terms of an agreement are and what costs are included (or excluded) in the package being offered. In this case, being pennywise could end up making you pound foolish
  • Make sure you're clear on who is responsible for what and who will own the payroll information. What kind of information do you expect to receive and is this covered in the cost?
  • How flexible is the company about changes that have to be made or ad hoc requests you may have, and will you be charged extra?

Before contracting a service provider, make sure you understand all the terms and conditions of your agreement, and that all your requests have been put in writing.

Many small businesses do not have a dedicated Human Resource manager or an in-house accountant. This, and the administrative headache that goes with the payroll process, makes it a business function that is most often outsourced. There is, however, some 'homework' you need to do before you outsource your payroll.

Payroll processing can be a complicated process, even in a small business with a minimal number of employees. With a large number of service providers targeting SMEs, outsourcing your payroll may be the best option, depending on your budget and the type of business you are running.

The benefits of outsourcing

The most obvious factor to consider is the financial cost of doing your own payroll vs. hiring a service. Calculate how much money you would spend to do the payroll in-house. Include training costs (of the person doing it), man-hours, printing pay-slips, documents needed for tax compliance and so on. Compare this with prices quoted by potential service providers.

But, it's not just about the money.

  • Resources: Would you have to employ someone to manage the payroll? Or would it take up most of an existing employee's time, when they could be better utilised somewhere else?
  • Responsibility: It's important that your payroll is done correctly and accurately every time. Mistakes affect your employees and can get you into trouble with the tax-man. Independent providers have measures in place to avoid this and have to take some responsibility if mistakes are made. You also have legal recourse if the service is found to be negligent or fraudulent.
  • Consistency. With an employee doing your payroll, you have to hope they don't call in sick or take leave. They must know the system well and be able to make adjustments as needed. Payroll services have systems in place to ensure your work is done on time and with all variables accounted for, without too much hassle.
  • Compliance: Without you having to pay for training, good payroll service providers keep up to date with the relevant tax laws and compliance issues. This also makes it important to have a company that deals with small businesses.
  • Security. Employee files contain personal information that has to be kept confidential. If you are handling your own payroll, you must have proper systems and security measures in place to protect the privacy of your employees. Payroll service providers are legally bound to do this.
  • Less hassle: With someone else being paid to do your payroll, you can get on with the business of doing business, without worrying that everything will get done properly and on time.

Staying on top of your payroll

If outsourcing your payroll is more practical and cost effective for your business, the next step is to find a reputable service provider.

  • When sourcing quotes, give the service provider some information about your business and be clear about what you expect
  • Find out who your colleagues are using and if they are happy with the service they're getting
  • Does the service provider guarantee the security and confidentiality of your payroll information? And how do they do this?
  • Find out exactly what the terms of an agreement are and what costs are included (or excluded) in the package being offered. In this case, being pennywise could end up making you pound foolish
  • Make sure you're clear on who is responsible for what and who will own the payroll information. What kind of information do you expect to receive and is this covered in the cost?
  • How flexible is the company about changes that have to be made or ad hoc requests you may have, and will you be charged extra?

Before contracting a service provider, make sure you understand all the terms and conditions of your agreement, and that all your requests have been put in writing.

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