When you decide to manage payroll in-house instead of using a professional service, there are many hidden costs to consider. Doing it yourself may initially seem less expensive. Still, once you calculate the time, effort, risks, and expenses involved, outsourcing begins to look like a more effective solution.
Here are some of the main costs of DIY payroll that are not immediately apparent.
Cost of Time Spent on Manual Calculations
Unnecessary Administrative Burden: Managing payroll manually or with basic software is time-consuming, taking valuable time away from critical business activities. This is particularly burdensome for small business owners who already wear many hats. In addition, payroll tasks, such as remitting taxes or paying employees, are time-sensitive. Missing deadlines can lead to fines and strained employee relations.
Poring over spreadsheets and trying to learn new accounting software keeps you away from revenue-generating tasks — your business. Spending time on formulas or software that isn’t intuitive is better spent elsewhere in your business. Time traps in DIY payroll processing include bookkeeping and HR calculations, such as:
Tax and Benefit Deductions
Preparing payroll means computing deductions for the Canada Pension Plan (CPP), Employment Insurance (EI), income taxes, and other benefits or garnishments per employee per pay period. This can take 8-10 hours each month—or longer.
Calculating and Reconciling Timesheets and Pay Rates
Before you can begin processing payroll, you must tally timesheets, confirm employee salaries and hourly wages, and calculate overtime and other compensation variables. Doing this manually for multiple employees takes significant time and effort every pay period. Opting to DIY rather than outsource payroll services means you lose productivity for other tasks — and this will really add up.
Hidden Costs & Impacts of Manual Calculations
- Administrative Burden: Payroll processing requires meticulous attention to detail, consuming time that could be spent on core business activities.
- Opportunity Cost: Time spent on payroll is time not invested in growth strategies, customer service, or revenue-generating tasks.
- Reduced Productivity: Business owners and staff may become overwhelmed, resulting in less efficiency in other areas.
- Delayed Business Growth: You may miss critical business opportunities due to time spent managing administrative tasks.
Opportunity Cost of Not Focusing on Core Business
The hours you spend processing payroll eat into time better spent growing your core business and revenue.
Less Time for Critical Functions
The more effort invested in payroll processing, the less time you devote to essential revenue activities — time you could spend growing your business.
Rather than focusing on higher ROI activities like business development and customer acquisition, your attention gets diverted to back-office administration. The opportunity cost of that lost time? Immeasurable. Plus, your ability to stay focused takes a significant hit, which can eventually lead to work-related stress and burnout.
Risk of Errors
DIY payroll is prone to human errors, such as miscalculations, incorrect tax withholdings, or incorrect data entry. These mistakes will lead to employee dissatisfaction, penalties, and potentially legal issues.
Bottom line: Performing payroll calculations has a considerable risk of error, even if you’re highly skilled with quantitative data. Here are common risks with DIY payroll:
Incorrect Payment Amounts
If tax and deduction calculations are wrong, employees' paycheques could be over or under the correct amounts, and your remittances will be off.
Hidden Cost & Impacts of Calculation Errors
- Calculation Mistakes: Manual data entry and complex calculations increase the risk of errors.
- Correction Processes: Identifying and rectifying mistakes consumes additional time and resources.
- Employee Dissatisfaction: Payroll errors can erode trust and morale among employees.
- Financial Losses: Overpayments reduce profits, while underpayments can lead to legal disputes and penalties.
Risk of Compliance Errors & Penalties
Miscalculating or failing to properly withhold mandatory deductions (like CPP, EI, and income tax) can result in significant compliance issues and penalties.
CRA Fines and Interest Charges
If you make substantial errors, inaccurate paycheques and Canada Revenue Agency (CRA) remittances could result in undesirable CRA audits, penalties, audits, and fees for late or inaccurate remittances or missed filings.
Public Accountability
As an employer, you’re accountable to the CRA for following all payroll laws and filings. Falsely claiming you know what that entails carries risk. What is the potential cost of even the smallest mistake? You could lose your employees’ trust and damage your public reputation.
Hidden Costs & Impacts of Compliance Risks and Penalties
- Complex Regulations: Canada's payroll system involves intricate federal and provincial laws, including income tax, Canada Pension Plan (CPP), and Employment Insurance (EI) contributions.
- Frequent Changes: Tax laws and labour regulations are subject to change, increasing the risk of non-compliance.
- Financial Penalties: Errors in calculations or late remittances can result in fines, interest charges, and penalties from the Canada Revenue Agency (CRA).
