Outsourcing Payroll Pros And Cons
When managing a business, one of the most important operational duties is ensuring accurate payroll.
It can be a time-consuming and somewhat complex process for those tasked with it, and outsourcing payroll is one way of alleviating that burden.
Here I’ll take you through what outsourcing to payroll services entails and the pros and cons of this approach.
What Is Payroll Outsourcing?
Payroll outsourcing is the act of hiring an external provider to handle all the payroll operations of a company. This includes processing wages, tax withholdings, and ensuring compliance with various labor and tax laws.
You and your employees provide the details (compensation, hours worked, classification etc.), and the payroll service takes care of the rest.
As we’ll go into, outsourcing payroll can be especially helpful for companies operating internationally or for complex processes requiring a lot of manual calculations.
Pros Of Outsourcing Payroll
Starting on a positive note, the potential pros of outsourcing payroll:
Ready-made and managed payroll processing
An outside payroll provider offers a ready-made, efficient payroll process so you don’t have to spend time setting one up and managing it.
Potentially lower operational costs
You don’t need to invest in best payroll automation tools or personnel to manage payroll internally. With outsourced payroll, all that is handled by a third-party provider with a dedicated team who can cover for each other.
Ensured accuracy and compliance
An external payroll provider should have the expertise and resources needed to ensure accuracy and adherence to payroll compliance regulations. Something to look out for here is if they’re willing to cover the costs of any errors on their part.
Low onboarding & training requirements
You and your team won't need to learn about payroll software, adapt to changing tech, or train on complex systems. All of this will be handled by the payroll outsourcing company.
Cons Of Outsourcing Payroll
Despite the potential pros, there are also a few reasons organizations choose to process payroll in-house using their own checklist to ensure accurate payroll.
Loss of control
Some organizations prefer complete control over their processes including payroll. This means no dependencies on external partners and their continued customer service levels.
Cost
In some instances, outsourcing may not necessarily be more cost-effective than performing payroll internally.
Depending on the services, cost structures, and other factors, outsourcing payroll could end up costing more in the long run than typical costs of payroll platforms used internally. Outsourcing still requires oversight from someone internally.
“While outsourcing gets rid of direct expenses like manual processing, software, and compliance staff, you do still pay vendor fees,” says Andrew Gosselin, CPA & Senior Editor at TheCalculatorSite. “Cost savings might happen initially but expenses could rise over time, especially if changes or special requests lead to extra charges. Before deciding to outsource, do a multi-year cost analysis.”
Data privacy
With data stored externally, companies have to be prepared to provide additional security measures to protect confidential employee data and maintain information privacy and integrity.
Outsourcing Payroll Case Study
Conor Hughes, HR Consultant at RealHR Solutions, shares his experience outsourcing payroll:
“When we were outsourcing payroll at a mid-sized tech company, we recognized the growing complexities and pressures on our internal team.
We conducted a cost-benefit analysis comparing our internal costs, including software and personnel, with proposals from third-party providers.
For instance, internally, our costs were around $120,000 annually, whereas outsourcing quotes ranged from $60,000 to $90,000.
We also considered potential savings from reduced errors and compliance risks. The decision was financially sound, and we made sure to establish clear SLAs with the provider and kept an internal payroll expert to facilitate communication and quick problem resolution.
During the transition, we encountered some integration issues and initial discrepancies, but with proactive management, we stabilized the process quickly.
Within six months, the overall efficiency improved, freeing up our HR team to focus on strategic activities and delivering significant cost savings.”
Outsourcing Payroll Best Practices
Wendy Mankinson, HR manager at Jolanda Hydraroll, provides us with some best practices to ensure outsourcing is a success and safeguard your payroll:
- Thoroughly vet potential outsourcers. Use resources such as this site, Trustpilot, your network, and Reddit forums. Also, ask the vendor for evidence of valid insurance documentation and cyber security policies.
- Negotiate robust service-level agreements with inbuilt penalties
- Map out a detailed implementation and transition plan
- Maintain internal expertise to oversee your outsourcing provider
- Understand the outsourcer's limitations on issues such as global payrolls
- Insist on secure data transfer protocols.
- Have a contingency plan to bring the payroll back in-house should it be needed.
To Outsource Or Not To Outsource
Ultimately, the decision to outsource payroll is based on your organizations’ unique needs and some due diligence around these.
Your payroll service provider of choice should be knowledgeable and well-versed in payroll compliance and have secure systems in place to properly store and manage employee data.
A good starting point is our pick of the best payroll companies.
It’s also beneficial to have frequent communication between the company and the payroll provider to ensure that the payroll is being processed as accurately and efficiently as possible.
