Payroll is the most frequently outsourced HR function. It‘s a time-consuming, error-prone task that requires extensive knowledge of multiple regulations. That said, deciding whether or not payroll outsourcing is right for your business can be tricky. It is essential that you understand the pros and cons to help you in the decision-making process.
What is Payroll Outsourcing?
Payroll outsourcing is when an organization hires an external provider to handle all the payroll functions. It involves engaging a third-party service provider to process the administrative and compliance requirements related to employee pay.
Delegating this role to a third party provides access to expertise and technology, is time-saving, and maintains full compliance for the business. The level of outsourcing the payroll function requires varies, from basic service to a more comprehensive package including all aspects of payroll.
Typically, businesses outsource payroll to:
Regardless of whether you‘re a small business or a big corporation, you should consider all the benefits and potential downsides when determining whether outsourcing payroll is the right decision for your business.
What Features do Payroll Outsourcing Providers Offer?
You may be wondering, what are outsourcing payroll services, and which features do providers offer? Payroll outsourcing and HR solution providers have the knowledge and technology to provide the following key features:
|Calculation of gross and net pay|
|Payroll tax filings and payments|
|Employee pay deposits, such as direct deposits and paycards|
|Year-end compliance processing|
|PTO and accrual trac|
|HRIS management and integration|
|New hire reporting|
|Wage garnishment processing|
What Are the Advantages of Outsourcing Payroll?
Payroll outsourcing is one of the most powerful trends in management. One statistic supporting this statement shows that between 2015-2019, companies that partially outsource payroll services increased by 300%.
No matter your business’s size, outsourcing yields many advantages that fuel business growth.
The payroll process involves complicated calculations, such as benefit deductions, wage garnishments, and tax withholdings. A significant amount of time must be invested to navigate these nuances and avoid them entirely. Aside from that, the finance department must stay up-to-date with state and federal regulations or risk receiving a hefty fine.
According to the NSBA 2018 Small Business Taxation survey, one in three small businesses reports spending more than 40 hours each year on federal taxes alone. Thus, outsourcing and streamlining this time-consuming task is an attractive idea for many business owners.
2. Refocus on Core Business
Today, companies are under increasing pressure to be innovative and agile. You can free up time to refocus on your core business and ensure business continuity by outsourcing payroll. When you outsource, you save valuable time, which can be spent creating strategic business plans and other revenue-generating activities.
3. Expertise & Knowledge
Working with an outsourced expert means you gain access to years’ worth of knowledge and experience. In fact, a typical employee in a payroll organization has 12 years of experience.
If your business operates across multiple states, the complexity of handling payroll increases as there are multiple jurisdictions. Outsourced payroll providers have an in-depth understanding of payroll laws and regulations and stay updated with upcoming legislative changes.
4. Security & Compliance Threats
With the carryover option, an employee can carry over up to $500 of the unused funds to the following year. The amount is available for the entirety of next year’s plan. This allows for wasteful spending of the funds just to avoid losing them.
5. Reduced Errors
The IRS penalizes business owners for payroll errors, even if they are honest mistakes. Payroll requires flawless accuracy, which may be hard to achieve manually, so it comes as no surprise that one-third of US employers make a payroll mistake each year.
Worst of all, the fines levied can cost businesses thousands of dollars. These mistakes can provoke a chain reaction causing employers to pay their employees late or underpay, affecting employee morale and trust.
Outsourcing payroll eradicates payroll errors and eliminates the risk of costly fines and high turnover rates.
A survey by Deloitte shows a direct correlation of the number of FTEs (full-time employees) responsible for processing payroll to the size of the company. In other words, the larger the organization, the higher the number of employees needed to run payroll. Therefore, processing payroll in-house is not always the lowest-cost solution.
For instance, the organization will need to train internal staff, invest in the necessary computer equipment and hardware, and the proper accounting and IT security technology to run payroll smoothly. Organizations also outsource to decrease risks and liability since tax mistakes can be costly, yielding a good investment return.
Adrian Geffert, Sales & Marketing Director at Payescape, expressed, “Payroll is an essential process that every single organization has to do, no matter the size. However, due to the sheer amount of paperwork and demand, internally managing payroll can be time-intensive, and there can be a lot of pressure and risk involved.
When a company chooses to outsource its payroll, it becomes the responsibility of a team of impartial third-party specialists who are up to date with industry knowledge, data security, regulations, general employment laws, and so much more.
Outsourcing payroll doesn’t absolve a company from dealing with anything payroll-related. Businesses will still need to liaise with the payroll company and provide essential employee information when required.”
As further stated by Adrian Geffert, “It is entirely up to the company as to whether they want to reduce the number of FTEs, but in most instances, the employees that were working on payroll were able to focus on other areas of the business, as they no longer have to spend time on administrative payroll tasks. However, managers and business owners need to make sure they’re choosing a reputable payroll company with the correct certifications and qualifications.”
What Are the Cons of Outsourcing Payroll?
While the benefits of outsourcing seem countless and clear, what are some of the disadvantages of payroll outsourcing? As with all outsourcing, employers should weigh the advantages against potential difficulties. In this case, the cons are mainly the risk of communication errors, security issues, and financial costs.
While relying on a third party to process all payroll-related matters is beneficial, it also means that you have to depend on them if problems ever arise. As a result, fixing errors may be complicated if you cannot check in and easily contact customer support. While many payroll service providers offer 24/7 support in the case of a payroll emergency, the lack of in-house personnel may be a disadvantage to some employers.
2. All-inclusive Packages
At this point, you might be wondering, how much does it cost to outsource payroll? Although there is no clear answer to this question as it depends on your company’s specifics, typically, outsourcing payroll is much cheaper than running it in-house.
Still, many payroll and HR solutions offer all-inclusive packages by providing additional services. These packages can significantly increase the cost of outsourcing, and many of the additional services may not provide real value to your business. Companies need to find a provider that matches their business needs for outsourcing to be cost-saving.
3. Business Owners are Ultimately Accountable
If a provider fails to pay the taxes on time and accurately, the business is still responsible for those errors. Even if the IRS prosecutes the third-party payroll company for the tax error, it is the business that might be left owing money to the IRS. Hence, the IRS recommends that all employers ensure that their payroll provider utilizes the Electronic Federal Tax Payment System to make payroll tax payments on time.
4. Loss of Control
One primary concern of businesses that transition from internal to external payroll is confidentiality. By handing over confidential and sensitive company data, you allow another company access to private information. GDPR is intended to offer better security around data, but this loss of control over personal information may not sit well with employers or employees.
Tracey Beveridge, HR Director at Personnel Checks, shared their experience with outsourcing payroll. She states,“Although going external could connect us with payroll experts, we ensure our team has regular training and are always up to date on GDPR compliance and FLSA legislation.
The main disadvantage for us when considering outsourcing payroll was the lack of control over who may or may not be dealing with our accounts. Due to the nature of our business, anyone carrying out work on our behalf needed to be suitably vetted. This was the main reason for choosing not to outsource payroll from the outset. As time has gone, this decision has been further validated with the increased flexibility that we have over the whole payroll process.”
It is clear that the payroll function demands consistency and precision, as it contains many intricate calculations. Moreover, as the workforce is more globally and internationally connected, the complexity of running payroll increases. In conclusion, employers need to consider all factors, as payroll outsourcing can bring value and provide greater business efficiency.