Are you considering outsourcing your payroll? Read our guide to compare the cost of outsourcing your payroll with in-house processing.
Ask what payroll costs and most businesses will quote the payroll software subscription, possibly adding the salary of whoever runs it. Both numbers are real and together they account for perhaps half of what payroll actually costs.
That matters when you are weighing up whether to keep payroll in house or outsource it, because a comparison built on the visible half tends to favour whichever arrangement you already have. This article sets out how to build the comparison properly, what belongs on each side, and what the decision usually comes down to once the numbers are honest.
We have deliberately not put figures against these items. Costs vary enormously by headcount, award complexity, pay frequency and entity structure, and a fabricated benchmark would be worse than useless. What follows is the framework. The numbers are yours to fill in, and the exercise of filling them in is usually where the answer becomes obvious.
Start with what appears on an invoice or a payslip.
Software licensing is the obvious one. Whether that is a standalone payroll product, a module within your ERP, or a bureau platform, there is a recurring fee usually scaled by employee count.
Staff cost is the second. The salary of whoever runs payroll, or the proportion of their salary attributable to it where the role is shared. Superannuation, leave loading and on costs belong here too, and are frequently left out of informal comparisons.
Then there is training and certification, because payroll rules change and staying current is not free.
And there is the infrastructure the arrangement requires, which for desktop software includes the machine it runs on and the backup arrangement, and which most businesses account for centrally rather than attributing.
This is where in house comparisons usually go wrong, because every item below is real and none of them appears as a line on any budget.
Managers approving timesheets. Finance reviewing the run. Someone reconciling the payroll clearing account. Someone answering employee questions about a payslip. Across a fortnightly cycle this accumulates into a meaningful figure that nobody attributes to payroll.
Payroll does not wait for annual leave. Either somebody else is trained to run it, which costs training time and carries risk because they do it rarely, or the payroll officer works during their leave, or you engage someone externally at short notice at an unfavourable rate.
Underpayments must be remediated, and the correction costs more than the original payment because of the investigation, the communication and the potential for it to affect more than one person or one period. Overpayments are worse, since recovery is legally constrained and frequently not attempted.
Superannuation guarantee rate changes, Single Touch Payroll Phase 2 reporting requirements, annual wage review outcomes flowing into modern award rates, changes to leave entitlements. Somebody has to read this, understand what applies, and implement it before the pay run that it affects.
Harder to price and genuinely the largest exposure in many businesses. Where one person understands your payroll configuration, your award interpretations and the reasons behind historical decisions, their departure creates a period of real risk. Businesses that have been through it will tell you the cost was not theoretical.
Underpayment remediation, penalties, and the cost of an external review to establish the extent of a problem. Low probability, high consequence, and the businesses most exposed are usually those least aware of it.
The other side of the comparison is more visible but not entirely so.
The service fee is the main item, typically structured per employee per pay cycle, sometimes with a base fee. Understanding what that includes is the important part, because providers scope quite differently.
Transition cost is real and one off. Setting up, migrating year to date figures, verifying the first parallel runs. It is front loaded and worth budgeting for explicitly rather than discovering.
Internal time does not go to zero. Somebody still approves the run, still answers employee questions your provider cannot, still owns the relationship. Expect a reduction rather than an elimination.
And there are usually variable charges. Off cycle runs, terminations, amended payment summaries, year end processing. These are legitimate and belong in the comparison, so ask for the full schedule rather than the headline rate.
A fair comparison holds three things constant.
The same scope on both sides. If your in house cost excludes the manager time spent approving timesheets, and the outsourced quote includes timesheet management, you are comparing different things. Write down what is included before pricing either side.
The same time horizon. Transition costs distort a first year comparison and disappear from a three year one. Look at both, and be explicit about which you are quoting.
The same risk position. Outsourcing shifts some compliance and continuity risk to a provider, and that transfer has value even though it does not appear as a number. It is worth naming it explicitly rather than leaving it out because it is hard to quantify.
The single largest item in most internal calculations is what the person doing payroll is not doing instead, and it is the one most consistently omitted.
Where a management accountant spends a day a week on payroll administration, the business is paying accounting rates for administration and losing a day of accounting. The relevant cost is not the proportion of their salary. It is the value of the analysis that did not happen.
Where an owner runs payroll in the evenings, the cost is whatever they would otherwise have done with that attention, which in a smaller business is usually the highest value time available.
This cannot be calculated precisely and it can be estimated, and an estimate included is considerably more accurate than a precise figure omitted.
Businesses that leave it out systematically favour the internal option, which is why the comparison so often concludes that internal is cheaper than it is.
Some patterns are consistent enough to be worth stating.
