Should you outsource your government’s payroll?

Preparing your government's payroll takes a lot of time and expertise. From collecting employee information, tracking leave, processing timesheets, and calculating pay to processing garnishments, delivering pay checks, submitting tax forms, and preparing year-end reporting, there's a lot to do. That's why some governments use a third party to do all or part of their payroll. But how do you determine if outsourcing payroll is right for your government?

Your leadership and governing body will make the final decision about how to handle payroll. Some will shy away from partial or full outsourcing because of the costs involved. However, it's important to remember it costs money to process payroll in-house, too! To help you determine if outsourcing payroll is right for your government, consider the pros and cons of each option, calculate the true costs of each, and answer the following questions:

1. Do your staff have the right skillset? Employees processing payroll must be detail-oriented and able to research and interpret technical information. They must be cognizant of many deadlines and maintain meticulous records.
2. Is this how you want staff to spend their time? If staff are performing payroll, it may prevent them from doing other important tasks. You should decide if that is the best course of action. If it's creating an overtime situation, then you might want to reevaluate. Also, remember, you should have a backup person to cover absences and vacations.
3. Can you provide ongoing training? Your payroll clerk must keep up with payroll laws and tax filing rules, as well as payroll-related fraud schemes. For example, recent fraud schemes have targeted payroll clerks into redirecting direct deposit payments to fraudsters (who are posing as an employee). You'll need to plan and budget for ongoing staff training.
4. Can you effectively monitor the payroll function? Someone other than the preparer of payroll must monitor and review the process. Governments have experienced many misappropriations when one person has too much control over the payroll process and monitoring was poor or nonexistent. This reviewer must ensure only the appropriate people are paid, at the correct rates, deductions are appropriate, and that taxes paid are accurate and remitted on time.
5. How complex is your payroll process? It can become challenging when you have many different pay types, various benefits and deductions, or garnishment situations, and you don't have dedicated payroll staff. For a small government processing payroll in-house, complexities typically begin to grow when you reach about 10 to 15 employees.
6. Do you have the right tools to do it? A software system has built-in safeguards to assist staff with payroll calculations. Those who use a spreadsheet or manual methods are more likely to make errors. Also, if you are storing any sensitive employee information online or on a computer connected to the internet, then you should make sure this information is secure and protected.
7. Have you received negative feedback? Feedback can come in many forms. For example, your employees might complain if they've been underpaid, you may learn about issues resulting from a state or federal agency audit, or you may have received notices or penalties from taxing authorities about errors or missed filings. If you've received negative feedback, it may be time to reevaluate how you process payroll.

Additional payroll-related resources

If you are managing a payroll function, remember SAO has these payroll-related resources to help you:

• Payroll Guide – This comprehensive resource can help you develop policies and identify best practices and other ways to improve your payroll process. Leadership, managers, supervisors and payroll clerks can all find information tailored to them in this guide.
• Internal Control Checklist for Payroll Systems – This checklist can help you self-assess your government's internal controls over payroll processes.
• Segregation of Duties Guide – This guide contains a chapter on payroll and how to segregate duties (see Section 2, Chapter 3). It also suggests compensating controls when it's not possible to segregate duties due to the size of your staff.

How to reach us for more assistance

• Remember, SAO can help. If you have technical questions, submit them using our HelpDesk in the client portal.
• We also have internal controls specialists at SAO's Center for Government Innovation available to talk with you about best practices and resources. For assistance, reach out to us at Center@sao.wa.gov.