Should I Outsource Payroll?
Andy Scheu • February 28, 2021
Question: Why Outsource Payroll?
Answer: Outsourcing payroll can 100% save you money!
Here’s how:
In general, professional payroll services only get paid for the number of checks they produce. Thus payroll processing becomes a variable cost, a direct function of the number of employees you have, as opposed to a fixed cost of having an employee on staff processing your payroll.
For example, a Time & Pay outsourced solution for a company with 20 employees paying on a weekly basis will cost on average between $60 and $70 per payroll period. This includes pay checks, management reports, tax filings – with guaranteed compliance, quarterly tax reporting and more.
This translates into about $3,400 per year.
You know that you cannot hire a person in-house to do payroll for that little cost. For a qualified individual, it would be at least 10 times that, plus overhead. Add to or reduce staff, and the cost of the payroll service varies depending on the cost per check, while your fixed in-house cost for qualified staff will remain the same, and increase over time.
Your in-house staff may have trouble keeping up with payroll compliance depending on their resources and the demands on their time. Failure to keep up will prove costly! Your outsourced payroll professional always keeps up with the rules and regulations, never works overtime, never goes on paid vacation, never gets sick pay, and will always be there around the holidays to meet any special payroll needs you may have.
Yes, we know this in-house person may be doing some other bookkeeping functions as well, but keep in mind processing payroll does not generate any income for your business. You know your staff needs to spend as much time as they can servicing your existing clients, finding new ones, collecting valuable receivables and other income generating tasks.
What are other cost saving advantages to our payroll services?
- Guaranteed compliance. The IRS notes that up to 40% of all businesses will be subject to costly IRS penalties for compliance failures. A reputable payroll service like Time & Pay will take responsibility for any penalties that are a result of errors on their part thus eliminating the cost of non-compliance penalties. The cost of compliance is always less than the cost of non-compliance
- A good payroll service provider will include other compliance services such as new hire reporting (included at no cost as part of Time & Pay services) or garnishment compliance that will eliminate your cost of meeting those requirements and the greater risks/costs of non-compliance.
- A good payroll service provider will utilize superior systems that will eliminate all the costly errors associated with manually calculating paid hours, payroll, payroll taxes and other associated information as well as the cost of redoing the payroll if errors are made. Think you produce an error free payroll? Do this simple exercise to see if our services will help you.
- A good payroll service provider will offer quality, in-depth management reports that will help you better define, and thus control your labor costs as well as integrate the information with your accounting system.
- A good payroll provider like Time & Pay will be able to provide you with a quality automated timekeeping system that will eliminate most of the costs, and all of the costly inefficiencies of tracking hourly employee’s time at work. Still using a manual time clock or time sheets? Be sure to see our automated time and attendance services.
- Often times, employers are not aware of, or do not take advantage of, pre-tax deductions. A good payroll provider will be able to help you determine pre-tax benefits, accurately account for and process pre-tax deductions and create tax savings for your company that often times exceed the cost of the payroll service provided.
- A good service provider will be able to offer you other cost-saving means to help you manage your employees, their benefits and other HR issues. These are areas fraught with risks/costs if overlooked or ignored. For example, as a customer of Time & Pay, you have complimentary access to qualified HR consultants to address HR issues that need your attention due to legal considerations. This is a very valuable service that could normally cost you thousands of dollars a year depending on how often you need the expertise.
- A reduction in the “cost of ownership”. Many studies have shown that companies will significantly underestimate the cost of implementation and maintenance of in-house payroll/HR software and technology. When you take into account required IT infrastructure, labor, maintenance, as well as the on-going investment of bringing this technology in-house, the costs are much greater than estimated. They add up quickly and can easily far exceed outsourced solutions.
Now is the time!
Yes, there may be a few situations where outsourcing your payroll may not be cost-effective. But now is the time to find out if an outsourced solution will save your business valuable resources. Now, more than ever, it is important for businesses to operate as efficiently as possible in order to keep the doors open and maintain a competitive edge.
You may be overlooking an important avenue for your cost-cutting measures if you have not looked at an outsourced option. Take the important step of evaluating an outsourced payroll solution for your business.
