Everything You Need to Know About Outsourcing Payroll Processing Services
Managing the employee payroll can be time-consuming – unless another company is hired to do it for you. Outsourcing payroll can result in big cost savings and provide access to payroll management experts, but it also comes with unique challenges and risks. How payroll outsourcing works and how your company can evaluate an outsourcing strategy are covered in our ultimate guide to payroll services outsourcing.
What is payroll outsourcing?
Outsourcing payroll is a process when an organization pays employees and contractors, manages their payrolls, handles global payroll compliance, administers benefits, and files taxes through a third-party platform or entity.
Third-party payroll platforms save organizations time and money, reduce payroll errors, and eliminate the need for payroll personnel to undergo in-house training.
Accounting firms, payroll companies, or Employer of Record platforms handle payroll outsourcing. Employers of Record serve as the legal employers of their employees when an organization engages them. By doing so, the organization can hire contractors and full-time employees, onboard talent, manage payroll, and comply with the national employment laws and tax regulations.
What Is Payroll Co-Sourcing?
A payroll co-sourcing model involves outsourcing some elements of the payroll process while maintaining others in-house. Companies can get “hands-on” in specific areas they would rather not entrust to a third party while still enjoying some of the benefits of outsourcing. Some companies, however, co-source payroll duties if they believe an external service can handle certain tasks more efficiently, keeping the process in-house except for when they prefer to outsource.
What Payroll Functions Can Be Outsourced?
A payroll service can handle virtually all payroll functions. Among the responsibilities that can be outsourced are: payroll account setup, payment method setup, tracking time worked, calculating wages, delivering pay, instilling security measures, compliance with government regulations, withholding taxes and garnished wages, managing employee deductions, remitting payroll taxes, and completing end-of-year tax work.
How cost-effective is outsourcing payroll?
Outsourcing payroll management isn’t guaranteed to be cost-effective, but many companies find it cheaper overall than keeping it in-house. When all goes well, hiring out the work can provide significant advantages and cost savings. It’s important to note that payroll outsourcing providers charge in different ways, and that they can take on some or all of the payroll process, so cost-benefit analyses will vary based on goals and budgets.
Do most companies outsource payroll?
Outsourcing payroll is one of the most common HR functions. According to a Statista survey published in 2022, 12% of companies globally fully outsourced payroll, while 26% co-outsourced payroll.
How Does Payroll Outsourcing Work?
The first steps
In the outsourcing process, most of the actual work consists of preparing to outsource payroll functions. A company must first decide to what extent it wishes to outsource. What is the company’s preference regarding outsourcing or co-sourcing, and, if the latter, how will the responsibilities be shared? Often, companies decide that a third-party service will handle only payroll tax issues.
The payroll outsourcing industry is expected to expand both domestically and internationally in 2022. Different companies will evaluate a provider based on different criteria, but they must all ensure that employee data is adequately protected and that relevant regulations are followed.
As soon as an outsourcing provider is selected, both parties must agree on “terms of engagement.” Here, the provider’s specific duties are defined, and compensation is discussed. At the end, the client provides the payroll provider with all information it needs in order to perform the assignment.
Upon exchange of information and establishment of procedures, the payroll outsourcing provider begins its actual work. Pay is usually distributed according to a clearly defined schedule (every two weeks is popular). Payments must be withheld by the provider before applicable taxes are withheld.
In most cases, providers report to the client on a regular, predetermined basis, confirming services rendered and detailing performance. This is a great opportunity for the client to make sure everything is going as planned. The last major component of the process is outsourcing end-of-year tax duties. It involves both submitting documentation to tax authorities and remitting the tax dollars.
What are the Benefits of Payroll Outsourcing?
Outsourcing payroll has the following benefits:
It saves time
In addition to being challenging, payroll is also time-consuming and overwhelming. It takes time and dedication to manage global payroll, regardless of how many employees you have. Research shows that 26% of small businesses spend more than 3 hours a month processing payroll. It is possible to use this time for more productive activities. Consequently, payroll outsourcing allows organizations to focus on other more important tasks by removing the payroll burden from their plates.
It reduces expenses
By removing cost-inducing factors such as hiring payroll attendants, training payroll professionals, and processing payroll, payroll outsourcing reduces expenses and saves organizations money.
