Entrepreneurs who highly prioritize their time and value their piece of mind frequently delegate operations management to others. By joining forces with a comprehensive service provider, the majority of repetitive tasks that deal with a bulk of data such as billing and collections, payroll obligations, tax withholdings as well as report generation, are efficiently performed for them.
Handling employee payroll can be a time-consuming task. However, opting for payroll outsourcing can significantly cut down on costs and provide access to experts in payroll management. Nevertheless, outsourcing still comes with its set of risks and challenges. Read on to get detailed insights into the function of payroll outsourcing and how this can potentially equip you with the knowledge to evaluate which outsourcing strategies can be adapted to your company.
What is Payroll Outsourcing?
If you find payroll management bothersome or beyond your expertise, fret not! There are skilled professionals who specialize in this field. These experts can cater to your every need, ranging from calculating salaries and deductions to efficiently transferring funds to your employees’ accounts and submitting taxes. You can also choose to outsource either a full or partial payroll management depending on your requirements and budget constraints.
During the initial stages of strategic outsourcing, firms preferred delegating low-skill duties that did not entail sensitive business matters. However, current practices have evolved, and several businesses assign crucial responsibilities, like customer service and financial management tasks. Such activities now comprise several job functions typically performed by human resource executives and administrators, including payroll operations.
Trustingly leaving a company’s funds and managing sensitive information to a third party was previously unthinkable. Still, a significant portion of the payroll process involves standard protocols and routine activities. As a result, it is now plausible to allocate these duties to dependable partners without surrendering decision-making power.
Meanwhile, “co-sourcing payroll” is a hybrid approach where certain aspects of payroll processing are outsourced while others are handled in-house. One benefit of separating tasks is that it allows companies to manage certain areas they prefer not to delegate to a third-party while benefiting from cost savings associated with outsourcing. Alternatively, some companies opt to co-source payroll responsibilities when they believe an external service can better handle specific tasks while retaining in-house control and turning to experts only when necessary.
General Payroll Functions That Can Be Outsourced
While it may not be universally preferred, the option exists to delegate nearly all payroll operations to an external service provider. Subcontracted duties may encompass a range of responsibilities, such as:
- Setting up payroll accounts
- Configuring payment methods
- Monitoring hours worked
- Calculation of wages
- Pay distribution
- Implementing security protocols to protect both company and employee data
- Guaranteeing compliance with governmental regulations
- Withholding payroll taxes and income taxes
- Management of employee deductions
- Remittance of payroll taxes
- Finalizing annual tax work
Two Kinds of Payroll Services
Payroll services can be found in a variety of forms, depending on the provider’s size, expertise, and target clientele. There are two primary types:
- Full-service Payroll Providers
With full-service payroll providers, you can give them your business and employee data, and they’ll handle everything else for your payroll from start to finish. Although relatively more expensive, full-service payroll is easier to manage. However, to share information with them, you must have reliable systems. They require access to important updates, such as changes to an employee’s employment terms or tax status, and timely timesheets for hourly employees. - Do-it-yourself (DIY) Payroll Providers
Many providers will handle the more challenging aspects of payroll, while you take care of basic administrative duties. For instance, you might keep track of employee records and time and attendance. However, they will determine all compensation, taxes, and other deductions. Additionally, they will provide you with software that makes your tasks easier.
How Payroll Outsourcing Functions For Your Convenience
The First Steps
In the process of outsourcing, the company needs to prepare by deciding on the degree of outsourcing, either full or co-source, and specifying the responsibilities the third-party service will take on. For example, a company may only opt for an outsourcing service to handle the tax issues associated with payroll.
Arranging Payroll Outsourcing
In 2023, various payroll outsourcing providers have been made available domestically and internationally. However, companies must evaluate the service providers against specific criteria to ensure they comply with relevant regulations and maintain employee data protection. Once a provider is selected, the terms of engagement are agreed upon, and compensation for services rendered is established. The client provides all the necessary information to complete the outsourced payroll functions.
Making Payroll Happen
After the necessary information is exchanged and the procedures are established, the payroll outsourcing provider begins its functions. This involves distributing salaries on a defined schedule, withholding applicable taxes, and reporting to the client regularly. The client can use these reports to confirm the progress of the outsourcing service. Finally, the provider is responsible for fulfilling the end-of-year tax duties, which include submitting relevant documents and remitting the tax dollars.
Who Should Outsource Payroll Functions?
If employers lack the necessary administrative resources or expertise, it is advisable to seek professional help from a third party when it comes to running payroll.