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New Tax Breaks on Overtime and Tips: What Employers and Employees Need to Know A major shift in tax policy is here, and it could mean more money in the pockets of millions of American workers — especially those who rely on tips or regularly work overtime. As part of the One Big Beautiful Bill (OBBB), signed into law on July 4, 2025, Congress introduced two key tax deductions: one for qualified tip income and another for overtime premium pay. These changes are designed to reward hard-working Americans and reduce the income tax burden on lower- and middle-income earners. But what does this mean in practice? Let’s break it down. No Tax on Tips: A Win for Service Industry Workers Under the new law, workers in tipped professions — such as servers, bartenders, hotel staff, and others — can now deduct up to $25,000 in tips from their federal taxable income each year. This deduction is retroactive to January 1, 2025 , and is set to remain in effect through the end of 2028. To qualify: The tips must be customary and reported to the employer . The worker must be in a recognized “tipping occupation,” such as those listed in prior IRS guidance. The deduction begins to phase out for individuals earning more than $150,000 (or $300,000 for joint filers). This means a server who reports $15,000 in tips could potentially deduct the full amount from their income when calculating their taxes — reducing taxable income and potentially saving hundreds or even thousands of dollars in federal taxes. This deduction does not apply to Social Security and Medicare taxes. Those payroll taxes are still assessed on total wages, including tips. No Tax on Overtime: Relief for Non-Exempt Employees The law also introduces a deduction of up to $12,500 per individual (or $25,000 for joint filers) for overtime premium pay. This refers specifically to the “time-and-a-half” portion paid for hours worked beyond 40 in a week under the Fair Labor Standards Act (FLSA). It’s important to understand what qualifies: Only non-exempt employees (those entitled to overtime under the FLSA) can claim this deduction. The deduction applies only to the premium portion — that is, the extra 50% above regular hourly pay. High-income earners will see a phase-out starting at $150,000 (individuals) or $300,000 (joint filers). For example, if an hourly worker earned $20/hour and worked 10 hours of overtime in a week, the overtime premium ($10/hour × 10 hours = $100) would be eligible for the deduction — not the full $300 in overtime pay. If that worker consistently earned similar overtime throughout the year, they could reach or exceed the maximum deduction and realize significant federal tax savings . What This Means for Employers Although the new deductions apply to individual tax returns, employers will play a critical role in ensuring that both workers and the IRS have accurate records. Here are the key responsibilities employers now face: Payroll Reporting Enhancements Employers must update their payroll systems to separately track qualified tips and overtime premium pay . These amounts must now be clearly designated on year-end tax forms like the Form W-2 . Form and Recordkeeping Requirements Employers will need to include additional information on employee tax forms, including: A breakdown of earnings by type (regular, overtime premium, tips). Occupation codes that identify whether the employee is in a tipping role. System and Software Updates Payroll vendors and in-house systems must be adjusted to reflect the new codes. For 2025, a “reasonable method” grace period applies, but in future years, precision will be required. Classification Reviews Employers may need to re-evaluate FLSA classifications to ensure that workers are properly labeled as exempt or non-exempt. Improper classification could result in missed deductions or even penalties. Communication and Training HR and payroll teams should be trained on the new rules, and employers should proactively communicate with employees about the potential benefits and what information will be required at tax time. How Employees Benefit — and What They Need to Do These changes are being praised as a way to put more money into the hands of frontline workers, but the deductions don’t apply automatically. Employees need to take certain steps to ensure they receive the tax benefits they’re entitled to. Maintain Accurate Records Employees should keep good records of their reported tips and overtime hours . While much of this will be available on their W-2, they should verify it for accuracy. Understand Eligibility Limits High earners may not qualify, and the deductions only apply to properly classified pay. Employees paid “overtime” who are exempt under the FLSA may find their pay doesn’t count. Prepare for Tax Filing These deductions will likely appear as line items on Form 1040 or a new IRS schedule. Employees should consult a tax preparer or financial advisor, especially during the first year of implementation. Track Annual Caps Workers should be aware of the annual deduction limits and ensure they do not over-report. Overstating deductions could trigger audits or penalties. What This Means in Dollars According to preliminary estimates from tax experts: A tipped worker who earns $20,000 in tips could save between $1,800–$2,200 in federal income taxes, depending on their tax bracket. An hourly worker earning $8,000 in qualified overtime premium pay might reduce their federal taxes by around $800–$1,200 . For households that include both tipped and overtime-earning workers, the combined benefit could reach $4,000–$5,000 annually — a significant reduction in their federal tax liability. Final Thoughts This new legislation signals a clear shift in tax policy — one that rewards work done during evenings, weekends, and holidays, and recognizes the financial challenges of service industry workers. For businesses, it means adjusting payroll systems, refining classifications, and improving documentation . For employees, it means paying attention to how their income is reported and taking full advantage of available tax savings . Time & Pay is here to help employers navigate this transition. Our systems can be tailored to properly track and report eligible tip and overtime income, ensuring compliance and helping your employees take advantage of these new deductions. If you’re unsure whether your payroll processes are ready, now is the time to evaluate and prepare. Need help tracking qualified wages and ensuring accurate reporting? Contact Time & Pay today — we’ll help you get compliant and keep your employees informed.
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