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7 Min. Read

Payroll Outsourcing: The Ultimate Guide

Payroll Outsourcing: The Ultimate Guide

The payroll processes of your business are going to have several moving parts. And with so much else going on, it can be difficult to stay on top of everything. Plus, payroll can be an extremely time-consuming and tedious task to undertake. 

One of the biggest challenges of payroll is to make sure your employees receive accurate wages and to pay them on time. As a small business owner, there is a lot for you to worry about and you might be struggling to keep up with your payroll. One of the options that you have is payroll outsourcing. 

Below you will find the ultimate guide to payroll outsourcing for your business. 

Here’s What We’ll Cover:

What Is Payroll Outsourcing?

When Does It Make Sense to Outsource Payroll?

Key Takeaways

What Is Payroll Outsourcing? 

Simply put, outsourced payroll is the process of using a third-party service provider to handle everything for you. They take on all the administrative duties and compliance functions when it comes to paying your employees. As well, they assist with meeting compliance deadlines.

This can help your business save a ton of time and money. You can reduce the need to hire and train your staff to have payroll expertise. Plus, you can limit expenditures, such as purchasing and maintaining expensive payroll software. It can also help you stay compliant with all the requirements of PAYE and have more control over the payroll.

That said, the benefits of payroll outsourcing are going to depend on your actual payroll requirements. For example, some businesses only offer limited services and can handle everything that’s involved. Other businesses might be a bit more complex and require in-depth payroll processes.

What Happens When You Outsource Payroll?

Whether or not you decide to outsource your payroll needs is going to depend on several factors. Many business owners outsource payroll requirements since it can be time-consuming and complicated. And this is especially the case if your expertise isn’t in areas such as finance, bookkeeping, or accounting

By using a payroll outsourcing company, they take on everything. This can range from gathering all your employee’s information and time card data to calculating the amount that’s due. Then, they issue pay to your employees in the process that works best, which can be direct deposit or even a payroll check.

Typically, most payroll outsourcing services follow some similar steps when processing payroll. Here are some of the most common things that they can do for you:

  • Set up and organize payroll software that includes employee data and bank account information 
  • Collect the relevant information needed for payroll for new employees 
  • Conduct and provide the required new hire reporting information 
  • Request or access the number of hours worked for each pay period 
  • Confirm the number of hours that were worked each pay period, while calculating gross pay
  • Process pre-tax deductions, such as health benefits and various taxes
  • Process post-tax deductions 
  • Deposit wages into employee accounts, which can be by direct deposit or by check, for example
  • Pay vendors and suppliers on your behalf, like paying insurance companies 
  • Provide in-depth payroll reports 

When Does It Make Sense to Outsource Payroll?

At the end of the day, you’re the only one that’s going to be able to know what’s best for your business. But, payroll outsourcing makes sense if you don’t have staff who have the proper experience or time to handle payroll.

Usually, you would have one person who performs the administrative duties of bookkeeping and payroll. But sometimes that’s not an option. Plus, you can save a lot of money by outsourcing since you don’t have to hire someone full-time. 

Some small businesses even decide to assign payroll responsibilities to an employee in Human Resources (HR). They would then take on everything from hiring, onboarding, policy management, and training. That said, it still doesn’t guarantee that they have the expertise or skills to handle your payroll effectively. 

Questions to Ask

Outsourcing to a third-party vendor can mean a few things. Such as a dedicated payroll provider, a bookkeeper, or a professional employer organization (PEO). But, before you make a final decision it can be important to ask yourself a few questions. This helps ensure that you are getting exactly what you require and whoever you outsource to can handle all your needs.

  • Can they manage off-cycle payroll and issue year-end bonuses?
  • Can they correct errors in payment such as underpayment?
  • Can they manage the benefits you offer your employees? Such as health insurance or pension contributions? 
  • Can they accurately track and manage leave balances, like paid time off, vacation time, and sick time?
  • Do they offer specific self-service options for your employees to benefit from?
  • Do they generate and provide in-depth payroll reports?
  • Do they use the right type of software to handle payroll tax payments and filing? 
  • Can they handle payments to suppliers and contractors?
  • Do they offer direct deposit capabilities to pay your employees?

Deciding to outsource payroll usually involves very low risk to your and your business. However, there are a few things that you want to avoid. Knowing and understanding them now can help you limit those possible risks. 

Here are some important things to keep in mind when outsourcing payroll: 

  • Don’t hire an accountant or bookkeeper who is unqualified 
  • Make sure that you secure your year-end data before you cancel an existing service 
  • Always check for customer reviews to get a better sense as to who you’re outsourcing to
  • Try and put certain controls in place to limit the possibility of embezzlement or fraud

What Are the Main Activities that Payroll Outsourcing Should Cover?

It is mentioned above, but this is all going to depend on your business and what your actual needs are. Some payroll outsourcing can cover absolutely everything, while others might only cover a few basic areas. That said, payroll outsourcing should cover anything related to your payroll needs. 

This can be gathering and maintaining all your employee information and calculating their salary or wages. It also includes distributing payroll, calculating and adding bonuses, and generating payroll reports. As well, you might also need to comply with certain tax laws and regulations. 

Key Takeaways 

One of the best things that you can do if you’re thinking of outsourcing payroll is asking yourself exactly what you need. Can you afford to hire and train a dedicated bookkeeper or have an entire payroll department? Or can you assign those tasks and responsibilities to someone in HR?

If you can’t do either of those or you just can’t stay on top of all your payroll needs, outsourcing might be the best choice. When you outsource, you can ensure that your payroll processes run as smoothly and efficiently as possible. And you can make sure your employees get paid accurately and on time. 

Outsourcing to a dedicated payroll service provider helps stay compliant with changing legislation. Some of the biggest benefits to outsourcing payroll can include: 

  • Fully automated online payroll processes
  • Having payroll taxes accurately calculated
  • Access to a payroll expert for any questions or concerns
  • No payroll errors or a payroll mistake that can cost you and your employees
  • The ability to focus your time and energy on other areas of your business

Having someone with payroll experience to complete payroll processing can be a good solution. And it doesn't matter your business size or if you're a specialist company. Use the guide outlined above to help you decide whether payroll outsourcing is the right choice for your business goals. 

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