8 Considerations for Managing Payroll within Business Central

Over many years of serving as an ERP consultant, one of my roles has been to assist organizations with selecting a new ERP solution. Specifically, my role was to demonstrate how each organization could deploy Business Central to meet their workflow and reporting requirements, and also to help build a plan for configuring and implementing the software.

Most small to mid-sized organizations today choose to outsource payroll to a third-party payroll provider (such as ADP, Paylocity, Paychex, etc.). This may have some level of integration between the ERP system and the outsourced payroll service provider.

While it is becoming less and less common each year, I continue to encounter organizations interested in running payroll in-house, ideally within the ERP solution, such as Business Central.

I fully appreciate the fact that every business is unique, and these unique factors require that each case be evaluated independently. This means that there is no single payroll solution or option that can be recommended for every organization. With that said, after fully evaluating an organization's specific payroll requirements, my response is usually: The payroll process should be outsourced to a leading payroll service provider.

But let's assume you prefer to understand why this is the usual response. Below my goal is provide a list of eight key considerations for making a payroll decision and provide some thoughts along with each of these considerations in order to compare and contrast the use of the "In-house" and "Outsourced" deployment models.

These key considerations include:

1. System Security

2. Employee Payroll Data Access

3. Familiarity with Withholding Rates, Calculations and Year-end Reporting

4. Internal Payroll Staffing

5. Distribution of Payroll Funds

6. Integration with ERP solution

7. Implementation and Support

8. Payroll Processing Costs

Before I dive into factors that may be specific to Microsoft Dynamics 365 Business Central, note that many of these factors are also relevant for any small to mid-sized organization running any ERP solution.

The Payroll Module in Business Central

If you have started a free-trial of Business Central or are already up and running, you may have noticed the absence of a Payroll Role Center or other payroll-related menu selections. This is because Microsoft has made the decision to not include payroll as a standard module within Business Central (meaning that payroll functionality is not developed, maintained, and supported directly by Microsoft).

I am slightly hesitant to venture a guess as to why Microsoft has made this choice, but based on over two decades leading a Microsoft partner organization, my guess is that Microsoft believes that payroll is best handled by certified Microsoft partners with the expertise to develop and maintain a payroll solution, with the key reasons as follows:

1. The local and regional nature of employee data management

2. The continuously changing tax rates, thresholds, and calculations

3. The variability of local payroll processing and data tracking requirements

4. The global availability of Business Central

However, just because Microsoft has chosen to not develop and support payroll as a Microsoft-provided solution, that does not mean that there are not many options available.

A search on Microsoft AppSource (Microsoft AppSource – destination for business apps) quickly reveals that there are over 250 certified apps for Business Central related to "payroll":

Certified "Payroll" Apps for Business Central listed on Microsoft AppSource

Types of Payroll Apps available for Business Central

There is a wide variety of "payroll" related apps on AppSource, with some apps designed to supplement the payroll process, and where many of the apps are specific to a particular country or region. Excluding these types, there are two primary types of payroll apps available for Business Central:

1) "In-house Apps": These apps, as they are commonly referred, have been developed directly within Business Central, and designed specifically to be used within Business Central, just like any other app that is accessed from the standard Business Central user interface. There are some excellent apps available, several that have been around for many years and have a well-proven, feature-rich payroll solution.

With these types of apps, all payroll data is stored and processed directly within Business Central, where the organizations employees are responsible for ensuring that the system is setup properly, tax rates and payroll calculations are accurate, and control of cash disbursement is managed by the internal payroll team. Again, this would be commonly referred to as "running payroll in-house".

2) "Outsourced Apps": These apps are provided by third-party payroll service providers. Some handle the app development and support themselves, while others are developed and supported by other Microsoft partners in conjunction with the third-party payroll service provider. These apps are generally designed to provide an integration between Business Central and their specific payroll service/application.

With these types of apps, all payroll data is stored and processed within the third-party payroll service providers system, with some level of data integration between Business Central and the payroll solution. This is commonly referred to as "outsourcing payroll".

Depending on the size of the organization or industry, it relatively common deployment model is the use of any third-party payroll service provider with no integration to Business Central. For example, if the majority of employees are salaried and timesheets are not a major factor, you may not need any integration with production or project entries. And the "Standard Journal" or "Recurring Journal" features within Business Central's General Ledger can be used to very quickly create and post the periodic payroll G/L Entry, eliminating the need for any financial integration.

Let's review each key consideration in more detail...

Considerations for in-house vs. outsourced payroll

System Security

• In-house: when choosing to operate payroll within Business Central, having well-defined user access and data security setup is paramount. Without it, non-payroll personnel may gain access to payroll related data. Unfortunately, the reality at many small to mid-sized organizations is that the required time and effort to establish and maintain this security has not been done. For example, a user with the Permission Set "SUPER" or "SUPER (DATA)" assigned would have access to all payroll-related pages and reports. (unless the payroll app developer has taken some steps to prevent this).

  
  

• Outsourced: in this scenario, all payroll-related data is stored within the payroll providers environment, making it significantly easier to define which personnel have access to this system, making it much less likely that a user is able to gain unauthorized access.

Employee Payroll Data Access

• In-house: many organizations prefer to provide each employee with online access to their individual payroll-related data. When evaluating in-house payroll solutions for Business Central, verify if an employee portal option is available with the solution.

  
  

• Outsourced: almost all outsourced payroll service providers offer an employee portal. Some may include access to this portal for no additional charge while others may require an additional fee to add this feature.