It eliminates payroll errors
An organization that handles payroll in-house is prone to payroll errors. When the government charges organizations for payroll mistakes, they spend a lot of money. Using a global payroll solution minimizes the chances of errors, missed deadlines, and improper payments.
It ensures compliance
Global payroll can be challenging and complex for international organizations. Paying international employees requires compliance with local employment and payroll laws. The complexity of making payments overseas is eliminated with global payroll platforms. Platforms like these usually have a global network and are experienced in international transactions.
It improves security
With a global payroll platform, sensitive information will be protected using state-of-the-art technology to safeguard company and employee information.
What are the Disadvantages of Payroll Outsourcing?
Outsourcing payroll has the following disadvantages:
It provides less oversight
By outsourcing payroll, you are giving up direct supervision of at least some of its processes. Even though a client company is responsible for setting expectations and monitoring a provider’s performance, there’s no substitute for the level of oversight achievable by managing payroll functions internally.
It’s important to find a trustworthy third-party provider, but companies can’t simply blame their provider when payroll mistakes occur. It’s the company’s responsibility to compensate its employees correctly, and problems caused or left unresolved by the provider will keep costing the company time and money until they’re resolved. Additionally, the client is still responsible for tax remittance, regardless of whether it outsourced this payroll function, meaning it’s on the hook for any errors even if it’s not directly involved.
It decreases data security
Even more concerning is the increased risk of a breach of sensitive data that outsourcing inevitably brings. Although many cloud-based payroll data management programs use encryption and firewalls for security, they are juicy targets for criminals.
While data security risks such as these don’t completely disappear, transferring sensitive information (such as Social Security numbers, bank account information, etc.) outside the walls of a company and potentially across the globe can increase exposure. It is less likely that a company will face these types of risks when everything is kept internally.
What should you look for before choosing a global payroll partner?
Those who have experience negotiating outsourcing contracts with third parties can use their past experiences as a guide. If your company has never outsourced before, it’s a good idea to spend some time selecting the right provider and making sure all other aspects of your arrangement are in order.
It might seem more difficult to find a new payroll department than to outsource manufacturing processes or customer service. A company’s workforce is its greatest asset, and payroll fuels its “engine.” Considering how sensitive the data involved is, it’s easy to see why these aren’t decisions to make lightly.
When choosing a global payroll solution, knowing what to look for will simplify the process. Take note of these tips.
Payroll partner reputation
It’s crucial to keep in mind what’s at stake when choosing a payroll outsourcing provider. An experienced provider makes things easy for the client, but clients shouldn’t be misled into thinking that they are secure. Data breaches and mistakes can happen to even the best payroll managers. To minimize these inherent risks of outsourcing, make sure the provider you choose is trustworthy and experienced.
The assurance that payroll information is handled efficiently is provided by choosing a reputable payroll partner. Also, look for a global payroll partner with an outstanding track record.
People’s social security numbers, full names, and bank account information are sensitive information in payroll management. A third-party payroll platform that takes security seriously is a good choice when choosing a payroll partner.
It is important for the right global payroll partner to stay up to date with changing regulations. Managing global payroll requires knowledge of country-specific employment laws and tax regulations.
This is another area where a misstep by a payroll outsourcing provider can lead to problems for both the provider and the client. Companies outsourcing internationally should not assume they can ignore employment regulations in the provider’s country, since these can be very different from those in the United States. Likewise, companies should never assume that all applicable taxes have been successfully remitted by a provider-always double-check the figures to ensure that they are accurate, as errors can have costly repercussions for clients.
Payroll outsourcing aims to reduce costs. Therefore, it is crucial to choose a payroll company with a price that is in line with the organization’s budget when selecting a global payroll provider.
What is the best way to find a payroll company?
“Payroll outsourcing providers” or “payroll service bureaus” often specialize in payroll outsourcing. “Professional employer organizations” (PEOs) offer broader administrative or HR services, including payroll management. It is common to use the terms “payroll service provider” and “payroll services” to refer to either type of organization.
It is true that payroll outsourcing offers advantages, but no single resource can guarantee success when it comes to managing payroll. In order to save money and time, business leaders should not take outsourcing payroll lightly. Having a solid understanding of payroll outsourcing’s pros and cons, in addition to accurate information about existing payroll management costs, can help guide decision-making.
What criteria do you employ to choose the perfect outsourcing partner? If you need help in finding the right outsourcing partner, book a FREE APPOINTMENT with Outsource Asia experts today.