When it comes to payroll outsourcing, the key factors to consider are efficiency and cost-effectiveness for your business. It’s important to thoroughly research and evaluate your business requirements before making a final decision. Partnering with the right provider can significantly reduce the time and effort you spend on payroll, freeing you up to focus on growing and managing your business effectively.
Top Reasons Why Payroll Outsourcing Works
Reduced Costs: The main reason behind outsourcing payroll is cost savings. Companies find it more economical to outsource their payroll management than to handle it in-house. This has been one of the driving forces behind outsourcing in general, including payroll functions. By outsourcing to a provider in a country where salaries and wages are generally lower, the client company can recoup a significant portion of the difference in employee compensation.
Even when payroll is outsourced domestically, cost savings can still be achieved. For instance, a company based in New York or San Francisco that manages payroll in-house must pay high salaries to attract qualified employees, just like the rest of its staff. However, by delegating the work to a third-party provider located in a region with lower living costs, the outsourced function becomes cheaper. For even greater savings, consider using a free payroll software solution.
Professional Expertise and Service
Outsourcing offers the added advantage of entrusting payroll tasks to specialized providers who excel in efficient payroll management. For several firms, managing payroll in-house is merely a crucial housekeeping duty, as they have expertise in a completely different field. Conversely, a payroll outsourcing provider or “payroll service bureau” focuses solely on payroll tasks. If they offer additional services, they typically relate to similar sectors.
This implies that the third-party provider possesses comprehensive experience in payroll matters and has efficient management systems in place for all payroll functions. They often employ personnel with specialized training and have all the required software at their disposal.
Naturally, the quality of payroll outsourcing may vary, but many companies still prefer these third-party payroll managers over internal capabilities. Errors in tax calculations or regulatory compliance can consume valuable time and result in costly resolutions, making it imperative to “get it right” on the first attempt. “Leaving it to the pros” proves particularly beneficial for large firms that have complex and demanding payroll obligations.
Increased Focus on Primary Responsibilities
For any organization, the top priority is to focus on the core functions that generate revenue. However, performing peripheral roles like payroll management can be unavoidable. But relying on in-house staff to handle this task can hamper revenue opportunities and also affect business efficiency during unexpected situations.
It’s only in the case of payroll outsourcing providers that payroll management is considered a core function. Outsourcing payroll can help businesses to reduce administrative burdens and allocate resources more effectively, thereby allowing them to streamline their employee tasks and prioritize other critical functions.
Tips for Selecting an Outsourced Payroll Provider
To ensure a smooth and successful transition when outsourcing payroll services, it’s important to choose the right provider. Following these steps can help:
Define Your Requirements Payroll: Processing can be complicated if you have multiple pay frequencies and employee classifications. Determine your requirements first.
Ensure Compliance Payroll: Providers need to adhere to multiple state and national regulations. Before selecting a provider, ensure that they have a solid understanding of compliance requirements.
Evaluate Vendor History Reputable payroll providers usually have a stable ownership structure, strong financials, and an impressive track record of successful implementations. Look for providers with a good reputation.
Review Peer Feedback: Industry analysts and clients who have used the provider’s payroll services can provide valuable feedback. Review their feedback to help you make an informed decision.
Secure Buy-In from Stakeholders: Outsourcing payroll is easier when you have the support of your employees and senior leadership. Secure their buy-in to make the transition as smooth as possible.
Key Take Aways
Like any business decision, outsourcing payroll has its advantages and disadvantages. Employers must thoroughly evaluate a full-service payroll provider before partnering with them to ensure they can meet their specific needs and have a consistent history of success.
For company owners that are relatively inexperienced in outsourcing, it is crucial to invest ample time in choosing the appropriate provider and verifying all other terms of the arrangement. It is important to bear in mind that payroll is the lifeblood of a company, as it supports its most valuable resource: its employees. Furthermore, considering the confidentiality of the information at stake, it is evident why these decisions must not be taken hastily.
Employers can save time and money by outsourcing payroll. Instead of dedicating extensive hours to administrative tasks, employers can concentrate on promoting business growth. This approach can also prevent expensive penalties, thanks to improved accuracy. At EVS, we value both our client’s security and the satisfaction of their employees. Our virtual payroll experts deeply understand how much a misstep by a payroll provider can turn into a huge problem. And so we only pool the best of the best. Book a free consultation with us today and we’ll tell you how outsourcing your payroll could be the best decision you can make for your company.