Payroll Outsourcing Statistics

Payroll Outsourcing Statistics

How does payroll outsourcing work? Is outsourcing payroll an emerging trend for small businesses and entrepreneurs? If you find yourself asking these questions, it’s likely because your small business’s payroll is taking too much time or not being done right. With the dawn of remote work, companies are hiring a more spread out workforce. While this trend helps find talent, it increases the complexity behind the administration and compliance for payroll services. 

Payroll outsourcing is an effective and growing strategy for entrepreneurs that should be more widely used. This blog will dive into what payroll outsourcing is, the pros and cons, and the statistics surrounding it. 

What Is Payroll Outsourcing?

Payroll outsourcing is the practice of offboarding your payroll operations to a third-party provider. This business strategy allows for expertise without the cost and pains of hiring someone. Outsourced payroll companies can cover a small part of your payroll operations or the entire function. For example, state tax registrations can be outsourced to payroll companies. 

Benefits of Outsourcing Payroll

The benefits of outsourcing payroll include cheaper costs, higher expertise, easier scalability, and saving time. Small businesses can often benefit from outsourcing payroll because it is cheaper than hiring someone to do it internally. Most businesses do not need a full-time payroll professional. This benefit is heightened by the payroll company’s expertise. 

An outsourced payroll company is dedicated to keeping up-to-date with payroll laws and best practices, which can be a lot to keep up with for a small business. Outsourcing payroll services can give you peace of mind, because you know it will be done right. Too many business owners take a large portion of their time running payroll. This is an unscalable practice for the business, and outsourcing payroll can save entrepreneurs time. 

Cons of Outsourcing Payroll

The risks or cons of outsourcing payroll include security and cost. Security is always a risk with establishing a new partnership. Companies who choose to outsource payroll should establish a secure communication channel and vet their security practices. Payroll involves confidential information, so this risk is very important to mitigate. 

Cost is also a con for some small business owners who have been doing payroll on their own. While outsourcing payroll is an additional cost, payroll is already costing the business by taking an employee’s time.

Is Payroll Outsourcing Still Effective? 

Payroll outsourcing is still effective for small businesses. Heading into 2023, small businesses should thoughtfully weigh the above pros and cons of outsourcing payroll. For many companies, outsourcing payroll is a good idea that will benefit the business. 

Here are 7 payroll outsourcing statistics that you need to know: 

1. Businesses with over 50 employees are 66% more likely to outsource than smaller businesses – This statistic indicates multiple realities. First, larger businesses have more cash flow to potentially spend on external partners. Second, larger businesses invest in outsourced companies as a part of their growth path. In other words, they understand the value of outsourcing and are more likely to think the pros outweigh the cons. 
2. The outsourced payroll market is expected to grow by 6.15 billion USD by 2025 – The payroll market is growing because demand is growing. Expertise, time, and peace of mind are 3 things every entrepreneur needs in their business. Hiring a payroll expert is too expensive for small businesses, so outsourcing is the solution that more and more businesses are turning to. 
3. 25% of employees say they’ve received a paycheck with errors – Payroll errors mean headaches. This is an extremely high rate for errors. This emphasizes the value payroll companies provide. Instead of one or two employees running payroll as a part of their job, outsourcing payroll gives you a dedicated expert for running payroll smoothly. 
4. 49% of employees leave their company after 2 payroll mistakes – Payroll mistakes are not only headaches, they are costly. Predictable and on-time payroll improves the employee experience at a company. Errors are detrimental, as many Americans live paycheck to paycheck. 
5. One-third of small businesses report spending over 6 hours a month on payroll processing – These 6+ hours are most likely being done by an internal employee who is a key contributor to other functions of your business. Payroll is complex, and as a business grows, the complexity increases. Outsourced payroll companies are built to scale with your company. 
6. 10%-20% of workers are misclassified by their companies – Unfortunately, these mistakes do not lead to a pat on the back and “do better next time.” Instead, they lead to a hefty bill from the IRS, which collected over 6 billion in payroll mistakes in 2020. Misclassification can be an easy or intentional mistake, but small business owners should be diligent about avoiding it. The easiest way to stay diligent with compliance is to outsource payroll to an expert.
7. Between 2015 to 2019, the global payroll outsourcing market grew from 17% of businesses to 38% – While the market has had ups and downs, the growth on a worldwide scale is impressive. It shows this is not only a localized trend, but an international strategy worth exploring for businesses of all sizes. 

These numbers do not lie. Payroll outsourcing is growing, needed, and strategic. On top of all this, it gives back to entrepreneurs what is most precious, time. However, doing diligent research on a company to partner with is essential to creating success. Payroll outsourcing is not for every company, nor is every payroll outsourcing company perfect for your outsourcing needs. Research, referrals, and a needs analysis proactively mitigate risk. 

Do Most Companies Outsource Payroll? 

Around 39% of companies, which equals more than 10 million American businesses, outsource their payroll. While this is not the majority, it is still a large chunk of American businesses. 

Around 40% of small to mid-sized companies make a payroll error each year. Each penalty has an average fine of nearly $850. While outsourced companies do occasionally make mistakes, the frequency and likelihood of these mistakes are much lower. 

At what point should you outsource your payroll? This question is dependent on your business. However, every business needs payroll processing. If this knowledge is already inherent to your team, then allow your business to grow before outsourcing. However, if payroll knowledge is not already on your staff, outsourcing could be a good idea. Businesses as small as 1 or 2 employees can outsource their payroll to ensure compliance and save time. There is no set time to outsource payroll, but setting up conversations with these companies can help you understand if the timing is right. 

Let Milestone Take The Burden Of Payroll Off Your Shoulders

Milestone has an experienced team of dedicated payroll professionals ready to help your small business. We focus on small business payroll services because we believe in helping entrepreneurs build processes and foundations that will allow them to grow. Our team can handle a wide range of payroll challenges, from hourly employees to commission tracking to a spread out workforce. We are excited to partner with you to help solve your payroll challenges. Reach out to us today to get started.