In-house payroll is often run out of necessity when running a small business. It is one of the first hurdles that ownership and management must face, often without guidance. As such, it becomes a function of ‘who seems best,’ and often stays that way- which isn’t always a problem, but should require some examination.
In order to best appraise this, you should be considering if payroll is an HR function, a finance function, or if you should outsource your payroll processing to alleviate internal strain or confusion.
In a small business setting, it is important to consider what a department represents alongside its intrinsic function. This is where the comparison between HR and finance comes in: there is crossover to both departments with respective pros and cons, but also necessary separation.
HR is a natural fit to run payroll for its role as an aggregator of the payroll structure itself. An HR team deals with salary changes, employee compliance, deductions, and is the origin source of much of the data that is ultimately used every pay period. Additionally, as payroll will inevitably contain occasional mistakes (no matter who processes it), HR is well-versed in dealing with employees at a conversational level, and stemming concerns professionally.
Finance has significant merit for running small business payroll as well. According to Deloitte’s recent study regarding payroll operations, the finance department was most commonly selected to process payroll internally among businesses with 1000-5000 employees. Finance professionals are more likely to be acquainted with tax law and have a more thorough understanding of balance-sheet economics. Many payroll errors can be avoided at the reconciliation stage of data entry, and having an eye for outliers is something that a finance team will have an edge in.
Ultimately, there might be a case for a combination of the two, or finding something that represents a perfect union.
Payroll and HR have a natural coexistence in the workplace.
A payroll team will be looking to collect reports on hours and wage records, while maintaining tax records and compliance forms with the appropriate authorities. They are also in charge of reconciliation and depositing money into the appropriate accounts. This is especially important, as research has shown that 40 percent of employees would be financially burdened by payroll being delivered even one week late.
Human Resources is designed to maximize the potential of employees while mitigating risk at the same time. This broadly includes attracting prospective employees, hiring and onboarding, and making sure the needs of current employees are met. They also deal with some shared functions in regard to payroll, such as salary increases, bonuses, and dealing with issues should there be any on the paycheck. Ultimately, HR is more on the hook for the cultural side of the sensitive subject of pay, but that side must be represented well regardless of what team is technically in charge of processing the payroll.
Having highlighted what is typically the responsibility of each department, it is easy to see how there must be healthy communication between the two. If there is no cohesive plan or infrequent updates, errors are almost guaranteed to occur.
This means that if you are having HR take care of onboarding, salary structure, sensitive data changes, and any payroll claims, there must be an immediate transference of this information to Payroll. Similarly, as Payroll looks to make changes to benefits, wages, or who is receiving money, they should be verified with HR before they’re implemented.
Payroll is also typically in charge of processing W-2s, or doing time sheet reviews. The actual communication about these issues might be better served through HR, however. A good solution for these mixed responsibilities is to have a meeting as often as you run your payroll, or even once a month. This way, there will be no confusion about changes in information or deadlines that need to be met.
The split in departments for internal payroll highlights a solution that is becoming more and more popular: outsourcing payroll.
As the business world turns increasingly towards cloud-based solutions, efficiency and accuracy are more accessible than ever. Taking the stress out of deciding who is accountable internally has cultural and financial benefits.
Using a third party that combines the necessary elements of both HR and Payroll to achieve harmony is an ideal setup. Often, small businesses do not realize how much time (see: money) is spent on creating a sub-optimal system that could be outsourced for relatively little cost.
Like any system, you should still be selective about your consideration for outsourcing payroll. These types of decisions don’t manifest their benefit or downside quickly, so mapping out your choice for outsourcing is important up front.
In the debate between Payroll, HR, and outsourcing, there is no right answer for a small business. However, it is more likely that the stress of creating a complete circuit between HR and Payroll in your business can be alleviated by outsourcing to a streamlined professional service.
With that in mind, we recommend looking into payroll services that fit your business structure and culture without sacrificing the integrity of your data.
At Paytech, our goal is to make payroll more budget-conscious and small-business friendly. If you are looking to make a change in your payroll structure, please reach out to learn more about our services- we’d love to help.