Short answer
Outsourcing payroll typically makes sense when payroll becomes complex, vulnerable or time-consuming. In-house payroll administration can be beneficial in very simple setups - but often involves greater risk.
Many companies feel reassured by an in-house solution because they find that they can obtain information and answers to questions more quickly. This applies to both small and larger companies. However, in most cases, questions can easily wait 24 hours, so using an external payroll agency can certainly be a good idea.
Internal payroll administration - pros and cons
Benefits:
- Full internal control
- Close to employees and management
- Can work with very simple pay structures
- Quick answers to questions
- The company manages its own deadlines for input and is not required to meet external deadlines
Disadvantages:
- Heavy reliance on a single key person – highly vulnerable
- Risks associated with illness, holidays or redundancy
- Requires constant updating of legislation, regulations and systems
- Mistakes can be costly (fines, back payments, disgruntled employees)
- As a rule, it is more expensive than an external agency. It is not just the salary of the in-house employee – typically, you have to add 35–50 % on top for pension, holiday pay, sick pay, training courses, etc.
- There is rarely time for innovative thinking and optimisation, so more time is often spent than is necessary
Payroll outsourcing - pros and cons
Benefits:
- Specialists with up-to-date knowledge on general legislation (not collective agreements)
- Lower risk of errors, as checks have been put in place to ensure correct pay
- A scalable solution for growth – staff are always on hand
- Less administration and more management time
- Documented compliance
- Can help tighten up internal procedures
- Guarantee that your salary will always be paid – regardless of illness, redundancy, etc.
- Usually cheaper than an in-house solution
Disadvantages:
- Less daily hands-on control
- Requires good collaboration structure and alignment of expectations
- Requires an internal contact person who can provide payroll data
When does outsourcing payroll typically make the most sense?
- As your business grows
- When there are multiple salary types or collective agreements
- When payroll is currently handled by one person
- When errors or delays have caused problems
- When management wants to free up time
We have explored in more detail here the vulnerability that comes with relying on a single person to handle the payroll: The hidden risk of in-house payroll processing and What happens to payroll if your payroll manager doesn't show up tomorrow?
When might in-house payroll administration be the better option?
- Very small businesses
- Very simple salary conditions
- If there is already a high level of in-house expertise on pay and a contingency plan has been drawn up
- If the company does not have an internal contact person who can provide data to the payroll agency
How to find out what’s right for you
The choice between in-house payroll administration and outsourcing is rarely a simple either/or decision on paper – it depends on your specific situation: how complex your payroll is, how vulnerable you are if a key person leaves, and how much time payroll actually takes up at present. A good place to start is to calculate the full in-house cost (payroll + overheads) and compare it with the cost of an external solution. If you’d like to delve deeper into the value itself, we’ve summarised it here: Is payroll outsourcing worth the money? – and you can read more about our outsourcing of payroll administration.
Conclusion
There is no one-size-fits-all solution. However, for the vast majority of SMEs, outsourcing payroll provides greater peace of mind, fewer errors and more time than managing payroll in-house.
Peace of mind and security are the most important factors these days, because an in-house payroll officer can quickly be out of the picture due to resignation or illness – and very few companies have a back-up plan.
Dansk Løn Service helps you assess what makes the most sense in your situation, and how a partnership and a fixed structure can be set up. We’ll also let you know if a partnership doesn’t make sense – we’d rather be transparent, as a partnership where expectations aren’t aligned rarely turns out well.