The What, Why, and When of Payroll Outsourcing

Running a business means juggling a variety of administrative responsibilities. Outsourcing payroll could make your job easier.

Most successful entrepreneurs know how to delegate. To maintain a certain standard of service, roles and responsibilities must be passed to the right people in the business. In a larger sense, this is how outsourcing works: A third-party organization is engaged to take care of some essential administrative process, leaving the business itself – and its employees – free to concentrate on delivering core services.

One the most popular and obvious outsourcing options is payroll. Labour intensive, time-consuming, and attached to a raft of compliance obligations, payroll can quickly become a burden for even the most experienced administrator. Whether you’re debating handling it in house or already exploring your outsourcing options, it’s worth taking the time to explore the payroll processing service landscape:

What Is Payroll Outsourcing?

Simply put, payroll outsourcing means exporting some or all of your payroll administration to a specialist third-party organization. The payroll package you choose will integrate with your existing business infrastructure, including your HR department, and deliver its services each pay cycle.

Market research predicts the global payroll outsourcing market will grow at a compound annual rate of almost 6 percent from 2017 to 2021. Access to cloud computing and a variety of software platforms has dramatically enhanced the services payroll providers can offer their clients. Businesses can choose packages ranging from simple tax, pension, and salary calculation to end-to-end logging of employee hours and the issuing of paychecks on payday.

Why Should You Outsource Your Payroll?

Outsourcing payroll is more than a matter of ensuring employees are paid on time. Payroll is time-consuming and complicated. If a significant chunk of your attention is devoted to it every month, there’s a good chance that your core services are being adversely affected.

Neglecting payroll, however, isn’t really an option. While compliance errors can incur costly fines from the tax man, missed pay deadlines can lead to something worse: unhappy employees. The administrative burden payroll brings can easily have a knock-on effect, especially on closely connected departments like human resources. HR staff will bear the brunt of any employee dissatisfaction, should your payroll performance slip.

In international contexts, outsourcing becomes even more important. Global payroll providers represent a way to acclimatize your business to its surroundings by removing the need to become rapidly familiar with a set of entirely new compliance regulations as your company is finding its feet.

Essentially, outsourcing is a happy medium that allows your business to focus on what it does best with the peace of mind that the minutiae of payroll processing are being handled by experts.

When Should You Outsource Payroll?

If you’re consistently running your pay deadline close, you should urgently consider outsourcing payroll as an option. That said, if the situation has reached that stage, it may already be too late.

The decision to outsource should be made before payroll problems begin to bite. Practically, this means carefully considering your ability to meet business needs with your current infrastructure and resources. You’ll need to be happy that outsourcing is viable. How will it help you over the short and long terms? Will the time and money saved help you grow your business?

How Do You Choose a Payroll Provider

Not all outsourced payroll providers are created equal. Important considerations include:

1. Reputation: With a preponderance of cloud and software platforms available, the barrier to entry into payroll outsourcing is lower than ever before. Contact prospective service providers with questions about the level of security they offer, the software they use, and the way they handle errors. Also worthwhile: obtaining references from the providers’ previous clients.
2. Service level: What kind of payroll services do you need? Payroll providers will offer a range of service levels, from the simple calculation of wages and taxes to reporting tax and issuing paychecks.
3. Price list: Crucially, outsourcing payroll should be cost-effective. Payroll involves a wide variety of hidden or unexpected regulatory obstacles that may not be covered by your purchased package. Understand what you are paying for, what you will need to handle in house, and whether you’ll need to pay extra for certain services.
4. Expertise: Choose a payroll provider with experience and expertise appropriate to your business. Think about your tax obligations, the size of your company, and whether you require regional expertise – if, for example, you are opening a branch in an international location.

What Happens Next?

Once you’ve decided to engage a payroll provider, working out how to approach one can be daunting. The landscape is crowded and complicated, but keeping a number of simple steps in mind can help you find a suitable provider and select a service package that suits your needs:

1. Approach: Before you contact a payroll provider, list the payroll services your business needs. Having this list of services in mind when you approach payroll providers will help you keep on top of costs and avoid overselling.
2. Selection: A simple Google search will return thousands of potential providers. Narrow down the field by asking around in your business community. Organizations with needs similar to your own may have useful recommendations.
3. Contact: Talk to potential providers on your shortlist to ensure they meet your needs. Pertinent information includes practical payroll issues, such as costs and turnaround time, but it’s also important to find out how the service will affect other in-house aspects of your business, like your HR department.
4. Engagement: When you engage a payroll provider, make sure you understand your own responsibilities and roles within the process to the ensure everything proceeds as smoothly as possible. HR and legal staff will need to be briefed and understand how their departments will connect with the outsourced system.

How Will Outsourcing Payroll Help Your Business?

Outsourcing payroll can bring a number of key benefits to your business, including:

1. Experience: Payroll administration comes with a vast amount of administrative and regulatory baggage. By outsourcing, your business can import the necessary experience and expertise to navigate the compliance labyrinth and avoid costly financial penalties or consequent reputational damage.
2. Efficiency: Even if you’re confident you can satisfy your business’ payroll compliance obligations, payroll administration can still be a lengthy, costly, and exhausting process. With infrastructure already in place, chances are a payroll provider can handle your regular pay cycle with greater efficiency, delivering cost-savings and freeing your business up to deliver its core services.
3. Security: By necessity, payroll processing means dealing with sensitive personal data, including bank account information. If you’re worried about a potential breach, outsourcing represents a chance to choose a provider with a proven security model and a tested response plan.
4. Scalability: Outsource packages can be tailored to suit your business’s specific needs and financial resources. They can also be scaled up and down when those things change. In practice, this means consistently high levels of payroll performance even as your business grows or faces challenges.

What Else Should You Know?

Outsourcing isn’t a one-size-fits-all solution. You’ll need to think carefully about your payroll strategy at every stage of the process. Important points to remember include:

1. Preparation: Before any decision to outsource payroll –or any business process, for that matter – you should be satisfied you’re bringing a net benefit to your business. It may not always be about saving money: If you’re not comfortable navigating the compliance landscape, your outsourcing strategy may be aimed at avoiding costly penalties or frustrating employees with missed paydays.
2. Decisiveness: Once you’ve decided to outsource (or not, as the case may be), committing to your strategy is crucial. Payroll is the backbone of your business. It shouldn’t be treated with half-measures. Payroll problems can quickly snowball.
3. Participation: Your relationship with your payroll provider shouldn’t go one way. It’s vitally important that you remain a participant in the payroll process, and you should be happy with the way your relationship with the payroll provider works. Make sure you understand how your provider will support you, how they will address problems, and how quickly they will respond to queries.
4. Integration: Your outsourced payroll won’t exist in isolation. It will need to integrate with other aspects of your business. Given its intersection with the HR department, you’ll have to think carefully about how both departments will interact on an ongoing basis. Are you happy with the level of communication between your HR staff and your payroll provider?

Graham McKechnie is global tax director at Activpayroll.