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Outsourcing Payroll to Meet the Needs of Your Business

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There are some functions of your business that absolutely must be done by the company internally. These are the functions that define your business, and sending them out to another company would impact your business’ ability to maintain its reputation and grow. Other functions, though, may still be vital to your company but don’t necessarily need to be handled by your employees. One of these important functions is the processing of payroll. While your company absolutely needs to make sure that this is done correctly, it might be a smarter move to have it done off-site. Fortunately, outsourcing payroll is a well-trusted and often-used type of business relationship.

Table of contents

  1. What is payroll outsourcing?
  2. Why outsource payroll?
  3. How does outsourcing payroll work?
  4. What are the benefits of outsourcing payroll?
  5. How much does it cost to outsource payroll?
  6. Payroll outsourcing mistakes and tips to avoid them
  7. Making the right choice

What is payroll outsourcing?

Unlike many other business practices, outsourcing payroll is almost exactly what it sounds like. Rather than going through the payroll process in-house, a business can choose to outsource various aspects of the process to an outside company. Generally speaking, this company will do most of the heavy lifting when it comes to matters of payroll, including not only factors like processing, but also keeping track of tax matters and even dealing with industry-specific compliance issues. Companies that choose to outsource do so for a number of reasons, but it’s fairly common no matter what industry at which you choose to look.

Why outsource payroll?

There are many good reasons for outsourcing payroll. One of the most common, of course, is simply a matter of not having the expertise in-house – a payroll company already knows how to get the job done, so it’s simply more efficient to let them handle the matter. Other companies might have the expertise in-house, but they might not have the time or equipment necessary to handle their current workload. Other companies, however, might choose to outsource because doing so will allow them to spend less than it would cost to keep a full-time payroll employee on staff.

outsourcing payroll

Companies choose to outsource this kind of work because it makes sense for their business. There’s not really a right or wrong reason to make this choice. If outsourcing can free up resources or capital, it’s usually an easy decision for a company to make that choice.

How does outsourcing payroll work?

It’s always a good idea to start your exploration of a topic by determining how it works. Payroll outsourcing may be common, but relatively few people outside the business world actually understand how it works.

Step 1: A contract. You’ll find the company that is the best fit for your needs and choose a program of services that meets not only your business’ needs, but also your budget.

Step 2: Supplying data. You’ll typically lay out all of the information that the other company needs to know, including tax information and even the schedule on which your payroll should be run.

Step 3: Communication. Once you’ve provided the payroll company with the relevant information, you’ll continue to interact with the company as you make changes to your workforce.

Most of what you’ll do, though, is simply paying invoices and breathing deep sighs of relief as you realize that you don’t actually have to handle the minutiae of payroll processing any longer. This is largely a hands-off process once your relationship is established and all of the various processes get up and running.

What payroll functions does my company still have to perform if we outsource?

Ultimately, what your company is responsible for after you enter into your outsourcing agreement really comes down to the services that you choose. Your particular situation may be more or less complex than others, so you might have many services done by the other company or only a comparatively small number of services outsourced. It’s important that you read your contract carefully and that you understand exactly what the other company can do for you.

In reality, your company still bears one hundred percent of the responsibility for compliance and tax issues even if you’re expecting the other company to take care of those duties. This means that you’ll still need to double-check to ensure that you’re having the correct amount of taxes withheld, that you’re classifying your employees and contractors correctly, and that you’re following any specific fiscal rules that govern your industry.

What are the benefits of outsourcing payroll?

If you’ve always done payroll yourself, you may wonder why outsource payroll at all? After all, doing so in-house seems like it might be a savings to some and at least you’ll have the benefit of overseeing everything that is going on. This type of outsourcing is very popular for a reason, though, and there are actually a number of very good reasons to choose not to do payroll on your own. Below are only a few of them that have many businesses choosing to have another company take over the responsibility for their payroll duties.

Headcount Benefits

Processing payroll means having the available employees to do the processing work. If you’ve got a very small business, that generally means doing that work on your own. As you grow, that may mean bringing in an outside party to do the payroll work. Over time, you’ll have to accrue enough people to not only effectively process payroll, but to make sure that the process is secure and done correctly. This can be quite an expense as well as a fairly ineffective use of your workforce.

outsourcing payroll

If you choose to outsource, you’ll be able to eliminate the need for a large payroll department. You may still choose to have someone oversee issues of compliance and work as a liaison with your payroll processor, but you won’t need an entire department. This will allow you to better allocate your personnel to those areas that can actually help your business grow.

Better Security

Payroll security is a serious matter. Unfortunately, a surprisingly large number of the security issues that crop up with payroll are internal, both due to the actions of employees and the security failures of the companies themselves. This is not, however, generally something that you’ll have to worry about if your work with an outside company. These companies are in the business of processing payroll for others so they’ve already made sure to have the right security measures in place. If you want to rest easily with the knowledge that your data is safe, outsourcing may be the right choice for you.

