Payroll Outsourcing – Pros, Cons, & Best Practices

In today’s marketplace, companies continue to look for cost savings and ways to make their operations more efficient. 

While a company needs to retain control over the core operations that set their business apart from the rest, they may find immense value in outsourcing supporting and back-office functions like payroll processing. 

So what does outsourced payroll look like, and what are the potential advantages and disadvantages of taking this route? Throughout this article, we will discuss why companies consider outsourcing payroll services, the pros and cons associated with it, and provide you with some best practices for getting started.

What is Payroll Outsourcing?

Payroll outsourcing is a type of service in which third-party providers offer legal, tax, and accounting support related to the payroll process. Payroll outsourcing partners can manage the entire process to ensure employees receive correct paychecks and taxes are properly calculated and withheld, among other technical components. 

Payroll processing is known for being tedious, so human resource teams can work to streamline and simplify their workflows by outsourcing payroll. Further, the regulatory and compliance requirements associated with this process can easily become a burden for HR professionals. As a result, organizations can simplify compliance requirements by outsourcing this process to a team of experts.

Lastly, many firms consider outsourcing payroll for cost-saving reasons, though the feasibility of this can rely on a multitude of different factors, which we will discuss in more detail below. 

Cost Effectiveness of Payroll Outsourcing 

Companies are often drawn to payroll outsourcing–or outsourcing of any kind–because of the potential cost savings they can tap into. 

The cost of recruiting, hiring, training, and retaining staff is almost always going to cost the organization more than what they’ll spend on outsourcing. Especially today when the labor market is so tight, companies are often dealing with an expensive revolving door of attracting and hiring talent that can be avoided when hiring a reliable outsourcing partner. 

In many cases, hiring an external outsourced partner rather than internally turns a fixed labor cost into a variable cost. This means the labor cost associated with payroll processing will directly correlate to the amount of work that goes into it, not a fixed cost that gets paid to an internal employee each month, regardless of their output. 

Even still, companies will need to make the proper assessments before partnering with a provider to ensure it makes sense financially. They should evaluate the costs of in-house payroll management compared to payroll outsourcing, and determine what the ROI of their investment will be, among other considerations that we will describe later. 

Pros of Payroll Outsourcing 

Companies across all different industries, geographies, and sizes can tap into the advantages of outsourcing payroll processes. Here are some of the top benefits of outsourcing payroll that you may experience. 

Expertise and specialized knowledge 

Working with an outsourced payroll partner gives organizations access to teams with specialized knowledge and expertise on payroll matters. No matter how simple or complex the payroll tasks might be, outsourced payroll experts can handle them with precision and efficiency. 

Especially for smaller organizations that may not have hired a payroll specialist just yet, outsourced partners can be a key asset for these teams when it comes to tax, legal, or compliance concerns related to payroll.   

Time and cost savings 

One of the biggest draws of outsourcing payroll is that it can help companies become more efficient with their resources. 

Payroll tasks can be very tedious and time-consuming, so outsourcing this process can save HR teams valuable time and money that can be spent elsewhere. Plus, when comparing the costs of hiring in-house personnel to manage payroll versus hiring an outsourced company, outsourcing is almost always the better option financially. 

Compliance and accuracy 

Payroll outsourcing can also help companies meet compliance requirements and stay up-to-date on the changing regulations in the field. The guidelines and regulations surrounding payroll can be complex. But, outsourcing payroll processes can help companies simplify their compliance burden and delegate it to the outsourcing partner.  

If found non-compliant with payroll requirements, companies could face costly fines, legal consequences, and other penalties. So, gaining expert support on compliance matters is a massive benefit to organizations.

Outsourced payroll partners help companies stay on track by ensuring employees are paid correctly and on time, tax liabilities are paid, and timely reporting is done.

Scalability and flexibility 

Rather than hiring a payroll team internally, hiring outsourced payroll providers means companies can scale their engagement up or down as needed to meet capacity needs. 

When managing an internal team, it can be much more difficult, lengthy, and taxing to hire and fire personnel to meet the needs of the expanding or downsizing business. To avoid this headache, companies can hire outsourced payroll providers who are much more adaptable to changing business conditions. 

Access to advanced technology and software

Working with payroll outsourcing partners not only gives organizations access to expert teams of professionals, but it also allows them to take advantage of the latest technology and software that they utilize. 