Below roughly twenty employees, payroll rarely justifies a dedicated person, so it sits with someone in finance or with the owner. Outsourcing here is often clearly cheaper once the true internal time is counted, and the risk reduction is substantial because the alternative is one part time person with no cover.
Between twenty and a couple of hundred, it depends on complexity more than headcount. Salaried staff on a single arrangement is straightforward. Award covered staff across multiple classifications, shift loadings, allowances and penalty rates is a specialist job, and specialists are expensive to employ and easy to lose.
Above a few hundred, a dedicated function usually makes sense economically, and the question shifts from whether to outsource the whole thing to whether to outsource parts, such as complex award interpretation, year end, or cover during absence.
Complexity outweighs headcount throughout. A hundred employees on one salaried arrangement is a simpler payroll than thirty across three awards with rostered shifts.
Worth being specific, since it is the variable that determines the answer more than size does.
Award coverage is the largest component. Where modern awards apply, the payroll carries minimum rates by classification, allowances, overtime, penalty rates and span of hours provisions, and each is a separate opportunity for error.
Employment mix is the second. Full time, part time and casual staff accrue entitlements differently, and casual conversion adds ongoing decisions.
Variable hours is the third, since a payroll that depends on what was actually worked has timesheet capture and approval on the critical path every cycle.
Multiple states is the fourth, bringing payroll tax across jurisdictions with different thresholds, rates and grouping provisions, along with different long service leave regimes.
And multiple entities is the fifth, since each carries its own reporting and its own thresholds.
A business with three or four of those is running a specialist payroll regardless of how many people it employs.
Two considerations sit outside the cost model and frequently decide the question.
Accuracy and compliance is the first. Payroll errors damage trust in a way that is disproportionate to their size. An employee underpaid by a small amount, discovered by them rather than by you, changes how they read every payslip afterwards. Specialists who process payroll continuously across many businesses make fewer of these mistakes than generalists doing it fortnightly, and the difference compounds.
Attention is the second. Payroll must be right and it does not differentiate your business. Every hour a finance person spends on it is an hour not spent on forecasting, margin analysis or anything else that does. For a small finance team that trade off is significant even when the direct costs are close.
Not all outsourced payroll is equivalent, and the differences are worth probing.
The last one is a fair test. A provider comfortable with that conversation is confident in the service rather than in how difficult they are to leave.
One cost that appears in neither column and belongs in the decision is what happens between payroll and your general ledger.
Where payroll runs outside your accounting system, someone posts a journal each cycle, reconciles the clearing account and investigates differences. That work is invisible in most cost comparisons and it is not small.
Where payroll runs on the same platform as the ledger, the posting is automatic, the reconciliation is largely unnecessary, and reporting on labour cost by department, project or entity is available without exporting anything. For businesses already running NetSuite, that argument frequently outweighs a modest difference in service fee, and it is covered in more detail across our payroll and bookkeeping service.
It is worth asking any prospective provider how their output reaches your ledger, because a report and an automatic posting are very different amounts of ongoing work.
Frequently misunderstood, and it affects how you weight the risk transfer in the comparison.
Engaging a provider does not remove your obligations as an employer. You remain responsible for paying people correctly, for superannuation, for reporting and for record keeping. A regulator's interest is in the employer.
What you get is expertise that makes errors considerably less likely, and a contractual relationship where responsibility for their mistakes can be allocated. That allocation varies substantially between providers and is worth reading rather than assuming.
The practical position is that outsourcing materially reduces your risk without eliminating your responsibility. That is a good arrangement, and it is not the same as handing the problem away, and understanding the difference determines how closely you should still be paying attention.
If you want a genuine answer, the exercise takes an afternoon.
List every activity in a payroll cycle from timesheet collection through to reconciliation and reporting. For each, estimate the time and who does it. Multiply by the number of cycles in a year and convert to cost using real salary figures including on costs. Add the software, the training and a realistic allowance for cover and error correction. Estimate the opportunity cost as a range. Then obtain two quotes on the same scope, including the variable charges.
Most businesses that do this properly are surprised by the internal figure, because it has never been assembled in one place before. Whichever way the decision then goes, it is at least an informed one.
Our guidance for payroll managers and for chief financial officers covers the operational and financial views of this respectively.
The comparison is worth doing properly whichever way you expect it to come out, because the exercise itself surfaces things worth knowing about how payroll currently runs in your business.
Most businesses have never counted the full internal cost, and the counting is the part that changes the conversation.
Our piece on partnering with a payroll bureau covers what a good arrangement looks like, and Australian payroll compliance covers the obligations any arrangement has to satisfy.
Where the wider question is which functions belong outside the business, comparing in house and outsourced costs applies the same framework more broadly.
If you would like help building the comparison for your own business, get in touch.
