Knowledge Expansion

In-house or outsourced payroll: What’s the right fit for your medical practice?

Insight Article

HR Legal

Kenneth T. Hertz FACMPE

At the end of the pay period, there’s one thing every one of your employees relies on: You getting their payroll check right. They don’t want excuses or explanations – they just want it correct, every time, even if you change systems.

An April 18 MGMA Stat poll found that almost half of respondents – 48.9% – handle staff payroll processing in-house, and another 31.9% have a mix of in-house and outsourced processing. Only 17.3% of respondents said they outsource all their staff payroll processing.

When you evaluate your practice’s payroll systems, there are several questions to answer when deciding whether to do payroll in-house, outsource it or use a mix of both approaches:

  1. Is your current payroll processing effective and efficient? If not, what about it is not?
  2. If you want to change the system for processing payroll, what do you want to achieve: Cost savings? Reduction in staff? Securing compliance and/or tax expertise?
  3. How do you manage and track employee benefits now? Are you looking for a better way?
  4. How complicated is your payroll? Do you have multiple payroll cycles, shift variations, frequent changes and corrections to time tracking? Do you have off-cycle payroll checks on a regular basis?
  5. How many accounts do you currently use for payroll? Is your current payroll and benefit system completely integrated or fully interfaced? Do you spend time writing numerous journal entries?

As you ask these questions while considering a change, keep in mind what your options might entail:

In-house payroll

In-house payroll typically provides more flexibility and more control, and it can be useful if you have off-cycle payroll requests.  The system works if you have the appropriate technology to process payroll and track benefits in an efficient way, as well as the appropriate staff with knowledge in compliance, taxes and other regulatory and statutory issues.

There are costs involved, and be sure to consider all of them in any analysis: indirect labor costs, direct labor costs, system maintenance and support. If you consider moving to outsourced payroll processing, some vendors will talk about costs on a per-check basis. When you evaluate your costs, reduce them to a per-check basis so you can compare apples to apples.

Outsourced payroll

If your payroll is very complicated, seeking out a vendor may be optimal. If you are willing to give up control and do not have off-cycle payroll needs, an outsourced system can work well. You typically get added value through human resource expertise available, regulatory and statutory expertise and current tax expertise.

Combination in-house/outsourced

This approach gives you the best of both worlds: Greater flexibility and control than total outsourcing, yet the added value of a vendor’s tax, regulatory and statutory expertise. In many mixed approaches, the practice collects the hourly information, gross pay, generates reports, and often distributes checks, with a vendor handling taxes, W-2 forms, direct deposits, garnishments and printing of checks. Just remember: when you’ve seen one situation, you’ve seen one situation. Everything is open to negotiation, and keep your goals in mind.

You have choices, but the most important steps in evaluating your payroll systems are knowing what you want to achieve, doing your due diligence and making a thought decision with a solid plan for testing and implementation. Remember, it’s your employee’s paycheck and it better be right.

About the Author

Kenneth T. Hertz
Kenneth T. Hertz FACMPE
Principal Consultant MGMA Consulting

With nearly 40 years of management experience, Kenneth T. Hertz, FACMPE, has held numerous leadership positions in small and large healthcare organizations in primary care, multispecialty care and large integrated systems. His consulting work has encompassed a broad range of services, including operational improvement, practice analysis, strategic planning, organizational development and strategic marketing.