Is Outsourcing Payroll a Bad Idea?

Considering the risks, is outsourcing payroll a bad idea for my company? Is there a better alternative option?



When you hear news of a security breach from a major payroll service provider, it begs the question: is outsourcing your business’s payroll a bad idea?

Security Breach: Is Outsourcing to a Payroll Company Worth It?

Talk to a room full of small business owners, and right away you’ll see that, despite the risks, the number of businesses that outsource payroll is steadily increasing. More and more companies choose to offload the burden of processing paychecks, deductions, reporting, taxes, and everything else that comes with payroll administration.

In fact, a 2020 Deloitte Payroll Benchmarking Survey reports that 73% of organizations outsource some aspect of payroll. With the burdens of paying employees and compliance reporting continuing to rise, businesses that outsource their payroll see this as a good financial investment and a huge time saver.

Vulnerability for Unpaid Bills: Is Outsourcing to a Payroll Company Worth It?

However, there’s a second hidden risk that should make small business owners think twice before outsourcing to a payroll service provider. Simply put, if the payroll processor chooses not to submit the required tax payments to the IRS – after you’ve paid the money to the payroll company each pay period – your company is still on the hook with the IRS.

One notorious case came to light several years ago when a payroll company used its clients’ collected tax monies for personal gain instead of paying the IRS. Their clients – all small businesses – had been duped out of millions of dollars and faced devastating IRS consequences.

But how could this be when the payroll company’s job was to remit and pay taxes on behalf of its clients? Sadly, there was no fiduciary liability on the payroll company to do so. And, unfortunately, the IRS and states have maintained that “reliance on a third-party service to remit its taxes does not excuse the employer from liability for the failure to pay taxes, even when the employer is a victim of a scam.” (Business & Technology Law Group®)

An isolated case? Hardly. It’s so common that the IRS posted this warning to help small businesses protect themselves from abuse. They also have a form for filing complaints about improper or fraudulent activities regarding your federal taxes.

A Smarter, Safer Solution: Outsourcing to a PEO

There is, however, a solution that provides both the benefits of outsourced payroll and solid protection from IRS liability. That solution is partnering with a Professional Employer Organization (PEO), which offers a distinct level of protection to their clients.

When your company partners with a PEO, the PEO becomes a co-employer to your staff and takes on the role of "employer of record." In doing so, the PEO assumes fiduciary liability for your company’s tax payments under the PEO’s employer identification number. That means any problems associated with taxes and reporting are directly tied to the PEO, not you.

Additionally, PEOs like Stratus HR provide economies-of-scale access and pricing for employee benefits programs. This means companies of all sizes can offer Fortune 500-size benefits on a small-business budget. A good PEO can also manage recruiting, background checks, hiring, employment eligibility verification, onboarding, and other non-core HR functions that are usually identified as resource drains.

Stratus HR also has an independent verification and audit done each year to maintain its SOC 1 Type 2 certification. While this elective step isn’t required by the PEO industry, it provides clients with peace of mind that their information is protected with the highest degree of data security. (Not sure what a SOC 1 audit is? Learn here.)

To ensure data entries are authentic, Stratus HR provides custom-built software and an employee app that enable clients and employees to securely log in and make changes themselves. This prevents service reps from having to decipher whether a fax, text, email or phone call are truly authentic, and the software has built-in security features to ensure any changes made are authorized and are not transmitted in an unsecure portal.

It all adds up to this: while outsourcing payroll is still a great option for many small and medium-sized businesses, business owners can derive the best protection and benefit by partnering with a PEO like Stratus HR.

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