Why you should consider payroll outsourcing

Payroll, in the modern era of business, has become a great deal more complex than it ever was in decades past. Even though automation and other major advances in technology that address this essential category of human resources have grown fairly prevalent — as has been the case in many other aspects of business — several other factors combine to turn payroll into a (potential) logistical nightmare. The rise of the contract work-based "gig economy," evolving requirements in regulations such as the Fair Labor Standards Act, surges in remote employment and the continued multinational expansion of countless companies are just a few examples of such factors.

Taking all of this into account, numerous organizations have turned to payroll outsourcing service providers to ease the burden of the process and keep it from becoming a labyrinthine mess. If you've been experiencing difficulties in the course of overseeing compensation for your workforce as it expands and changes — or even simply looking to streamline your HR operations to focus more internal resources on mission-critical initiatives — outsourcing may be the right move. But before diving into the deep end and making this choice, it'll be best to familiarize yourself with what the service entails and how it really works. 

What are the fundamentals of payroll outsourcing?

When you outsource your payroll, you're entrusting a third party with all of the ins and outs of the key tasks for the process. According to Entrepreneur, a typical list of those duties might include:

• Issuing paychecks or direct deposits to members of staff for the appropriate pay periods
• Directly carrying the payroll for certain 1099-classified independent contractors
• Creating and confirming employee schedules, accounting for sick days, vacation and other forms of leave
• Paying federal and state tax obligations per the amounts withheld from every paycheck
• Withholding and allocating Social Security contributions (as well as retirement accounts and pensions, where applicable)
• Administering health insurance and other employee benefits
• Sending out Form W-2s to employees for their personal tax filings each year
• Filing the organization's payroll tax documents 
• Providing reports on companywide payroll and compensation as requested by management

The specifics of how these responsibilities are handled can vary significantly from one organization to another, particularly in cases where a company based in one country must pay (and provide benefits to) employees in other nations. (In such instances, the provider handling the local payroll outsourcing may be able to serve as the local employer of record for the employee, if it also functions as a staffing agency or is otherwise authorized to fulfill this role. But this is by no means guaranteed. If not, the employing business will need to either rely on multiple vendors to cover all of these bases or incorporate itself locally in foreign countries where it has an employee presence.)

How can payroll outsourcing services help your organization?

Arguably, the biggest benefit of enlisting a payroll outsourcing services provider to work alongside your company is — as alluded to above — the amount of time (and money) you can save. Small and medium-sized businesses, for example, need to put all of their resources (money, time and employee effort) toward the business itself, ensuring that it provides the goods and services it's supposed to as effectively as possible and is competitive enough to cover overheard and ideally turn a profit. Diverting personnel hours and money toward managing payroll can, in the long run, have a negative impact on the main goals of the company.  

That said, payroll — like other essential HR duties — has to be maintained, and that's where a third-party services provider can come in handy. Choosing a payroll outsourcing service also helps you avoid the possibility of making mistakes that can be costly for both you and your employees:

• Citing data from the IRS, Business 2 Community pointed out that approximately 1 in every 3 employers in the U.S. suffers financially as the result of a payroll error on an annual basis, costing billions of dollars in total.
• Approximately 40% of small businesses incur IRS penalties due to such mistakes. 
• Companies that use traditional time cards, as a significant number still do, make mistakes affecting anywhere from 1% to 8% of total payroll, per the American Payroll Association. 

Looking at those numbers, it stands to reason that the odds of that type of mistake become higher if the numbers aren't being crunched by professionals with significant experience in the field. Something as simple as not knowing about the annual cap on employee contributions to Social Security might lead someone without proven payroll know-how to think a higher-earning employee's paycheck that comes later in the calendar year isn't being deducted properly. Failure to keep up with changes in federal or state laws that affect taxes or other deductions might also lead to major mistakes.

Specifically, If your internal payroll supervisor attempted to correct deductions that were not actually wrong by subtracting from the next payment of the employee in question, they'd be taking money out of a worker's pocket. This will of course cost the business money, as the employee has to be repaid once the error is discovered. By contrast, an outsourcing provider's staff will be well-versed in federal and state law and know exactly how to manage deductions and withholding properly. As a result, errors like these aren't likely to happen.

