An In-depth Outsourced Payroll Guide: Why Companies Choose This Option

Businesses have long capitalized on the benefits of front-office and back-end outsourcing. They even delegate administrative tasks to third-party service providers. For instance, they employ human resources (HR) and information technology (IT) support outsourcing.

But what about payroll tasks? Are they worth outsourcing? The short answer is yes.

This page provides an in-depth guide to outsourced payroll. Read on to get some answers to these questions:

• What is outsourced payroll, and how does it work?
• Why should you outsource it?
• What trends should you consider when outsourcing payroll?
• How do you get started with payroll outsourcing?

Let us dive right in!

What Is Payroll Outsourcing?

Payroll outsourcing involves hiring a third-party service provider to handle your organization’s payroll and related tasks. A third-party vendor offers many services, such as processing payroll, managing taxes, and managing employee benefits.

Specifically, outsourced payroll includes the following functions:

• Payroll account setup. A payroll provider typically uses software automation to improve data accuracy and efficiency. Such technology automates payroll processes, helping reduce manual work and human error. A third-party provider starts by creating a payroll account, but first, you must provide employee information.

• Payment method setup. You decide how your employees and contractors receive payment. Payroll solutions let you set automatic payments on a biweekly or monthly basis. But an outsourced payroll provider can also dole out payments via direct deposits. Whatever your choice, your service provider sets up the payment schedule in its system.

• Attendance tracking. Most payroll services use automated software that helps employees keep track of their start and end times. They can record their lunch breaks, overtime hours, and leaves to make salary calculation easier. Your outsourced payroll team also monitors the system for data accuracy and makes corrections.

• Wage calculation. Your outsourced payroll team adds employee wages at the start. The system then automatically computes wages, adding and deducting according to employees’ tracked attendance. The third-party team double-checks the software for payroll accuracy to ensure proper salary disbursements.

• Employee deductions. Workers must contribute to legally mandated benefits such as social security, health insurance, and retirement plans. Your payroll provider inputs the corresponding benefit contributions so that the system can automatically deduct them from employees’ gross pay.

• Salary disbursement. When payday comes, your payroll provider releases the right salary payments to employees. Its primary goal is to ensure employees get paid properly and on time.

• Tax filing. In some cases, your payroll provider handles tax-related matters. They calculate, report, and file taxes with the proper authorities.

• Payroll security and compliance. Payroll providers prioritize network security and regulatory compliance. Since they handle companies’ finances, they secure the network and protect employee data to avoid breaches and cyberattacks.

Outsourced payroll providers are capable of handling all these tasks. But organizations often allow service providers to manage certain functions only. For example, organizations have an in-house payroll team but entrust tax-related matters to third-party providers.

Note: An outsourced payroll provider is the same as an outsourced IT provider. Companies entrust administrative work such as IT and payroll to specialized third-party service providers. Such solutions are more cost-efficient than building in-house departments because the latter requires investing in people, technology, and resources.

How Does Payroll Outsourcing Work?

Your business can delegate payroll and related tasks to a reputable third party through payroll outsourcing. Your contracted service provider typically uses specialized software to manage the payroll process.

Payroll outsourcing saves you time, money, and effort that you can better spend on important business aspects. Likewise, a payroll service provider understands tax laws and regulations to help your business avoid costly mistakes.

Here is how the entire payroll outsourcing process works:

• Hire a payroll service provider. The process starts with hiring a payroll provider best suited for your industry type, business size, and payroll needs.

• Create a service-level agreement (SLA). You and your hired payroll provider agree on the terms, conditions, and costs of the outsourcing engagement. Such details are included in a legally binding agreement.

• Set registrations in place. Your payroll provider ensures you have the necessary registrations and licenses for payroll management.

• Collect business and employment information. You provide the third-party partner access to employee information vital to managing payroll.

• Process payroll regularly. Your payroll provider tracks employees’ working hours, calculates wages, and disburses salaries biweekly or monthly.

• Report to the client for transparency. Your payroll provider sends regular reports detailing payroll management and business performance.

• Remit taxes and contributions regularly. Your payroll provider submits payments and documentation to tax authorities and third parties.

Front-office and back-office outsourcing have exploded in popularity, with more companies entrusting functions to third-party service providers. Companies even outsource administrative tasks such as: 

• Accounting and finance
• Human resources (HR)
• IT support

Invest in payroll outsourcing as part of your business strategy. Know the top reasons you should outsource payroll in the next section.

