Outsourcing Payroll Services – Can it benefit your company?
All employers can agree that paying their employees accurately is crucial. With the advancement of automated technologies, many companies are using payroll services to streamline their accounting process. If your company is considering using payroll services, there are several things to consider before converting to a new process.
What are payroll services?
Payroll services are managed by a third-party company that will calculate the payroll for business clients who hire them. According to IBISWorld, there are currently 316,454 businesses that offer payroll and bookkeeping services in the United States. These companies will usually oversee each part of an employee’s compensation including:
Direct deposit information – Banking information is sent to the payroll services company in order to authorize a direct deposit into an employee’s bank account.
Employee hours – Compensation is calculated based on the total time that is worked by an employee and can also include paid-time off (PTO) or holiday pay.
Workers’ compensation – An insurance for compensating employees who have been injured or develop a medical condition that occurs as a result of their occupation.
Payroll Taxes – This includes federal tax deductions such as:
- Social security – Employer withholding rate is 6.2% in 2023
- Medicare – Employer withholding rate is 1.45% in 2023
- Unemployment – Federal rate is 6.0% for the first $7,000 paid to each employee
Other payroll deductions – This often includes state and local taxes, extra withholdings that employees indicate on their W-4 form, health care and retirement deductions.
How do payroll services work?
A payroll services company typically uses an online portal for employees to access. Most often, employees will log into the payroll services system indicating their start and end times in order to accurately calculate the total time they worked.
Once the hours are approved by the manager, the payroll services provider will calculate the total time, deducting any taxes or other deductions including PTO that is used during a particular pay period. Then a direct deposit or paper check is issued to the employee on payday.
Other functions of payroll services can also include:
- Producing a report about an employee’s attendance
- Processing and sending W-2 tax forms to employees
- Managing benefits such as medical, PTO and retirement
Considerations when switching to payroll services
When you are considering a change of your payroll system, and moving from in-house processing to a payroll services company, most managers will weigh the following:
Efficiency – How much time is needed by the Human Resources (HR) department to process the payroll and benefits for the total number of employees in your company? According to Society for Human Resource Management (SHRM), the recommended ratio of HR staff to efficiently serve employees is typically calculated by this formula:
HR Full-Time Equivalent / Full-Time Equivalent employee in the organization x 100 = HR to employee ratio
For example: If you had 1,000 full-time employees and 10 HR staff, your ratio would be 1.0 which means 1 HR person per 100 employees which is a typical ratio to serve 1,000 employees efficiently. However, this is assuming all the HR staff are fully trained as specialists to effectively process payroll and benefits for 1,000 employees.
Cost – How much money does it cost to have your payroll processed in-house versus using a payroll services company? This would include the cost of HR specialists which according to the Occupational Outlook Handbook lists the median salary as $62,290 in 2021. Which means if you needed 10 HR specialists that would cost $622,900 per year.
Usually the accounting department also needs to assist with payroll and the Occupational Outlook Handbook has accountants and auditors earning a median salary of $77,250 in 2021. This would result in a total cost of $1,009,150 if you needed 5 accounting staff to assist the 10 HR specialists.
Comparing the cost of payroll services is usually determined by:
- Total number of employees
- Total number of services needed
This pricing can differ depending on the payroll services company you choose. In general, the total per month usually includes a monthly base rate that can range between $20 to $200 per month. In addition to the base rate, a fee for each employee usually ranges from $2 to $12 per month. The total cost would vary depending on the number of services you choose.
Support – How much support and training will you receive when you choose a particular payroll services company? Transitioning from in-house to a payroll services company will usually require some time to get everyone familiar with the new system. Depending on how smoothly it is to train your HR staff, employees and the availability of technical support, will determine how long your transition will take to complete. Many payroll services are willing to help you experience a seamless transition that will save you both time and money.
Benefits for employers who use payroll services
When employers change to a payroll services company, they enjoy the added benefits that can assist to streamline their business and often includes:
Accuracy – Some HR departments may not be aware of all the federal and state tax laws related to employee compensation which can change on a regular basis. However, having a payroll services company that is focused on these laws will help ensure your business stays in compliance.
Time – More tasks are falling under the umbrella of the HR department as they create a company culture that focuses on career development. Delegating the payroll and benefits paperwork allows HR the freedom to concentrate on other job functions such as recruiting and training.
Options – Most companies who provide payroll services have many options available for their clients to choose in addition to processing their payroll each month. Most of these companies also offer oversight for contractors and can assist new employees in completing their onboarding process.