Familiarity with Withholding Rates, Calculations and Year-end Reporting

• In-house: since all payroll and tax withholding calculations are managed within Business Central, it is ultimately the responsibility of the internal personnel to ensure that the calculations are being performed accurately and all tax rates and withholding rules are being followed. Also, very often payroll-related year-end reports must be generated and provided to the proper governmental authorities.

  
  

• Outsourced: the payroll service provider is responsible for ensuring that tax withholdings, calculations, and other payroll rules are being followed. There are frequently federal, state/province, and local taxing jurisdictions that may need to be considered and one of the key benefits of outsourcing payroll is that internal personnel is not required to continuously monitor for and implement these changes. Also, year-end reports are provided by the payroll service provider, making this a much less labor-intensive and perhaps more accurate process.

Internal Payroll Staffing

• In-house: specifically due to the strict security management requirements and the familiarity of payroll tax rates and calculations, it is imperative that a highly-qualified and trusted internal resource is managing payroll. Additionally, more hours per payroll period are typically required to process payroll internally, so additional resources may need to be allocated to payroll-related activities. It is difficult to estimate exactly how much more time is required, but it is almost always true that this the case.

  
  

  Additionally, an issue specific to small to mid-sized organizations is that there is typically only one person designated to manage and process payroll. This is a risk factor since the reality is that people change jobs and choose to leave the organization. Therefore, when payroll is managed in-house, it is much more common to designate an additional resource who is trained (or regularly participating) in the processing of payroll.

  
  

• Outsourced: for small to mid-sized organizations, my experience is that payroll can be fully managed by one resource, typically a Controller or Human Resources Manager, where the management and processing of payroll is only requires a portion of their time, freeing them to take on additional roles and responsibilities within the organization.

Distribution of Payroll Funds

• In-house: all distribution methods are maintained and executed within Business Central directly by the internal payroll resource. This may include the printing of payroll checks and the electronic transfer of funds via Direct Deposit. The organization can choose exactly when funds are to be distributed.

  
  

• Outsourced: most often, a payroll run must be completed several days in advance of the funds distribution date. For example, if funds are to be distributed on Friday, it is common that the payroll process and the transfer of all funds to the payroll service provider may need to be completed by the end of the day on Tuesday (or Wednesday). This lag between the funds transfer date and the funds distribution date is often a reason cited by organizations for choosing to run payroll in-house.

Integration with ERP solution

• In-house: running payroll directly within Business Central almost always will provide the optimal level of integration between payroll and other modules such as Production Orders, Projects, or Service Management since all of the data is managed within the Business Central environment. The question each organization needs to ask is: how important is it to have a fully-integrated payroll solution? In some cases, it is critical while in other cases it is a nice-to-have but not highly valuable.

  
  

• Outsourced: each third-party payroll service provider will offer a different level and type of integration with Business Central. Most offer General Ledger integration where a periodic payroll G/L Entry can be transmitted from the payroll solution to Business Central. Others may also offer integration with labor hours tracked for Resource hours reported within Business Central Projects, Production Orders, or Service Orders.

Implementation and Support

• In-house: Business Central payroll app providers typically offer implementation services to assist your organization with setting up and training your users on how to operate the payroll module. They will typically also offer support to assist your team with periodic payroll processing. These services are typically very individualized for your organization and tailored to meet your requirements.

  
  

• Outsourced: Most large payroll service providers have 10,000s of organizations running their payroll solution. Therefore, the implementation services provided will be very structured and organized. While this means more responsibility for your team, the setup required is often very streamlined with video-based implementation and user training available. Support for payroll processing is typically via a large helpdesk team and while you are not likely to have the same individual providing support from case to case, the size of the team means someone will be available to assist at most hours of the day.

Payroll Processing Cost

Last, but of course not least, is an evaluation of the total monthly (or annual) cost of processing payroll. This is perhaps one of the primary considerations for choosing how to process payroll, and a comprehensive analysis of the total costs involved with processing payroll should be considered. This analysis excludes non-financial factors such as risk or resource availability.

• In-house: the primary costs of operating payroll in-house consist of:

  • Internal Staffing to operate payroll

  • Payroll software licensing/subscription

    
    

• Outsourced: the primary costs of outsourcing payroll consist of:

  • Internal Staffing to operate payroll

  • Payroll software licensing/subscription

  • Additional fees, which may be charged per paycheck issued or for specific period-end regulatory reporting and filing

While it appears at a glance that the additional fees associated with outsourcing payroll may result in outsourcing being more expensive, it is possible that the internal staffing costs and payroll software costs are lower for outsourced payroll. Therefore, in every case, a detailed cost comparison should be created so that there is no misunderstanding on the total cost of operating payroll.

Summary

The decision to outsource payroll is an important one that is often made when an organization selects a new ERP system. For Business Central, there are many different payroll options available including both solutions to manage payroll in-house as well as using an outsourced payroll service provider that may be integrated with Business Central.

There are many factors to consider including Data Security, Employee Portal Access, internal resource familiarity with payroll processing, staffing for the payroll department, distribution of payroll funds, integration capabilities, implementation and support, and payroll processing costs.

Each organization is unique and should always make the decision is that best suited based on their own specific requirements. As a manager for many years at a small to mid-sized professional services business, our decision to outsource payroll was an easy one, based on factors specific to our business. And I suggest to always do your own due diligence... but if you are a small to mid-sized organization and you wanted to cut some corners, you can just ask me... and my suggestion will most likely be:

"Outsource it!"