Why Companies Outsource Payroll

Payroll is integral to business operations because it is responsible for paying employees. Well-compensated employees are happy and satisfied with your organization. They are highly productive and take excellent care of your customers, bringing more money into the business. 

Unfortunately, some companies face payroll challenges. Here are some alarming statistics:

• One-fourth of small businesses still use pen and paper to track finances, and almost half lack an accountant or bookkeeper. (Clutch, 2018)
• About 10% to 20% of employers misclassify their employees by tagging workers as contractors to save on taxes. (National Employment Law Project, 2020)
• Nearly 70% of businesses say payroll taxes are a moderate or significant burden. (National Federation of Independent Business)
• The IRS estimated employer penalties as $6 billion in 2020 due to tax miscalculations and missing payments. (Internal Service Revenue, 2021)

If your company faces some of the issues above, consider hiring a third-party payroll provider. Payroll outsourcing has emerged as one of the outsourced IT trends. It offers the use of advanced technology and enhanced data security. But you can take advantage of several other potential benefits. 

The following are some reasons you should consider outsourcing your payroll.

1. Save on Operating Expenses

According to Deloitte, cost reduction is the top reason for outsourcing. A payroll department is costly. Hiring payroll officers results in high labor costs. Investments in automated software and other payroll resources can also be expensive.

As such, companies outsource payroll to save on operating expenses. Payroll outsourcing lets you make the most of a service package, which is more affordable than building an in-house team. Your contracted provider employs professionals and resources for your payroll. You pay them based on the agreed pricing structure, which is cheaper than establishing your own team.

2. Tap into Professionals and Experts

According to Clutch, 90% of small businesses planned to outsource business functions in 2022. Among them, more than 25% wanted to work with experts. These companies consider expertise a valuable commodity in business.

In particular, an outsourced payroll provider gives you access to experts employed as payroll officers. These professionals can be bookkeepers tasked with tracking your employees’ working hours. They can also be certified public accountants (CPAs) responsible for managing your finances. Lastly, they can be tax professionals who help you stay on top of your tax obligations.

3. Leverage Payroll Software Technology

Companies of all sizes capitalize on the latest technology for a competitive edge. They leverage payroll automation for service efficiency and data accuracy. The global HR payroll software market might grow from $23.55 billion in 2021 to $55.69 billion by 2031 at a compound annual growth rate (CAGR) of 9.2%.

Given this market growth, consider investing in software technology for your payroll. Work with a third-party payroll provider for access to advanced technology to ease operations. Payroll software makes the work of contracted payroll officers more seamless, efficient, and productive.

4. Guarantee Payroll Data Accuracy

Nothing is more frustrating than getting paid improperly for services rendered. It is even worse if employees get less than the amount employers owe them. Such circumstances happen when payroll officers fail to update employee information or commit errors in calculations.

Companies outsource data entry services or hire outsourced payroll providers to avoid these problems. They work with trustworthy third-party vendors to improve payroll functions and reduce errors. Payroll service providers guarantee 99% data accuracy by using automated software and employing professionals to double-check input. 

5. Improve Payroll Process Efficiency

Aside from getting paid properly, employees expect to be paid on time. Receiving their salaries late not only demotivates them but also affects overall productivity, leading to a high employee turnover rate. Thus, improving payroll efficiency is imperative.

One of the best ways to achieve this is through outsourcing. Deloitte reported that 78% of companies use global shared services for standardization and efficiency. Service providers hire third-party experts to handle payroll and use automation to accelerate the process. As a result, employees receive their pay on time.

6. Boost Employee Morale

Employees are the most important stakeholders. They are valuable assets that perform day-to-day activities and bring money to your company. Take good care of employees so that they take care of your business. Gallup highlights protecting employees’ careers and financial well-being to achieve this goal.

Late and incorrect salaries lead to low employee morale, decreased productivity, declining revenue, and high attrition. Outsourcing helps boost employee morale through timely and fair compensation. Payroll providers ensure quality performance by following SLAs and meeting key metrics.

7. Maintain Business Cash Flow

Cash flow refers to the money going in and out of a business. The goal of every company is to earn more than it spends. Payroll significantly impacts your cash flow since you pay employees, and they make money for your business. That said, payroll outsourcing is one of the best ways to manage cash flow. 

Outsourced payroll providers help companies stay on top of their payroll processes. Paying employees on time and avoiding hefty fines due to non-compliance can prevent unnecessary expenditures. Likewise, proper compensation encourages employees to be more efficient and productive, making your business more profitable.

