Using a third-party payroll processor can be a sound business practice that saves time and money. Find out if it’s right for your business.

Have you ever considered hiring a payroll service provider (PSP)? Outsourcing payroll makes sense for a lot of businesses, but not all. Here’s what you need to know.

When to use a payroll service provider

When deciding to outsource payroll, consider these questions:

• How much time do you/your staff spend on processing payroll? Would it be more profitable to use this time for other business activities?
• How large is your staff and how much turnover do you have? A small company with a small, stable staff may be better off keeping payroll processing in-house.
• Do you/your payroll administrator have full knowledge of proper payroll procedures? Mistakes are costly and late tax payments can result in fines.

Pros of working with payroll service provider

There are several advantages to hiring a PSP. First, it might cost less than running payroll in-house. Since PSPs serve many companies, you’ll benefit from economies of scale.

Second, a PSP can help streamline business operations. In addition to processing payroll they can:

• Deliver checks or make direct deposits
• File federal, state, and local payroll taxes
• Provide reports
• Issue W-2 forms

A third benefit of working with a PSPs is that they can integrate their services with employee savings accounts for health (HSAs), flexible medical spending (FSAs) and retirement.

And finally, many PSPs provide greater data security than many small businesses are capable of. A PSP with multiple servers, backups and continuously updated technology can provide a higher level of protection for employee data.

Cons of working with payroll service providers

Of course, there are some potential downsides to working with a PSP.

Outsourcing payroll means you must work within strict timing schedules. Your company is just one of many that a PSP serves. They must stick to their production schedule to make sure all of their clients’ payroll is done on time.

If there are mistakes, they can be time-consuming to clear up.

Even with security measures in place, sharing payroll information opens you up to security risks. A rogue employee could steal data. In some cases, the IRS reports that dishonest individuals and companies have been prosecuted for stealing funds intended for payment of payroll taxes. Of course, this risk is present in-house as well.

And remember, if you outsource, you are still legally responsible for any and all payroll taxes due. This includes federal income taxes as both the employer and employee’s share of Social Security and Medicare taxes.

How to evaluate a payroll service provider

Before outsourcing your payroll, interview several providers. Find out:

• How is their customer service?
• How and when is payroll data turned over?
• Have they handled factors unique to your type of business, such as union dues or tips?
• Can checks be picked up locally in case of an emergency?
• How is sensitive data and personal information kept secure?
• What online services are available for employees?

Get more advice on what to consider when outsourcing some or all payroll functions  from this IRS guide.

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