Payroll Outsourcing vs. In-House: Cost Comparison

Payroll outsourcing and in-house payroll come with very different costs, risks, and time commitments. In this blog, we break down what each method entails, what businesses gain from outsourcing payroll services, and how the two options compare on cost, scalability, and overall value.

What In-House Payroll Really Entails

Running payroll in-house means the company manages every aspect of the payroll process internally.

Common in-house payroll tasks include:

• Calculating wages, overtime, and deductions
• Processing payroll taxes and filings at the federal, state, and local levels
• Managing direct deposits and paper checks
• Tracking benefits deductions and wage garnishments
• Responding to employee questions about pay, deductions, and tax forms
• Maintaining payroll records
• Handling payroll tasks during employee onboarding and offboarding
• Training to stay up to date on tax codes and compliance regulations
• Track payments and maintain compliance

In-house teams must also stay current with changing tax laws and labor regulations. For businesses operating in multiple states, this adds another layer of complexity and risk.

The True Costs of In-House Payroll

The cost of in-house payroll is often underestimated because expenses are spread across departments and overhead categories rather than appearing as a single line item.

These are just a few costs that come with keeping your payroll in-house:

• Payroll staff salaries. Glassdoor estimates the annual salary for a full-time payroll manager often exceeds $70,000 annually, depending on location, company size, and title definition.
• Payroll staff benefits, training, and turnover costs. The US Bureau of Labor Statistics' June 2025 report estimated that benefits alone cost an average of $13.58 per hour worked.
• Opportunity costs. Every paid labor hour that accounting, HR, or administrative teams spend supporting payroll instead of their core tasks adds up.
• Payroll software subscriptions, upgrades, and system integrations can cost anywhere from several hundred to thousands, depending on the complexity, features, and technical support labor costs.
• Compliance risks, including penalties, interest, and potential legal fees.
• Hardware purchases and repairs. Computers, printers, or servers used for payroll processing, plus security features like external hard drives or backup batteries.
• Specialized supplies like paper for check printing and printing supplies.
• Office space, furnishings, and utilities allocated to payroll staff.
• Miscellaneous necessary expenses, such as IT support, cybersecurity measures, and system maintenance.
• Backup and disaster recovery planning for payroll data.

This list is not all-inclusive. The direct and indirect costs of keeping your own payroll staff will vary by state, industry, and your unique business needs.

What Outsourced Payroll Typically Includes

Outsourcing payroll shifts the administrative and compliance burden to third-party experts who specialize in payroll processing.

Most payroll outsourcing services include:

• Payroll calculations and direct deposit processing
• Payroll tax filings and payments
• Year-end forms such as W-2s and 1099s
• Compliance updates as laws and regulations change
• New hire reporting and multi-state payroll support
• Wage garnishment administration
• Data security and backups for payroll data

Many providers also offer additional features, such as self-service portals that allow employees to view pay stubs, access tax documents, and update personal information. Outsourcing payroll also often replaces various in-house costs like office space and supplies. For many businesses, this improves budgeting accuracy and cost control.

Payroll Outsourcing Price Models

Payroll outsourcing costs are typically structured in predictable, transparent ways. Standard pricing models include:

• Per-employee-per-month (PEPM) fees
• Tiered pricing based on company size
• Tiered pricing based on payroll needs
• Bundled packages that include extra services like compliance guarantees, check printing, or contract worker 1099 filing

For most growing small and mid-sized businesses, outsourced pricing models are predictable, and a small outsourced team is typically more affordable than a single in-house payroll employee.

Key Considerations Beyond Cost

Cost is important, but it should not be the only factor in a payroll decision. Several operational considerations often have a greater long-term impact.

Scalability

The business's resources limit the in-house payroll staff. As your business grows, the payroll staff’s responsibilities grow more complex. This can require additional training, hiring, office space, and supplies for the department.

Outsourced payroll scales more easily, and it does not require your administrative team to allocate resources into hiring, training, and supplying new payroll staff when the business grows.

Security

If you keep payroll in-house, your company is fully responsible for protecting sensitive employee data such as Social Security numbers and bank account details. This requires a strong internal IT infrastructure, access controls, encryption, and regular audits. Reputable outsourced payroll providers protect this data for you with advanced security systems and up-to-date regulatory compliance.

Accuracy

In-house payroll can be more vulnerable to errors caused by manual processes, changing laws, or staff turnover. Fixing these mistakes can be time-consuming and costly. Payroll providers protect your business by utilizing automated systems, standardized workflows, and multiple review layers to minimize errors.

Support and Continuity

Internal payroll support depends on specific employees. If a key payroll staff member is unavailable or leaves the company, it can severely disrupt operations. Outsourced payroll provides access to a team of professionals who ensure uninterrupted and consistent service.

Expertise and Compliance

Maintaining payroll compliance requires constant monitoring for tax and labor law changes. In-house teams must invest in ongoing training to stay current, and the company often absorbs those costs as a necessary business expense.

Outsourced providers provide their own training, and they have the training and resources to keep up with compliance when you hire interstate or international talent. Many providers offer limited guarantees or penalty protection for errors caused by their systems.

Time Savings and Business Focus

Payroll is essential but not revenue-generating. Managing it internally can divert attention from tasks that help generate revenue or grow your business, especially if other departments need to stop everything to get payroll critical missing information.

Outsourcing payroll frees internal staff to focus on tasks like business growth, financial planning, brand awareness, and employee development.

Employee Experience

In-house payroll can offer personalized support when dedicated staff are available, and they tend to be flexible for unusual circumstances if the business environment allows.

Outsourced payroll often enhances the employee experience through reliable pay, consistent accuracy, and self-service tools. Timely, error-free payroll directly contributes to employee trust and morale.

Audit Support

During audits, in-house teams must gather and present payroll documentation.

Many payroll outsourcing providers offer audit support. They store and supply records and provide guidance for IRS, state, or workers’ compensation audits. This can save your team considerable time and stress.

Capstone Accounting Provides Professional Payroll Services

Payroll isn’t just about paying your team. It’s about protecting your business, staying compliant, and delivering a smooth experience. Accurate and timely payroll shouldn’t cost your company tens of thousands of dollars. Our experts are dedicated to providing comprehensive payroll services that scale with your company’s evolving needs. Contact us today to schedule a consultation.