8. Focus on Your Core Business

Companies understandably prioritize their core revenue-generating tasks. But every department is integral to business operations. Payroll is an administrative task that requires your utmost attention. Otherwise, you risk compromising employee salaries and facing negative consequences.

Payroll outsourcing helps companies, especially small and midsize businesses (SMBs), focus on their core operations. Companies have the assurance that a third-party provider handles their payroll tasks accurately, efficiently, and seamlessly. Meanwhile, they can use their time and energy to make more money and expand their businesses.

Five Payroll Outsourcing Trends To Consider

Due to their advantages, front-office and back-office outsourcing services have long gained ground in business. Many companies have jumped onto the payroll outsourcing bandwagon due to the value it brings, such as:

• Cost savings
• Accuracy
• Efficiency
• Integration
• Standardization 

The numbers are in: The global market for payroll outsourcing services is projected to grow to $6.15 billion by 2025 at a 5.72% CAGR.

Keep up with this market growth by exploring the following payroll outsourcing trends:

• Increasing use of technology. Payroll outsourcing companies take advantage of today’s technology to streamline processes. For example, they use payroll software to automate specific tasks, reduce manual work, and expedite the entire process. Make sure to hire a payroll provider that invests in the latest technology.

• Greater focus on compliance. Payroll providers guarantee adherence to local, state, and federal laws. They ensure employers pay their employees properly, legally, and on time. They also help companies stay on top of their tax obligations.

• Increased emphasis on data security. Aside from compliance, payroll outsourcing companies prioritize data security and privacy. They secure their clients’ networks to avoid data breaches and prevent cyberattacks such as phishing and malware attacks. Safeguard essential data by working with a payroll provider with robust security measures and privacy policies.

• More custom and flexible payroll. Many payroll outsourcing companies offer customized solutions to meet their clients’ needs. They customize their services accordingly, adjusting payroll processing frequency and employee benefits administration when necessary. Choose a payroll provider whose level of support best suits your payroll needs.

• Growing demand for global payroll services. There is a growing demand for global payroll services since many companies are expanding internationally. Businesses tap into providers that can deal with the complexities of managing payroll in multiple countries. If your business operates in different locations, take advantage of payroll outsourcing!

How To Get Started With Payroll Outsourcing 

Examining your current IT system is the first step in payroll outsourcing. But there are several crucial steps before signing a contract with a reliable payroll provider.

An outsourced payroll provider helps optimize your payroll operation and scale your business. It is a viable solution for tapping into professionals who ensure employees get paid properly and on time. Hiring a third-party payroll provider is also one of the outsourced IT solutions for protecting data and leveraging technology.

Follow our key steps below to get started with payroll outsourcing:

1. Identify Your Payroll Needs

Start by understanding the specific requirements of your payroll operation. Examine your current process and assess your operational needs thoroughly. This helps you determine the type of payroll provider you need for your business. Consider the following when assessing your needs:

• Payment options. How effective is your current salary disbursement? Determine whether you need to change your payment method to either direct deposit or automatic payment to ease the process.

• Features and services. List all the payroll features you need, such as time and attendance tracking and employee benefits management. You want a payroll service provider offering such services.

• Tax and regulatory compliance. Every business is subject to taxes and regulations. You need a payroll provider to stay on top of your tax obligations and regulatory requirements.

• Service cost and value. You need a third-party vendor to help you save money for the long term. At the same time, you should capitalize on the value outsourcing brings to your organization. Strike a balance between cost and value to make the right decision.

2. Determine Payroll Tasks To Outsource

After evaluating your payroll process and identifying your needs, decide which functions to outsource. You can entrust your entire payroll operation to a third-party vendor or outsource some of your tasks. An outsourced payroll provider handles the following tasks:

• Collecting employee information
• Setting up accounts for payment
• Tracking working hours
• Computing employee wages
• Disbursing employee salaries
• Managing employee benefits
• Reporting and filing taxes

Note: Go back to What Is Payroll Outsourcing? to know the payroll functions you can outsource.

By outsourcing these tasks, you can free up time and resources to focus on other business aspects. You have peace of mind knowing your payroll provider handles such an operation accurately and efficiently.

