Edu BlogJuly 15, 2023

Why managing your payroll in-house is risky

So, you’ve decided to handle your company’s payroll internally because you want to control when salaries are paid and how sensitive company data is protected. These are important considerations, but have you thought about the risks involved with managing your payroll in-house?

As a business owner or manager, managing payroll is an essential task that requires attention to detail and accuracy. Payroll management involves calculating salaries, taxes, benefits and deductions, among other tasks. Your company can choose to either hire staff to handle these payroll tasks, or you can delegate them to a third-party service provider.

This article examines the risks of managing payroll in-house versus the benefits of outsourcing.

Risks of managing payroll in-house

Many businesses choose to manage their payroll in-house, but this can be risky for several reasons.

Errors

Payroll management involves numerous complex calculations. Even minor errors in calculating taxes or benefit can result in significant problems, leading to legal issues and hefty penalties and fines.

Compliance

This is one of the most significant risks of managing payroll in-house. As an employer, you are legally required to comply with various payroll laws and regulations.

Not only are these laws complex, but they are subject to frequent changes. Failure to comply can lead to severe consequences for your company, such as penalties, fines and legal disputes, which can inflict serious damage on your company’s reputation.

When you manage your payroll in-house, it is up to you to keep track of these legislative changes and ensure that the company’s payroll processes are always fully compliant. This can be time-consuming and difficult, especially if you do not have a dedicated payroll team. Small business owners, in particular, usually have limited resources to invest in payroll management. Consequently, it is often better to outsource your payroll management to a third-party provider.

Security

Payroll data contains highly sensitive and confidential information, such as ID numbers, banking details and salaries. In-house payroll management requires storing data on servers and computers. It is then your responsibility to secure this information and protect it from cyber threats.

However, not all businesses have the funds to invest in sophisticated security measures, which makes them a target for cybercriminals. A single data breach can result in significant financial losses and damage to the company’s reputation. Additionally, data breaches can also result in a loss of trust among employees, which can negatively impact their morale and productivity.

Resource-intensive

Managing payroll in-house requires lots of time and resources, which can probably be better spent on other core business activities. It can take hours to calculate employee salaries, taxes and benefits and then pay them. Furthermore, you need to keep track of sick and holiday leave taken, as well as other absences from work, which can be difficult to manage.

Lack of expertise

Payroll management requires expertise in tax laws, employment regulations, and accounting procedures. If you do not have a dedicated payroll team, you may lack the necessary expertise to manage payroll effectively.

An error in calculating employee salaries, for example, can result in underpayment – and ultimately employee dissatisfaction – or overpayment – and financial losses for your company. Deducting incorrect tax amounts from employee salaries can also lead to penalties and fines from SARS.

Expensive

Managing your payroll in-house may seem cost-effective at the outset, but the cost of payroll software, training and resources mounts up over the long term.

Benefits of outsourcing payroll

Outsourcing payroll can be a beneficial solution for several reasons:

Accuracy

Outsourced payroll service providers are experts in managing payroll as they have the requisite tools, automated systems and expertise to ensure that salaries, taxes, benefits and deductions are always calculated accurately.

Compliance

Payroll service providers make it their business to stay up to date with the latest payroll legislation, regulation and compliance requirements. They have dedicated staff to keep track of changes and implement them timeously.

Security

Payroll service providers have robust security measures in place to protect sensitive payroll data. They not only make use of advanced encryption technologies to secure data, but also have multiple layers of security to prevent cyber-attacks and data breaches.

Cost-effective

Managing payroll in-house requires hiring staff, investing in technology and software, and maintaining infrastructure. This can be a significant expense for companies, especially small and medium-sized enterprises. Outsourcing payroll is a cost-effective solution in that eliminates the need for these expenses.

Time-saving

Payroll management is a time-consuming task that demands accuracy and attention to detail. Companies that choose to outsource their payroll save time and can therefore focus on their core business activities. This can lead to increased productivity and efficiency, which can ultimately result in higher profits for the business.

To conclude, managing payroll is a critical task that requires accuracy, compliance and security. Companies have two options for managing payroll: in-house or outsourcing. In-house payroll management can be risky, as it is susceptible to errors, compliance issues and security risks. Outsourcing payroll, on the other hand, can be a beneficial solution as it is cost- effective, saves time and ensures accuracy and compliance.

Companies must weigh the risks and benefits of each option and choose the solution that best meets their requirements. Ultimately, outsourcing payroll can be a strategic decision that can help companies achieve their business goals and objectives.

 

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