Edu BlogNovember 18, 2022

In-house payroll and payroll services

What’s the difference between in-house payroll and payroll services?

Whether you run a small, medium or enterprise-sized business, your employee payroll is probably your biggest expense. And because your employees are the people who keep your business operational, it’s crucial to ensure that your payroll is always accurate and compliant, and that pay runs are always processed smoothly and timeously.

There are two options to consider when it comes to managing your payroll – in-house payroll and payroll services. The one you choose for your company will depend on the industry in which you operate, the complexity of your payroll and other requirements unique to your business.

A survey conducted by Deloitte on payroll operations in North America reveals that 32 per cent of businesses use in-house payroll, while 24 per cent outsource their payroll processing completely. And additional 43 per cent use a third-party server to host payroll but complete the process internally.

But what is the difference between in-house payroll and payroll services?

In a nutshell, an in-house payroll is one managed by the company’s own team, while payroll services are provided by a third-party provider. Let’s examine each option in more detail.

What is in-house payroll?

In-house payroll is when the organisation uses its own internal team (usually from the human resources or finance departments) to manage the payroll for the company. The payroll team usually makes use of purchased and installed payroll software to do this. Because the payroll team comprises employees of the company, they are paid through the same system they manage.

The payroll team’s responsibilities usually include gathering the relevant employee information (and maintaining it to ensure that it is always up to date), calculating salaries and any overtime pay due, managing deductions for medical aid, provident/pension fund and unemployment insurance fund contributions, as well as calculating pay as you earn amounts to be paid over to the South African Revenue Service (SARS). Once all this is done salaries are paid and payslips distributed.

What are the pros and cons of in-house payroll? 

Running an in-house payroll system offers several advantages.

  • Firstly, it gives you greater control and full transparency over the payroll process in that you get to develop a system that is specifically suited to your preferences.
  • And because the processing software and servers are located at your premises, an in-house payroll system enables you to make any necessary adjustments to employee information, correct errors and resolve any other issues more efficiently without having to first consult an external provider.
  • Data security is critical when it comes to payroll. Having on-premise payroll servers eliminates the need for a third party, which means fewer systems and people for your payroll to travel through, which reduces the risk of your data being compromised.
  • Hiring an internal team to manage your payroll could be more cost-effective over the long term, depending on the size and structure of your business, and the cost of purchasing and implementing payroll software. 

There are also some cons to consider when running in-house payroll.

  • Because payroll is linked to numerous human resource functions such as medical aid and pension funds, as well as time and attendance tracking, it can be extremely challenging to set up and ensure that the various systems integrate seamlessly with one another.
  • Managing payroll is also a time-consuming and complex task. According to Technology Advice, 26 per cent of small businesses spend three to five hours a month processing their payroll manually.
  • As your business grows, the more employees you will need to hire, which in turn makes managing the payroll more complicated, especially when it comes to complying with legislation, which increases the risk of making mistakes.
  • A fundamental component of payroll accuracy is legislative compliance. Payroll legislation and regulations are not only extremely complex, but also change frequently. If your payroll team is unfamiliar with payroll legislation and doesn’t understand the consequences of non-compliance, you could soon run into problems that affect the sustainability of your business.

What is meant by payroll services?

A payroll services provider carries out payroll functions on your company’s behalf. The extent of the service provided depends on your specific business requirements.

Fully managed payroll services are specifically geared to optimising the payroll function so that your business can save money. A payroll services provider frees human resources, payroll and/or finance personnel from the administrative and legislative burden of managing payroll so that they can focus on tasks that are of more strategic importance to the organisation.

What are the pros and cons of using a payroll services provider?

It’s not uncommon for business owners to feel overwhelmed by all the responsibilities associated with payroll processing. Even the smallest error can result in costly fines and penalties, while disgruntled employees and service providers can spell disaster for the company. Consequently, many companies choose to outsource their payroll to a payroll services provider.

  • Doing so enables them to improve efficiency, reduce operating expenses and alleviate risk so that they can concentrate on the core business activities that are essential for the growth of the business.
  • Appointing a payroll bureau means you no longer have to stay on top of frequently changing tax legislation – the payroll services provider will do it for you.
  • Payroll service providers are experts at what they do, which means the chances of payroll errors and omissions, or late tax submissions to SARS (South African Revenue Services) are extremely low.
  • Using a payroll service provider eliminates the need to purchase – and maintain – your own payroll software, as the bureau usually has its own. This also makes integrating your various human resource functions a breeze.

With all the benefits that outsourcing your payroll brings, there are some disadvantages to take into account.

  • It’s important to keep in mind that outsourcing your payroll to a payroll services provider does not alleviate your company’s liability. Mistakes can and do still happen, even with specialists involved, and your company could still be held liable, along with the payroll services provider.
  • Payroll services can be costly, depending on how many employees you have and the range of services provided.
  • It might take longer to access employee data if someone else is managing it.
  • The payroll services provider could go out of business. This is why it is vital to choose your payroll partner carefully. The only way to find the right partner for your business is to do your homework and take the time to fully investigate the various offerings on the market before making your choice.

What’s best for your business?

There’s no easy answer to this question because there are many factors to consider and you need to find a system that works best for your business.

Generally speaking, companies who don’t want to spend money on external suppliers, want to retain control over their payroll process, and have a qualified and experienced professional in their employ who is capable of doing the job efficiently and competently, should probably go the in-house payroll route.

Outsourced payroll, on the other hand, is ideal for businesses that are concerned about the compliance complexities of managing payroll, and would prefer to rely on the expertise of an external provider to get it right – and don’t mind paying for that expertise.

For more information on payroll solutions and services, read the following articles:

How a payroll bureau service can save you time and money

Top reasons to hire a payroll services company

How to choose a good payroll services provider

Everything you need to know about payroll outsourcing

A guide to investing in the right payroll solution

How to choose the right payroll solution for your business

Why payroll systems are important


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