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What is Payroll Outsourcing | An Illustrative Guide on Payroll Outsourcing

Payroll Outsourcing

What is Payroll Outsourcing | All You Need to Know about Outsourcing Payroll

The practice of outsourcing the payroll function has grown in recent years. It has grown both in terms of the users—the number of companies that are choosing to outsource payroll. It covers suppliers—vendors that have entered the market and are offering services.

Payroll Outsourcing

What Is Outsourcing?

Outsourcing is the business practice of hiring a party outside a company to perform services that should be traditionally performed internally by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure.  It helps to reduce the cost of running the outfit. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office. Hiring in the short term.

Since cost reduction has become a major concern for most companies, there is an increased focus on outsourcing single processes. This also covers enhancing existing outsourcing functions. The global human resource outsourcing market, of which payroll outsourcing is a major part, is expected to grow to $162 billion worldwide as in 2015. This is according to the website Seeking Alpha (

What is Payroll Outsourcing?

Payroll outsourcing is hiring a third party to manage your payroll processes. Although effectiveness varies by the payroll service provider.

As it pertains to outsourcing the payroll function, the cost of administering payroll in-house, compared to outsourcing, is often the primary consideration. Research by PriceWaterhouseCoopers, The Hidden Reality of Payroll & HR Admin Costs, conducted in 2011 in conjunction with ADP, analyzed the costs associated with payroll and HR admin when done in-house, as compared to when outsourced.

According to the study, organizations that retain payroll, workforce administration, time and attendance, and benefits administration in-house, spend on average 18 percent more than organizations that are outsourcing.

In addition, larger organizations spend 27 percent more than smaller sized organizations, and organizations using software vendors spend 32 percent more than those that use web-based solutions. The report reveals that despite significant technological advances in payroll administration software, the costs for payroll administration continue to increase.

According to a study by Bloomberg BNA, 64 percent of companies locate the payroll department within finance/accounting. Another 25 percent of companies place it in human resources. As well, 7.5 percent of these outfits put it in shared services. Another 4.5 percent of companies choose some other department.

When to Outsource

Using a payroll service generally makes sense if your payroll changes with each pay period. If your company has employees working varying amounts of hours each week or has a significant turnover rate, a payroll service can be a time-saving and cost-effective alternative to internal processing. Using a payroll service can also be helpful if you have to pay payroll taxes for multiple states.

The importance of effective payroll management

Payroll is one of the most vital activities for a company. An employee’s salary is his single largest connect to an organization and at the foundation of employee motivation/success. Payroll information is critical and highly sensitive. Any seasoned HR or admin person knows that it can make or break an employee’s relationship with his employer.

What are the advantages of outsourcing?

  • Assistance from experienced payroll service providers who are up-to-date on new legislation and regulation
  • Professionally managed substitution during staff absence
  • Confidentiality can be maintained mostly in the area of executive salaries
  • No infrastructure of training cost incurred

What are some questions you should ask before choosing a payroll service provider?

  • What is included and was is not included with the service plan?
  • Can I take a look at a demo of how your solution works?
  • Can you process different types of taxes?
  • How will I get billed for your services?
  • Who or how can I contact you if I have a question?
  • Can I make changes after the payroll has been processed? If so, is there a timeframe to make changes?
  • Do I have an assigned specialist or will I be working with a different professional every time?

Payroll Outsourcing Prices

Payroll outsourcing charges depend on the extent of services you plan to outsource and the kind of packages outsourcing companies/service providers are offering you.

The market for payroll is competitive and reflects the local market state. The basic service costs between $0.80 and $2.00 per check, plus a base account fee. The amount of the base fee depends on the pay period, with the less frequent payroll periods costing more. Over a year, however, less frequent payroll periods will cost less to maintain.

Added services such as tax filing and direct deposit can cost between $4 and $9 per payroll period. With direct deposit, there is often a nominal transaction charge per check in addition to the base fee.

Furthermore, there can be fees for adding or dropping employees, adjusting employee information, or setting up your account. Fees can differ dramatically across services, so it is important to check them out before signing up for a service.

Since pricing for services is relatively negotiable, try to avoid multiple unnecessary charges by knowing which service features you are most interested in before choosing a payroll company. In general, watch out for providers that offer low base processing rates with expensive add-on features.

Payroll Outsourcing Companies/service providers Offer Services List

  • calculating wages and salaries
  • withholding income taxes
  • direct deposit, and
  • providing management reports

What to look for when choosing a payroll company/service provider

When it comes to choosing a good payroll outsourcing company, here are some things you should consider:

Auto Files and Pays Taxes – A good outsourcing provider will have a system set up where they will auto pay and file the salaries and taxes for you in line with local regulations if they don’t provide that service, look elsewhere!

Reasonable Prices – A good payroll service should be able to save you time and money in the long run by offering good value for money payroll management service.

Client-Focused Customer Service – Managing an entire organization’s payroll can get complicated and you will probably have questions about how some aspects are calculated, which is why it’s important to work with a provider that is always available to assist you whenever you need them.

Key Benefits of outsourcing your business payroll

  1. They maintain monthly payroll processing in an efficient manner.
  2. They better utilize the most important asset of a company’s owner and that is time and money.
  3. Again, they take complete care of the updated HR laws and all legal issues related to that.
  4. They make sure that all the financial processing takes place accurately and on time.
  5. Once more, they are cost-effective, most of the good payroll outsourcing services can easily fit into your budget, and they are way more affordable than you think.
  6. They add greater value to employees by opening up doors for added benefits.
  7. It’s a great way to manage the whole payroll system of a company with the best people in the industry.