It may not be feasible for organizations to invest in highly-specialized payroll software or programs internally. But, specialized payroll providers will likely use the latest technology to ensure compliance, a high degree of accuracy, and efficiency. So, organizations are still able to leverage niche tech innovations without having to make the investment themselves. 

Able to allocate more focus on core business functions 

All in all, outsourcing payroll means organizations have more time, energy, and money to focus on core functions that move the needle for their business. 

With the peace of mind that tedious and time-consuming payroll tasks are being handled by experts, companies can have their HR professionals focus on tasks that are more strategic for business growth and require critical thinking. 

Cons of Payroll Outsourcing 

There are possible downsides that can come from outsourcing payroll; however, this isn’t a universal experience. 

When working with expert providers like Paypro, clients enjoy close communication with our expert team of professionals who are ready to jump in for assistance at any time. We value the power of both technology and personal relationships in all our outsourcing engagements, which helps us easily integrate with your existing software and workflows for effective payroll solutions that grow with you.  

Even still, here are some things to watch out for that can lead to an ineffective payroll outsourcing arrangement.

Loss of control and visibility 

Business leaders may feel like they’ve lost control and visibility over a crucial process within their organization when they outsource payroll to a third party. 

Especially given the compliance and regulatory implications of payroll, organizations want to feel confident that payroll is being handled properly. But, this can be difficult to manage without direct access and transparency to the payroll provider about their processes. 

Data security and confidentiality concerns 

Given the sensitive employee information that is necessary for payroll processing–like their Social Security number, bank account information, home address, and more–there are data security concerns that can come from outsourcing this process. 

Various regulations that cover payroll matters require companies to safeguard employee data, so the same expectations need to be upheld by service providers as well. If not, the company and its employees could face serious consequences in the case of a data breach or hack that exposes their data to bad actors. 

Dependency on a third-party provider 

Outsourcing payroll to a third-party provider makes the company and its employees dependent on them to some extent. 

While the company has to manage the external and internal forces that impact their own operations, working with an outsourced payroll company means they need to be aware of the forces impacting their business, too. 

If the outsourced partner faces system outages, financial troubles, or other headwinds impacting their operations, the company’s payroll processing can be impacted accordingly. 

Potential for communication challenges 

Depending on the outsourcing partner, there is a potential for communication challenges that degrade the trust in the relationship. When handing off such a critical function like payroll to a third-party provider, companies want the peace of mind that these tasks are being handled and that any potential issues are being communicated properly and in a timely fashion. 

Without clear lines of communication between the two organizations, a regular reporting schedule, and a dedicated point of contact for each team, communication issues can quickly arise. 

Integration and compatibility issues

It can be challenging to find an outsourced payroll partner that has the right technology and culture compatibility with your organization. 

If either of these factors are not aligned, integration with the external partner can be very clunky and inefficient, which can keep the engagement from being successful or result in inaccurate outcomes. 

Is Payroll Outsourcing a Good Idea? 

After reviewing the drawbacks and benefits of outsourcing payroll, how can you know if it’s the right fit for your organization?

Each company will have its own considerations to determine if outsourcing is a suitable fit for their operations. Aside from making a financial assessment of outsourcing, companies will also need to consider how it will impact their existing workforce. Namely, do they already have someone internally who is handling payroll? How will their role change if they start outsourcing?  

In general, payroll outsourcing might be beneficial to both large and small businesses that:

• Don’t have the in-house capacity/expertise to effectively manage payroll processing
• Have Finance/Accounting departments that need to spend their time on other tasks
• Require assistance/support with compliance requirements
• Need multinational payroll support

The Payroll Outsourcing Process 

If you decide to go forward with payroll outsourcing, here is a brief overview of some of the steps that are involved with a successful outsourcing partnership. 

Step 1: Selecting a payroll outsourcing provider 

First, you need to shop around to find the right payroll outsourcing provider that meets your standards. Consider all the points we’ve discussed so far, and whether or not they will help you meet the strategic goals of your organization. 

Step 2: Defining service requirements and expectations 

After you’ve chosen a provider, you’ll want to start the engagement by defining your service requirements and expectations from the outsourcing partner. Make these expectations clear and in writing so there is no confusion about what each party is responsible for to avoid payroll mistakes and other consequences. 

This is where you can discuss the unique needs of your organization, the size, and any other pertinent information that the provider will need to know to be successful. 

Step 3: Data migration and implementation 

Next, you will need to work with the provider to migrate your existing payroll data and set up a data-sharing process for the ongoing engagement. In order to process payroll on your behalf, they’ll need relevant information like employee details, salary structures, tax information, time cards, direct deposit details, and other records.