Payroll fraud occurs nearly twice as often (14.2 percent) in small organizations with less than 100 employees than in large ones (7.6 percent)

(Source: Forbes.com)

Avoiding Startup Costs

There are some fairly high costs that can be associated with processing your own payroll. Investing in the right software and the properly skilled personnel will require an allocation of funds that just might not be reasonable for a new business. This can be especially problematic when you look at the amount of actual work that will need to be done at first, as most software tends to be scaled for larger businesses and most payroll employees won’t necessarily have enough work to justify their salaries if you only have a few employees.

Working with another company, on the other hand, allows you to avoid these costs entirely. These companies already have the software they need and can offer a price based on your business’ actual needs. If you want to avoid paying for things you don’t need, you need to consider outsourcing payroll.

Compliance Convenience

It’s always important to make sure that you stay compliant with any state or federal regulations that concern the fiscal activities of your business. Whether this means special types of record-keeping or just paying your taxes correctly, a good payroll processing partner can help you. Your business will certainly always be responsible for keeping up with its compliance obligations, but choosing to work with a partner will help you to ensure that you don’t overlook any of the rules that can end up costing your company dearly.

Expert Help

Working with a payroll processor also gives you the benefit of that company’s expertise. You don’t have to try to hire away a payroll expert for your new company, nor will you have to train someone new every time there is a turnover in your payroll department. You will instead get access to people who know what they are doing and how to handle your accounts, with the benefit of knowing that this company will do its best to keep your business by dealing with all of your payroll matters with the utmost care.

Not sure about outsourcing your payroll? Click here to read about the benefits of managing your payroll online.

How much does it cost to outsource payroll?

Cost is always an issue with payroll. While there is no standard price for payroll outsourcing, there are certainly factors that will influence what you pay. Typically speaking, you’ll be looking at a fee of between twenty-five and two-hundred dollars per month just for basic payroll services, depending on the size of your company, your industry, and many other factors. Beyond that, you’ll also pay fees for tax assistance, paycheck issuing, and any other costs that are not part of your basic package.

outsourcing payroll
Every payroll company has its own schedule of fees, so it’s important that you look at what’s included before you sign a contract.

Payroll outsourcing mistakes and tips to avoid them

As you might imagine, it’s possible to make some significant mistakes when you’re dealing with outsourcing payroll. This is a common problem when you outsource any kind of function, so learning how to avoid these mistakes is a necessity. Your first goal should always be to identify what others have done wrong in the past, and then you should work to make sure you can take a course of action that will allow you to avoid those mistakes in the future. Below are three of the most common mistakes companies make when they choose to outsource payroll services – as well as the simple steps you can take to avoid those same mistakes.

Making Assumptions

Your relationship with your payroll company is one that’s predicated on a signed contract. Unfortunately, far too many businesses make assumptions about what their payroll company will do for them, leaving them to scramble to figure out what needs to be done when they realize that the task they assumed was being done was actually not included in the paid-for service. This extra work leads to extra costs and, in many cases, a fraught working relationship between the payroll processor and the client company.

Tip: Read your contract and make sure you know what is included in your services. If you are not sure about what your payroll company does, just ask your representative. There are many benefits that come with payroll outsourcing, but you can only make use of them if you actually know what they are.

Garbage In, Garbage Out

An important term in computing is “GIGO”, or Garbage In, Garbage Out. In short, this means that any process that starts with bad data is going to produce a bad result. As your payroll processing company can only work on the data that you give them, they can only produce the results that come from that data. Many businesses blame their payroll company for problems when the actual issue is the information that has come from the originator.

Tip: Double-check the information that you give to your payroll company before you send it over. Never assume that your numbers are correct – run them a second time and make sure that there is always a second set of eyes on anything you’re sending out. If you are able to send out reliable data, you’ll end up getting reliable results in return.

Concentrating on Cost

One of the cardinal sins of business planning is only concentrating on the cost. While there is certainly something to be said for being thrift, you generally get what you pay for when you’re working with payroll outsourcing companies. Going for the bottom dollar might save you money in the short-term, but it can lead to problems in the future.

Tip: Instead of focusing on getting the absolute lowest price, try to focus on getting the best price for the services you actually need. Doing so will give you a much better chance of actually saving money over the long run and give you a good chance to avoid payroll problems in the future. Try to focus on the value of the service rather than just the price tag.

Making the right choice

Choosing to outsource your payroll can be a highly beneficial decision for your business. While there are costs attached, they are more than outweighed by the resources that will be freed up and the level of competence exhibited by those who do the payroll work for your business. When you are ready to look at outsourcing payroll, it’s important that you start by looking at a company that you can trust. If you’re ready to start reaping the benefits of outsourcing your payroll, make sure to visit PayTech to look at the company’s payroll outsourcing prices and packages.

Click here to read the Payroll Fraud Prevention Guide and start protecting your business.


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