Payroll Outsourcing

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Employers have plenty of options when it comes to managing various human resource, accounting, and payroll responsibilities. However, a good understanding of the payroll basics is important before deciding whether to outsource payroll or handle it internally or "in-house". 

Types of Providers for Payroll Outsourcing 

Employers didn't get in business to handle administrative tasks, so outsourcing payroll and other administration to a third-party firm that provides payroll solutions and payroll tax filing services can allow free up companies to focus on the business of their business. However, there are a lot of options when selecting which provider or even what type of provider to outsource payroll to.

Accounting Firms or Accountants

For self-employed individuals and freshly created startups with 1 to 5 employees, a certified public accountant can handle the simple, straight forward payroll that's typically required. Although, the downside to using an accounting firm or accountant though is they're likely to become bogged down during tax season and less available to handle payroll requests and customizations. 

Payroll software may not always be directly available to employers from accountants, but is typically provided by the types of companies listed below. This can enable employers to manage more of the data entry required for to process payroll from time and attendance tracking to calculate time worked to paying employee bonuses. It can also enable employees in the company fill out an electronic W-4 to calculate payroll tax withholdings, view paychecks online or from a mobile device, make updates to direct deposit information, and even potentially access W-2s for filing taxes at year-end. 

Professional Employer Organizations (PEOs)

For smaller employers and groups with 2 to 15+ employees, professional employer organizations also known as PEOs, are a great option. They can tend to be a little pricey under the traditional PEO or "co-employment model" versus an administrative service only or ASO model.

The co-employment model means that the PEO has employees roll up under their organization, which creates certain economies of scale and increases buying power. For example, rolling up into the PEO, the 10 employee company now gets bulked into the 1,000's of employees from all the PEOs clients providing access to things like workers' compensation, health insurance, and other employee benefits at a lower rate. However, all these additional services beyond payroll will come with additional costs.  

Payroll Service Companies

Payroll service companies, also referred in the payroll industry as payroll service bureaus, are typically the most common option for employers to outsource payroll to. Keep in mind some payroll service companies may actually be a PEO offering payroll services under an ASO model. Don't worry though, both companies in this scenario for all intensive purposes are the same type of provider and are both offering full-service payroll and payroll outsourcing services.

Oftentimes, these companies can operate across the country, working with a nationwide client base and can service employers of virtually all sizes and in almost any industry OR they can be payroll specialists operating in a particular market niche or industry.

Payroll under this type of provider is significantly less costly than a PEO, but usually more expensive than an accountant or accounting firm since they are providing varying levels of payroll administration as well as quarterly payroll tax filing services or year-end payroll services.

And just because these companies specialize in payroll does NOT mean they don't also provide additional products, solutions, and administrative support for things like human resources (HR) and employee benefits administration. In fact, companies providing services above and beyond payroll is quickly becoming more commonplace than not.

It's very important to understand the product and service scope of the provider up front, before partnering with any payroll outsourcing company... even if payroll is the only area your company is looking to outsource.

Here's why: knowing the provider's full product and service offering will help create a longer term relationship and reduce the potential need to switch providers as an employer scales or evaluates outsourcing additional administrative tasks or processes.

Advantages of Outsourcing Payroll

Payroll outsourcing has become a great way for any organization to reduce costs while remaining efficient and compliant. This is especially true for small companies that are growing, but only have a single human resource person to handle everything related to employees. Instead of bringing a salaried payroll manager on board, a company can use an outsourced payroll arrangement. The main advantages of outsourcing payroll can include: 

  • Access to a secure payroll and time management software program 
  • Live customer support for employees who have questions or need to make changes
  • New hire reporting to comply with state laws
  • Tax filing and handling year-end reporting responsibilities
  • Avoiding tax and payroll mistakes, including IRS penalties 
  • More time for HR and Accounting to focus on other matters

Consider also that outsourcing payroll can help reduce the company’s liability should a mistake happen. Payroll outsourcing firms are required to stay up-to-date with all employment laws and payroll regulations. They provide another set of eyes on data so that it’s more likely that any errors will be spotted and corrected before any damage is done. 

Typical Outsourced Payroll Services

Most payroll outsourcing agencies offer services like securely processing payroll with a payroll software program. This includes handling all pre-tax deductions, such as FICA and Social Security taxes, benefit premium deductions, and garnishments. The payroll outsource company will provide regular reports to HR so that costs can be tracked, and handle all the direct deposit or mailing of paychecks and pay stubs. 

Be sure to take the time to determine the direction your company is taking before choosing to outsource payroll. Understand how much growth is expected and how many employees you plan to have on your payroll a year from now. If you have employees in different states, you will need a company that can handle this. 

Evaluating Payroll Outsourcing Companies

Choosing a payroll outsourcing company should be a careful decision made by the leaders of your organization. Any tasks that have become too cumbersome should be the first services to seek out in an agency.  For example, using a punch card attendance system and having to collect weekly paycards is very inefficient. In this case, the company can choose an electronic payroll system that includes modern timekeeping and payroll management. 

Another factor to consider when evaluating payroll outsourcing companies is customer service and support. It’s common for human resources and accounting to have questions about payroll. Being able to run custom reports is a good feature, but the company should also offer direct access to a real human being who can answer specific questions. This is also helpful for employers who need to make changes to their direct deposits, address, or have questions about items on their earnings statements. 

Always evaluate payroll outsourcing companies based on their business ratings and reviews from other customers. The Better Business Bureau can share how well payroll outsourcing companies are doing. Dun & Bradstreet offers consumer reports on payroll outsourcing firms. Ask for client references in your specific industry to get a better idea of how the payroll outsource firm handles things. 

Payroll Outsourcing Costs 

When selecting a company to outsource your payroll to, it’s important to have a good idea of what the costs are. Keep in mind that the more services you add, the more expensive payroll outsourcing can become. 

Payroll outsourcing costs for small businesses are typically start in the ballpark of $100 per month and can go up to as much as $1,000 per month for larger plans with additional products or services. Payroll outsourcing companies tend to offer packages, combining HR with payroll services. Other services, like distributing W-2 forms, can add further costs. 

When in doubt, ask for detailed pricing upfront and choose the company that best fits your needs.  If all possible, find out if there is a brief period where you can test-drive the service without committing to it first.

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