Managing payroll is often associated with complicated payroll calculations and time-consuming legal requirements. That's why companies of all shapes, sizes, and industries are outsourcing payroll as a way to reduce overhead costs, improve compliance, and avoid errors.
Here's what you need to know about payroll outsourcing, how it works, and when outsourcing payroll makes sense.
Payroll outsourcing refers to hiring a third party to manage employee payroll. According to a recent survey, 12% of organizations worldwide outsource payroll, while 26% of organizations outsource some (but not all) payroll functions.
Outsourced payroll providers (also called Fractional payroll providers) handle everything an in-house team does. This includes setting up direct deposits, calculating wages and deductions, distributing pay stubs, reporting to government agencies, transferring payments, and maintaining employee records.
Unlike in-house payroll processing, outsourcing payroll doesn’t incur overhead costs for employee salaries and benefits. Payroll outsourcing services can also be part-time or full-time based on what a company needs and can afford.
Preparing for a third party to take over payroll activities accounts for most of the work involved in outsourcing payroll. The first step is choosing a payroll partner. Each company evaluates a good match in a different way, but every payroll provider should sign a DPA (Data Processing Addendum). This document will help avoid legal issues if data is mishandled when outsourcing HRIS (human resources information system).
Preparing for payroll outsourcing:
Payroll outsourcing companies will check to ensure your business has the necessary licenses and registrations in place to manage payroll. Once the payroll processing company has all of this information, the next step is to provide details and amounts for employee benefits, bonuses, and wage garnishments, then approve paycheque totals.
Processing payroll can sometimes be an obstacle for smaller companies or scaling operations. Paying employees when resources are stretched thin is usually when mistakes happen. Outsourcing payroll puts everything in the hands of experienced payroll specialists without adding costs to payroll itself.
Benefits of payroll outsourcing:
Companies dealing with mergers or acquisitions can also outsource payroll functions to help consolidate different payroll procedures and systems. Expanding operations beyond borders is another scenario where a payroll outsourcing partner comes in handy for managing different payroll regulations and currencies.
Outsourcing is a low-cost option for managing payroll functions without sacrificing accuracy and compliance. Companies can free up cash flow and resources for core operations and long-term growth opportunities.
For most companies, performing payroll functions in-house is another process that requires constant supervision. Devoting resources to administrative functions like payroll is difficult to avoid, but it can chip away at opportunities for revenue and growth.
Since most of the payroll process involves routine tasks and established guidelines, it's easy to outsource payroll and continue operating as usual. This lets companies maintain decision-making authority without the burden of managing payroll operations when resources are in short supply.
Comparing payroll providers comes down to what's most efficient and cost-effective for each company. Finding the right payroll outsourcing provider will help you spend less time thinking about processing payroll and more time running and growing your business.
Need help finding the right fit for payroll outsourcing? Book a free consultation with one of our finance experts to learn more about how outsourcing payroll can work for your business.
