A practical look at outsourced payroll processing, when it saves money, and when it doesn't.
Thank you for reading this post, don't forget to subscribe!Thank you for reading this post, don't forget to subscribe!What Payroll Outsourcing Means
Payroll outsourcing is the act of delegating some or all of a firm’s wage processing functions to a third-party service provider, instead of processing them wholly in house. Outsourcing may be done through hiring a complete payroll bureau which processes payroll from calculation to issuing payslips, or a firm may simply delegate certain functions, like tax processing or end-of-year reporting, and handle other functions internally.
The reason for this choice is quite simple – processing payroll in the right way needs expert understanding of constantly changing rules on taxation, employment laws, and reporting periods. Instead of having to create and maintain such expertise, firms find it easier to hire one for themselves.
Why Businesses Choose to Outsource
Lower overhead
Maintaining payroll services within the company usually implies hiring payroll specialists and purchasing the corresponding software, which adds up to additional expenses for any number of employees of the company. An outsourcing service transforms these fixed expenses into the service fees that tend to be lower compared to the fixed cost mentioned above.
Reduced compliance risk
The tax codes, minimum wages requirements and statutory deductions change rather frequently, so that it becomes necessary to keep up with those changes. The outsourced payroll services ensure compliance by incorporating these rules into their procedures, thus minimizing the risk of a company falling behind.
Time saved for leadership
For a small or medium-sized company, payroll is often delegated to the owner or manager of the company, who usually lacks proper payroll expertise, which means that outsourcing payroll saves the time to perform these duties.
Handling complex pay structures
The companies in some industries have the payroll system that requires something else other than simple calculating salaries. There can be employees who earn tips, employees who receive multiple payments, those who get their payment garnished and those whose wages are regulated by unions.
When Outsourcing Can Cost More, Not Less
However, outsourcing is not always a more cost-effective method. Outsourcing companies usually require additional fees to provide customized services such as payroll systems with unique requirements for their payments and benefit plans, etc. In this situation, the "simplification" that the business pays for ends up costing more than keeping an internal system, which was created specifically for them.
What a Payroll Provider Typically Handles
| Function | Typical Scope |
|---|---|
| Wage calculation | Hours worked, overtime, multiple pay rates, tips, and commissions |
| Tax withholding & filing | Calculating and remitting income tax, social security, and other statutory deductions |
| Compliance reporting | Government filings, year-end tax documents, and regulatory correspondence |
| Payslip issuance | Generating and distributing pay statements to employees |
| Query handling | Responding to employee questions and liaising with tax authorities on the business's behalf |
A Regional Example: Payroll Bureaus in the UK
In the UK, payroll bureaus will usually handle communications with HMRC, generate reports for the company's accounts department, and provide payslips – sometimes even paying wages directly to the staff member. Changes in regulation can affect the process of outsourcing as well: for example, since April 2016, UK umbrella companies cannot claim travel and subsistence allowances in particular situations, thus potentially leaving themselves liable to reimburse HMRC for any tax relief previously claimed. In some cases, recruitment agencies along with their clients may be jointly responsible for the underpaid taxes.
The Middle Ground: Payroll Software
While outsourcing and in-house payroll solutions represent two extremes, many businesses decide to find something in between: use payroll software to assist the work of an accountant or an office manager in the company, not to hire additional payroll specialists nor outsource the task. This kind of software calculates pay based on approved rates and information taken from other related systems – time-tracking equipment like electronic time clocks, as well as other HR software.