- Legal Consequences: Non-compliance can lead to legal action, audits, and damage to the business's reputation.
Cost of Learning and Staying Updated With Canadian Tax Laws
You need extensive knowledge of Canada’s payroll legislation and regulations to handle payroll taxes and deductions reliably. Payroll regulations in Canada, including tax laws, employment standards, and provincial requirements, are complex and frequently updated. Staying current with these changes can be challenging for small business owners without dedicated payroll expertise. Each province in Canada has its own set of rules regarding employment standards, such as minimum wage, overtime, and statutory holidays, adding another layer of complexity.
Learning Payroll Basics
Payroll processing requires you or your staff to receive training on accounting baseline requirements and best practices.
Keeping Up With Changing Regulations
Not only is specialized training required, but laws change frequently. Staying current with evolving payroll laws related to effective tax rates, minimum and maximum deductions, T4 requirements, and more takes regular effort. Ongoing learning can be a significant drain on human and financial resources.
Cost of Investment in Payroll Software and Infrastructure
Managing payroll manually with spreadsheets is so 2008 — it simply isn’t feasible today.
Acquiring Payroll Software
Managing payroll manually isn’t cost-efficient. However, getting a proper payroll software program can be a huge investment and requires learning how the program works.
Updating and Securing IT Systems
Adding payroll software to your tech stack is a hefty expense. And the IT infrastructure you need to maintain data safety and privacy isn’t cheap either, nor is the payroll for an in-house IT services team. Cyber threats evolve by the minute, so your programs and infrastructure need regular security patches and upgrades. Is that an ongoing expense you’re willing to take on? Are you willing to take on the risk of not investing in cyber security?
On top of software updates and system maintenance, you’ll need to cover the ongoing expense of filing business tax forms. While necessary, information technology expenses eat into the savings of DIY payroll.
Data Security Risks
Hidden Cost & Impacts
- Sensitive Information Handling: Payroll involves confidential employee data, including Social Insurance Numbers (SIN), bank details, and personal addresses.
- Cybersecurity Threats: Small businesses may lack robust security measures to protect against data breaches.
- Legal Liability: Breaches can lead to legal action under privacy laws like the Personal Information Protection and Electronic Documents Act (PIPEDA).
- Reputational Damage: Loss of trust from employees and clients can have long-term business repercussions.
Audit Risks & Costs
Hidden Cost & Impacts
- Increased Scrutiny: DIY payroll processes may lack the rigour of professional services, attracting audits.
- Preparation Time: Gathering documents and preparing for audits consumes time and resources.
- Financial Costs: Audits can lead to additional taxes owed, penalties, and interest.
- Stress and Disruption: Audits can be stressful and divert attention from running the business.
Hidden Expenses in Employee Turnover
Hidden Cost & Impacts
- Recruitment Costs: Payroll errors can lead to employee dissatisfaction and higher turnover rates.
- Training New Employees: Onboarding new staff requires time and resources.
- Lost Productivity: New employees may take time to reach full productivity levels.
- Increased Costs: Frequent turnover adds to operational expenses.
How to Avoid DIY Payroll Management Errors & Costs
To mitigate these hidden costs, small businesses can implement the following options:
Outsourcing Payroll Services
- Benefits: Access to expertise, compliance assurance, and time savings.
- Cost-Effectiveness: While there is a direct cost, hiring outsourced payroll services may be lower than the cumulative hidden costs of DIY payroll or the costs of hiring in-house.
Using Cloud-Based Payroll Software
- Automation: Reduces manual entry and errors.
- Regular Updates: Software providers often update tax tables and compliance rules automatically. More complex businesses will need professional expertise along with specialized software to manage payroll successfully.
Hiring In-House Payroll Professionals
- Expertise on Staff: Immediate access to payroll knowledge.
- Dedicated Focus: Allows for better management of payroll-related tasks but may not be cost-effective.
Hybrid Approach
- Combination of Software and Professional Advice: Use software for processing and consult professionals for complex issues.
The Bottom Line
While DIY payroll management might seem cheaper, it actually comes with sizeable hidden costs. The hidden costs of DIY payroll processing will become apparent with lost time, unnecessary risk, additional infrastructure expenses, and lost opportunities.
Outsourcing to experts in payroll services is often more affordable in the big picture. You get the added capabilities of an entire team of payroll services professionals, which makes it an attractive option for supporting your business’s growth.
And the peace of mind it offers is priceless. Looking for tech-enabled payroll services? Get in touch.