Entrusting payroll services to a third party is also a big help if your organization has a broad spectrum of differently classified employees — like so many companies do these days. Dealing with a workforce that includes salaried staff, part-time, seasonal or hourly workers and independent contractors is not at all uncommon. This not only means having a broad spectrum of different salaries on your books (which is fairly routine), but also a varying total of hours worked each week (a much more complicated metric to follow). The combination of the two can be a major headache to juggle if your business does not have a payroll specialist or accountant on its staff, especially when you factor in the requirements of the FLSA and any other regulations that might apply to the situation (such as those of multiple states, as well as foreign countries). A payroll outsourcing provider will know all of these laws well and make sure they are observed, taking another possible stressor off your hands. 

How outsourcing works

To properly address and meet your particular payroll needs, an outsourcing provider will require you to share a great deal of data with them. This includes:

• Account information for your bank (and those of your employees, if you are paying them via direct deposit)
• Personal information for members of your workforce
• Details regarding the insurance company or companies providing your benefits
• Internal policy guidelines regarding paid time off (sick days, vacation, paid family leave and so on)
• Time card data or its equivalent
• Any relevant information about partner firms of yours or third-party vendors they might need to work with

Once your provider has this information, they can begin working on your payroll processes. That being said, it's important to note that while your outsourcing provider will handle all of the the day-to-day tasks of payroll administration as described above, the onus of obligation for that payroll still falls primarily on your organization at the end of the day. In other words, you can't think of payroll as a "set it and forget it" responsibility. As pointed out by The Balance SMB, you must still keep an eye on the process to make sure that all of your employees are paid exactly what they are owed and receive any and all benefits they are entitled to as well. Due to the reduction in sheer workload that outsourcing should provide, maintaining a baseline level of necessary oversight should not be a problem.

Are there any risks associated with payroll outsourcing?

It's true that some businesses, particularly those on the small end of the spectrum (say, a dozen employees, or perhaps even fewer) are more likely to choose to handle their own payroll internally than to work with a third party. Doing so may ultimately be the more efficient choice in those cases. Additionally, it is not always easy, even with the assistance of a provider, to manage the compensation for independent contract workers, or to oversee payroll and benefits in countries with especially complicated regulations that affect employee classification or immigration status. Lastly, as we noted in the previous section, your outsourcing service will need access to a great deal of data, so you will not have full control of it any longer, and some may find this disconcerting.

However, the handful of risks that do exist when working with a payroll outsourcing services firm are, by any standard, greatly outweighed by the considerable benefits your business can reap from such a partnership. This is true even if your organization is small and not spread out across multiple regional jurisdictions.

Choosing a qualified payroll outsourcing partner

You should take a number of factors into consideration when trying to select the ideal payroll outsourcing service from the pool of options that are available to your organization. This is a big decision, so you're more than entitled to be thorough and ask the provider's representative detailed questions about the firm's breadth of services, level of experience, reputation for customer service and other important criteria. As just one example, take into account how much information regarding your organization (and its partners) you will provide them so they can do their job. Therefore, it's important to pick a payroll outsourcing firm that you know you can trust with confidential data: Inquiring about the cybersecurity or encryption tools they use to protect the information you share with them is more than reasonable.

According to Fit Small Business, some other areas you may want to ask about include:

• Specific offerings: You'll want to know exactly how much of certain payroll processes, like onboarding — collecting new hires' W-4s, I-9s and benefits enrollment paperwork, etc. — your provider covers, and if there is anything your business must do directly.
• Bookkeeping tools: Is the firm using the most up-to-date software and applications to manage the tasks with which you've entrusted its personnel? Is the data involved managed securely?
• Reporting: How readily can you receive detailed reports on payroll for given periods, benefit participation and other key metrics?
• Employee accessibility: Is there a self-service portal for employees to obtain certain information as needed?

To learn more about payroll outsourcing and other service offerings from Marchon Partners, get in touch with us today.