There comes a time for most small business owners when they have to decide whether to outsource their payroll needs. As with most business decisions, there are pros and cons. In this blog post, we’ll try to provide a comprehensive overview of outsourcing payroll so you can make the best decision regardless of your business structure.
What is Payroll Outsourcing?
Payroll outsourcing refers to the practice of having an external third-party provider handle payroll operations for your business. Instead of managing payroll functions like calculating wages, statutory deductions, pensions, and tax liabilities in-house, these tasks are handled by payroll specialists at an outsourcing firm. You provide employee data like hours worked and the outsourcer handles everything related to determining pay and paying employees accurately and on time.
Main Benefits of Outsourcing Payroll
Outsourcing your small business’ payroll comes with several key advantages:
Saves Time and Focus
For most small companies, payroll is a complex, time-consuming process. Tasks like determining tax and national insurance contributions, tracking leave and overtime, issuing payslips, filing returns, and processing payments can take many hours every pay period. Outsourcing eliminates this administrative burden, allowing you to free up your time for more strategic priorities. You avoid hassles like upgrading payroll software, printing checks, managing tax forms, and tracking policy changes.
Reduces Payroll Costs
Handling payroll in-house requires investment in software, training, and possibly dedicated payroll staff. For small businesses, outsourced solutions are extremely cost-effective, since providers benefit from economies of scale in their technology and teams. Outsourcing converts payroll from a fixed to a variable operational cost as well.
Staying compliant with constantly changing payroll taxes, pensions auto-enrolment rules, and employment laws is challenging for small business owners without legal expertise. Outsourced payroll providers have extensive knowledge and ensure your payroll is fully compliant, avoiding penalties.
Adds Scalability and Flexibility
As your small business grows, outsourced payroll can easily scale up to handle additional employees. Providers also readily accommodate irregular staffing such as temporary, seasonal and zero-hour workers. In-house payroll may struggle with quick adjustments.
Provides Specialist Expertise
Outsourcing gives access to the knowledge of payroll specialists who are experts in both payroll processing and compliance. They can provide advisory services on taxes, regulation, and optimizing your payroll processes.
Simplifies Payroll Management
Outsourced payroll reduces the tasks you need to manage in-house each pay period to submitting your employee time data. Tedious payroll tasks from managing software to printing checks are handled for you. You avoid IT issues or upgrading internal systems.
Enhances Data Security
Reputable payroll outsourcing firms make substantial investments in data security, backups, access controls and encryption. For many small companies, ensuring the same level of security with in-house payroll may be cost prohibitive.
Key Considerations Before Outsourcing
While outsourced payroll delivers many benefits, some aspects to carefully consider include:
Vetting Providers Carefully
Not all payroll outsourcers are equal. Thoroughly research potential providers on aspects like accuracy, customer service, technology, security, and value for money. Check online reviews and testimonials. Compare multiple vendors.
Assessing Data Protection
Payroll data is highly confidential. Before outsourcing payroll, ensure your provider has stringent data security controls, encryption, access restrictions and backups to prevent breaches or data loss. Firms should provide visibility into security practices.
Loss of Institutional Knowledge
Over time, your in-house payroll team builds deep institutional knowledge. Transitioning to an outsourcer means some loss of personalized service and staff relationships. Provide enough information to minimize this.
Customized Reporting Needs
Discuss your unique payroll reporting requirements with providers during your search. A flexible outsourcer will tailor reports with all required payroll analysis fields and parameters.
Evaluate each prospective provider’s communication standards and SLAs around responding to inquiries, change requests, and providing guidance. Lack of responsiveness can negate outsourcing benefits.
Transition Process and Timeframe
Switching payroll platforms involves data migration and testing. Understand the transition process, blackout periods, and timeframes involved so you can plan accordingly before starting.
Vetting Contract Terms
Carefully review contract terms like length, early termination policies, liability, service guarantees, and who bears responsibility for penalties. Avoid contracts with auto-renewals and long notification periods.
When Outsourcing Payroll is Advantageous
Here are some of the top situations where outsourced payroll makes the most sense for a small business:
- You lack in-house payroll expertise and need to free up staff time
- Managing payroll is proving overly complex, stressful, or error-prone
- You want flexibility to support irregular staffing needs
- You need access to specialized payroll reporting and analytics
- Staying compliant with regulations is difficult with in-house payroll
- You are expanding into multiple geographic locations
- You are outgrowing your current payroll software capabilities
- Integrating payroll with your accounting system is challenging
- You want to leverage advanced payroll technologies and automation
While relinquishing control of payroll seems risky, for many small businesses, the potential savings, compliance, technology access, flexibility, security and convenience benefits make outsourcing an advantageous option. Just be diligent in your provider search and transition process. With the right partner, outsourcing payroll can allow your business to scale without proportional growth in HR management costs or headaches.