Managing payroll in-house may seem like a logical step for businesses intent on containing costs, maintaining control, or avoiding the expense of outsourcing. Beneath the surface, however, in-sourcing payroll can carry risks that often go unnoticed until they result in serious problems for the business. The truth is that while doing payroll internally might seem straightforward, the potential for costly mistakes is high, and the hidden costs can far outweigh the initial savings.
We discuss some of the risks and hidden costs of in-house payroll management that many businesses overlook, and why trusting experts like the MMS Group Payroll Services team can be a far smarter choice.
Misclassifying employees as contractors
One of the most common mistakes businesses make when managing payroll in-house is the incorrect classification of employees as independent contractors. Employees and contractors have different tax obligations, benefits, and legal protections under South African law.
Employers are responsible for deducting and paying taxes for employees, including PAYE, UIF and SDL. Contractors, however, handle their own taxes. Misclassifying employees as contractors means these deductions are not made, which can lead to serious penalties for the business upon whom the onus for the respective deductions rest.
Penalties and interest
SARS can impose significant penalties and interest on unpaid taxes due to misclassification. These penalties can quickly escalate and become a costly burden on a business.
Legal liability
Employees who are misclassified may be entitled to benefits and protections they were denied, such as paid leave or medical aid. This can lead to legal action against the company, including referral to the CCMA. Not only is this costly, but the business is also at risk of reputational harm.
The hidden cost here lies not only in the penalties but also in the legal fees and potential settlements that could arise from employee grievances.
Incorrect overtime calculations
South Africa’s Basic Conditions of Employment Act (BCEA) stipulates that non-exempt employees must receive overtime pay for hours worked beyond the standard workweek. This overtime must be paid at a rate of at least 1.5 times the regular wage.
What could go wrong?
Miscalculating rates
Overtime pay calculations must include all forms of compensation, including bonuses and commissions. Misunderstanding this can result in underpaying employees and expose your business to claims of unpaid wages.
Incorrect classification of employees
Not all salaried employees are exempt from overtime. Misclassifying employees as exempt when they should receive overtime can lead to claims for back pay, and disgruntled employees.
When these errors pile up, businesses not only face the direct cost of underpaid remuneration but also the administrative burden of correcting these errors.
Missed tax deadlines
Payroll taxes in South Africa include PAYE, UIF, and SDL. The failure to meet filing or payment deadlines is a common issue when handling payroll internally without the right expertise. Even one missed deadline can have costly repercussions.
Late payments
Missing the deadline for paying payroll taxes to SARS can result in administrative penalties and interest charges from SARS.
Incorrect filings
Incomplete or inaccurate SARS filings often trigger audits, which are time-consuming and costly to resolve. Audits also expose your business to potential additional fines and penalties if further errors or inaccuracies are found.
The costs associated with missed tax deadlines are hidden in the form of fines and interest but can spiral out of control if not addressed early on.
Poor record-keeping
In-house payroll teams often struggle to maintain precise and up-to-date records, especially as the company grows. Without robust payroll systems, errors can accumulate unnoticed.
What could go wrong?
Increased audit risk
Incomplete or inaccurate payroll records are one of the biggest triggers for tax audits. If SARS detects discrepancies in your payroll records, your business could face an exhaustive and costly SARS investigation.
Employee dissatisfaction
Payroll errors, such as underpayments or delayed wages, can significantly impact employee morale and encourage legal recourse.
Poor record-keeping can also lead to non-compliance with local employment and SARS laws, which carry heavy fines.
Fixing poor records is a tedious and expensive process, especially if your business has grown rapidly. The time and resources spent correcting these issues could be better used on core business activities.
Time and opportunity costs
Managing payroll internally is time-consuming, even with small teams. While it might seem like a cost-effective solution at first, the time spent on payroll by your HR team, or worse, your leadership team, represents a hidden opportunity cost. This time could be used more efficiently on tasks that directly contribute to business growth.
Reduced productivity
Payroll management diverts attention from core business functions, leading to lost productivity. The time your staff spends trying to get payroll right could be spent on more strategic tasks.
Burnout and mistakes
Without the right tools or expertise, managing payroll can become overwhelming for your staff, leading to burnout. And as mistakes increase, so do the costs to fix them.
The opportunity cost of having your in-house team handle payroll is often overlooked. When the full financial impact is considered, outsourcing to experts can become an obvious choice.
Why outsourcing to MMS Group makes sense
In-house payroll management often appears less expensive on paper, but the hidden costs—from penalties and legal fees to lost productivity—can add up quickly. By outsourcing your payroll to the MMS Group Payroll Services team, you avoid these pitfalls and ensure absolute compliance.
Our experienced team handles payroll efficiently and accurately, allowing your business to focus on the business itself rather than administrative tasks.