What Is Payroll Outsourcing?

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What Is Payroll Outsourcing?

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". 

But what does payroll outsourcing entail? When a company decides to outsource payroll, it means that they have delegated a portion or all of its payroll operations to a third party, often a payroll service company. 

The best payroll outsourcing services will also help with payroll tax reporting, regulatory compliance, unemployment claims, and more. 

Common Payroll Services from Outsourcing

Most payroll outsourcing agencies offer services such as:

  • Secure payroll processing with payroll software
  • Maintenance of benefit premium deductions and garnishments
  • Management of all pre-tax deductions, such as FICA and Social Security taxes
  • Quarterly filing of payroll taxes
  • Handling direct deposit or mailing of paychecks and pay stubs
  • Provision of payroll reports packages at the end of each pay period 

Benefits of Outsourcing Payroll

Outsourcing payroll can provide the following advantages and benefits for businesses that utilize a payroll outsourcing company:

Reduce Costs

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.

Improved Compliance and Less Liability

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.

Fewer Payroll Errors

Payroll outsourcing services 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. 

Human Payroll Support

Live customer support for employees who have questions or need to make changes.

Streamlined New Hire Reporting

Often, payroll outsourcing companies can also help with new hire reporting, helping you to comply with state laws.

Software Access
Access to a secure payroll and time management software program.

How to Choose a Payroll Outsourcing Company

Choosing a payroll outsourcing company should be a careful decision made by the leaders of your organization.

When selecting a payroll outsourcing service, it's very important to understand the product and service scope of the provider upfront, 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.

When choosing a payroll outsourcing provider, you need to do the following things: 

  1. Understanding your company's needs
  2. Checking reviews
  3. Evaluating the types of outsourcing providers
  4. Considering the cost

Understanding Your Company Needs

Any tasks that have become too cumbersome should be the first services to seek out in an agency.

Example Problem: A company uses a punch card attendance system and has to collect weekly paycards. This is inefficient.

Example Solution: The company should prioritize a provider with 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 and addresses or have questions about items on their earnings statements. 

Organizations should also ensure they understand how much growth is expected and how many employees they plan to have on their payroll a year from now. If you have employees in different states, you will need a company that can handle this. 

Checking Reviews

Employers should also take into account business ratings and reviews from other customers of your potential provider. 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 outsourcing firm handles things. 

Types of Payroll Services - Which Is Best?

Employers don't start businesses to handle administrative tasks, so outsourcing payroll to a third-party firm that provides payroll solutions and payroll tax filing services can 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.

Payroll Services from 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, straightforward payroll tasks that are typically required.

The downside to using an accounting firm or accountant is they're likely to become bogged down during tax season and less available to handle payroll requests and customizations. 

Accountants and accounting firms also rarely have payroll software available. 

Payroll Services from 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.

Businesses should note that PEOs 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 PEO's 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.  

Unlike accounting firms and accountants, Payroll software is typically available through a PEO. This can enable employers to manage more of the data entry required to process payroll from time and attendance tracking to calculating time worked and paying employee bonuses.

Payroll software can also enable employees in the company to 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. 

Payroll Service Companies

Payroll service companies, also referred to 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 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, servicing organizations of virtually all sizes and in almost any industry. Occasionally they can be payroll specialists operating in a particular market niche or industry.

Payroll services cost less than a PEO but are 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.

What is important to note is that 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.

Unlike accounting firms and accountants, Payroll software is also typically available through a payroll service company. 

Consider 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.

Find a Payroll Outsourcing Provider

Be sure to take the time to determine the direction your company is taking before choosing where to outsource payroll. 

If you are ready to begin your search, contact us today to get help finding the right provider for your organization. 

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