Every day seems to bring another perspective on data analytics, employee engagement or mobile apps that can more efficiently help employers cope with the mounting costs associated with employee expenses. Broadly speaking, these are rapidly becoming the dominant “spend” item on many corporate balance sheets. So reports HR Post blog.

The market for software that can help improve the costs and processing of benefits, recruiting and payroll (among other functions) is burgeoning. That said, even though payroll was one of the first HR functions to be automated, the age-old debate about payroll management is whether to keep it in-house or outsource it.

A handy rule of thumb used to be that payroll would be managed internally to maintain control over the process, employee confidentiality and cost-effectiveness. That is until an organization got to a certain size, at which point it became an inefficient use of resources to keep it in-house.

Today, however, it’s not so much about a company’s size as it is a confluence of factors (including the complexity of a changing work force, an evolving healthcare system and the need to integrate payroll with retirement-plan and benefit processing) that make a compelling argument for outsourcing payroll management.

The Tax Man Cometh

One such factor concerns the exorbitant amount of payroll tax penalties imposed by the Internal Revenue Service (IRS) on businesses, usually small companies. In the year ended September 2013, the IRS levied 6.8 million fines totaling $4.5 billion on companies that had assessed incorrect employee taxes for payment of Social Security, Medicare and unemployment insurance. That whopping figure was actually way down from $7.1 billion (on 7.9 million penalties) in 2009. So reports Bloomberg.

The discrepancies are caused by the continually changing rules associated with companies getting bigger and smaller or as they hire employees that are part-time, consultants or contractors in addition to full-timers, according to a prominent tax accountant quoted in the article.

Also, constantly evolving tax laws result in frequent changes in the rules for collecting payroll taxes, making it harder for businesses to keep up with regulatory nuances. As a result, the accounting-firm partner, David McKelvey, advises his clients with upwards of $1 million in annual sales to outsource their payroll services. Concurrently, the CEO of online payroll software startup ZenPayroll points out that 40% of U.S. businesses continue to process payroll taxes manually.

Payroll = Non-core Function = Outsource

It’s long been a common business adage that “non-core” functions – i.e., those that do not constitute a profit center or differentiate a business strategically from its competitors – are advisedly outsourced. So reports Small Biz Trends.

This category at most firms encompasses back-office and administrative functions including payroll. At the same time, many managers and business owners have to balance the recommendation to spin off non-core activities versus the time, expense and energy needed to identify an appropriate third-party provider.

Key benefits for companies when outsourcing payroll management include:

• More time and resources to focus on the firm’s core businesses
• Access to payroll technology increasingly oriented towards employee self-service (paycheck via direct deposit or payment card; mobile device usage)
• Tax and regulatory compliance expertise (e.g., the Affordable Care Act alone requires constantly evolving knowledge)
• Cost control and risk management aids – an executive with payroll giant Paychex indicates that time recordkeeping discrepancies alone result in overpayment of employees by approximately 4% nationwide. IRS statistics show that 40% of small businesses pay average tax penalties of $845 per year due to late or incorrect tax filings.

However, the choice between choosing a payroll provider that can be trusted and meet a company’s individual needs versus purchasing increasingly sophisticated technology and allocating a greater share of HR resources to the task is an important choice – and not a simple one.

But, as businesses grow and adapt to a challenges in the legal and regulatory environment (not to mention the cyber-world), just keeping up with technological advances can require its own operation. What it comes down to is whether the costs and resources allocated to payroll management can help an HR department operate more efficiently as an internal function, or whether everyone’s jobs and lives can be made easier by managing outside professionals who can do the job cheaper, faster and better.