3. Look for Outsourced Payroll Providers

Now that you have identified your payroll needs and outsourcing tasks, you can begin your search. There are different ways to find payroll service providers, such as:

• Online search. Searching online is the easiest way to find payroll providers. All it takes is a quick Google search to get a list of prospects. Visit their websites to learn more about their services, pricing, and terms.

• Referrals. Ask other business owners or professionals for referrals. They likely have experience working with outsourced payroll providers. You can get recommendations for reliable service providers from them.

Once you have a list of potential payroll providers, filter your options by considering the following key factors:

• Payroll process control. See how your prospects monitor payroll, streamline processes, and ensure on-time and accurate service delivery.
• Analytics and reporting. Factor in how your prospects collect, analyze, and report data to their clients. Payroll analysis and reporting are integral to your operations.
• Regulatory compliance. Ensure your prospects know the local, state, and federal regulations governing payroll operations. Reliable providers guarantee 100% compliance to help companies avoid hefty penalties and legal implications.
• Security and privacy. Your prospects should stay on top of their network security and data privacy. They deal with finances, so round-the-clock protection is ideal.
• Payroll workforce. Ensure your prospects employ highly skilled professionals who are expert bookkeepers, accountants, or tax specialists.
• Software technology. Payroll automation has become one of the outsourced tech solutions. Look for a technologically savvy service provider to use this feature.
• Employee experience. Check client and employee feedback about prospects’ services. Accurate and timely delivery of payroll underpins employee experience.
• Business reputation. For the most part, reputation mirrors a company’s credibility, competency, and reliability. A good reputation, therefore, indicates quality service. 

With these in mind, you should hire the right payroll provider for your business. The next steps detail how to maintain a good relationship with your new partner.

4. Create an SLA

An SLA is a formal agreement between you and your hired payroll provider. Simply put, it lists the service’s terms and conditions, usually including the following:

• Specific services offered by your hired payroll provider
• Terms and conditions for the payroll services provided
• Obligations and responsibilities of both parties

To expound further, here is what to do and include:

• Define outsourcing services. These can be tasks such as:

• Tracking employee attendance and working hours
• Calculating and processing employee salaries
• Handling tax compliance and reporting
• Managing employee compensation and benefits

• Set the terms and conditions. These might include:

• Frequency of pay periods
• Methods of payment
• Special requirements or restrictions

• Establish the obligations and responsibilities. These might include:

• Payroll provider’s scope of work
• Agents’ roles and responsibilities
• Your obligations as a client (service payments, support, etc.)

• Include other key outsourcing details such as:

• Operational objectives
• Key performance indicators (KPIs)
• Outsourcing costs
• Pricing model
• Breach of contract

Create a clear and comprehensive SLA that is favorable to both parties. While the end goal is to ensure the provider meets your payroll needs, understand that this contract protects both parties.

5. Start Your Payroll Outsourcing Operation

After creating an SLA, your outsourced payroll provider can start its operation. But first, you need to give them the following information about your business and employees:

• Employee names and contact information
• Bank account details
• Employee compensation and benefits

From there, they begin to handle your payroll tasks according to the contract terms.

As your outsourced payroll engagement is underway, track your progress regularly to ensure everything is going according to plan. You should perform the following:

• Review monthly reports and payroll data provided by your provider
• Get feedback from employees or check payroll issues reported by employees

By tracking progress, you can identify potential issues and address them quickly. This ensures your outsourced payroll process runs seamlessly and efficiently.

6. Implement Best Practices for Payroll Outsourcing

Implementing payroll outsourcing is one thing; ensuring its longevity and growth is another. Take steps to ensure a good relationship with your payroll service provider. Here are some best practices to follow:

• Always stick to the SLA
• Ensure employees adhere to time-tracking protocols
• Check and update employee details regularly
• Educate your payroll provider on regulations
• Ensure the provider secures the network and protects the data
• Stay on top of tax requirements
• Invest in up-to-date software
• Check regular payroll reports
• Ensure constant coordination
• Make operational changes whenever necessary

The Bottom Line

Payroll outsourcing is a viable solution for optimizing your payroll tasks. It provides numerous benefits for your organization and helps you achieve the following operational objectives:

• Operating cost savings
• Efficiency improvements
• Payroll data accuracy
• Technological integration and data consolidation
• Payroll process standardization

Consider our in-depth guide to outsourced payroll to understand what it is and how it works. More importantly, follow our practical steps to get started with payroll outsourcing. Hire a service provider that best fits your industry type, business size, and operational needs.

Outsourcing payroll is a smart way to streamline your business and improve your bottom line.