Step 4: Testing and validation 

Before going fully live, you’ll want to do some testing to make sure the system works properly and is operating to your standards and specifications. This is where you can work out any kinks to ensure employees get paid on time, tax liabilities are dealt with correctly, and deal with any other areas of friction that may arise. 

Step 5: Ongoing communication and support

Lastly, make sure you set up direct channels of communication between your team and the outsourcing company. Delegate points of contact for both teams, and establish a schedule for regular check-ins, reportings, and procedures for support issues and future questions or concerns. 

Tax Responsibilities and Implications 

The IRS has strict regulations regarding how tax filing must be handled by employers, meaning there can be serious legal and financial consequences for organizations that fail to adhere to them in the case of an audit.

It is the responsibility of the company to make sure they’re paying their payroll taxes, all income tax withholdings from employee paychecks, and other tax liabilities on time. So if you’re working with a third-party for payroll processing, make sure each party is clear on what their responsibilities are so nothing falls through the cracks. If they will be handling and paying all tax liabilities on your behalf, request regular updates and reports on these payments for full transparency. 

If they make a mistake, keep in mind that you will still be liable for the taxes you owe, including any penalties for late payments. Thus, it’s important to find a trusted provider who you can collaborate with to ensure compliance with tax regulations in all jurisdictions where you operate. 

Best Practices for Choosing a Payroll Outsourcing Provider 

As you’re shopping around for the best payroll outsourcing provider, there’s more to consider than just the financial feasibility of the partnership. Make sure you consider the following components to find the right provider for your payroll needs. 

Identifying business needs and objectives 

Be clear on what your organization needs and the types of solutions you’re looking for before you start comparing different providers. This will help guide you to the payroll outsourcing partner that fits your requirements and will add value to the organization. 

Evaluating provider reputation, experience, and expertise 

Consider what previous customers have said about the provider by checking out reviews of their services or requesting client references. You will be able to better gauge their reputation in the industry and determine if they’re a trustworthy provider. 

See what types of industry-specific certifications they may have, or any literature they provide on their specific areas of expertise. 

Assessing technology capabilities and security measures 

Evaluate their technological capabilities to determine if it’s up-to-par with modern innovation and industry standards. Assess whether the programs they utilize are compatible with your own internal payroll systems for easy integration. 

Make sure they have implemented sophisticated data security measures to help protect the sensitive information of your employees. This will ensure you’re adhering to relevant regulations and compliance requirements.

Considering customer support and responsiveness 

Inquire about their customer support team, and whether they offer a dedicated agent to help assist you with any future questions or concerns. Also ask about self-service features. Providers that have limited hours or methods of contact may not be able to provide you with the assistance you’ll need. 

Reviewing pricing and contract terms 

Before you sign the dotted line, review the full pricing and contract terms so you fully understand the conditions of the partnership. Request or make any amendments if needed, and make sure your legal team is able to review the conditions as well. 

The Role of AI in Payroll Services 

In today’s modern age, artificial intelligence (AI) technology plays a big role in outsourced payroll processes. The efficiency and data analytics capabilities of this technology makes it a great tool for automating and streamlining the repetitive and tedious tasks that are involved in key payroll functions. Plus, it can provide advanced reporting and analytics on-demand to help businesses make informed decisions regarding payroll and workforce planning. 

While this type of advanced technology may be out of reach for certain organizations, working with outsourced payroll partners gives you access to innovative systems that leverage AI for better efficiency and accuracy in payroll processing. 

However, no matter how integrated AI in HR becomes, like in payroll outsourcing, there will always be a need for human involvement in these processes. The personal connection that comes from building human relationships enables strong and trusting partnerships, supplementing the accuracy and efficiency of AI technology. 

Conclusion 

Payroll outsourcing is a common solution that organizations employ to gain back more time for their internal team, receive support on payroll and tax compliance requirements, access innovative technology, and more. 

Each organization will have their own unique considerations to make when choosing to outsource payroll and select the right partner. However, the benefits of outsourcing payroll, especially with a trusted partner like Paypro, helps companies streamline their back-end and devote their resources to more strategic matters. 

Paypro works hand-in-hand with our clients to ensure they receive personal support on tax, payroll, and legal issues, paired with advanced data analytics and reporting powered by our cutting-edge payroll software. 

Schedule a consultation with Paypro today to see if payroll outsourcing is right for you. 
 

About the Author

Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.