Benefits of Outsourcing Payroll
6 min. Read
Last Updated: 10/05/2023
Table of Contents
While some businesses opt to handle payroll functions in house through manual bookkeeping or do-it-yourself payroll apps, other business owners have come to rely on the benefits of outsourcing payroll to a professional payroll provider. When considering whether to outsource this function, the time and resources required to complete essential payroll tasks often weigh heavily in the decision-making process.
A 2022 Paychex poll* reported the following findings:
- The number of companies offering remote or hybrid work has increased by 124% since before the COVID-19 pandemic.
- In today's hybrid/remote workplace environment, the most time-consuming HR task is now tracking employees' hours worked, followed by researching the latest federal, state, and local regulations.
- 1 in 3 HR leaders report added stress on their payroll teams associated with the current competitive hiring landscape and the need to keep up with more frequent turnover rates.
These changes in the post-COVID-19 working environment mean HR teams have more on their plates than ever before. Fortunately, leveraging outsourced talent to help fill in the gaps for your in-house teams can help to address this growing workload.
What Is Payroll Outsourcing & How Does Payroll Outsourcing Work?
Payroll outsourcing is when a business hires an external processor to complete payroll processes on behalf of the business. The external payroll provider can manage taxes, direct deposits, and other routine processes such garnishments, salary adjustments, and calculating weekly payroll. They can also provide special tools that make it easier for businesses and employees alike to have 24/7 visibility into payroll calculations. By outsourcing payroll, businesses can save time and money by reducing the paperwork associated with manual processes and reducing the number of hours HR employees spend on payroll tasks.
Businesses may choose to outsource all payroll functions or just a few, such as payroll taxes, garnishments, and wage payment through options like direct deposits. The decision to outsource may depend on the size and complexity of the business and its needs. For larger companies with more complex payroll needs, including having multiple employees in multiple states, outsourcing payroll often makes sense financially and operationally. But small to mid-size businesses may benefit from outsourcing payroll as well; after all, regulations around payroll often change, and staying up to date on requirements might present a significant challenge. Professional payroll providers are obligated to track changes in rules, regulations, and tax rates for all geographic locations, and may prove to be a wise investment for business owners of all stripes.
Why Outsource Payroll: 6 Benefits for Businesses
Wondering whether the benefits of outsourcing payroll could help your company? Since payroll and tax responsibilities can be time-consuming and complicated — yet essential — busy owners are increasingly looking to outsource these functions.
Below are some common advantages of outsourcing payroll services, areas of your business where a provider may be able to help, and how this approach could make sense for your business.
1) Potential Time Saved
No matter how many employees a business has, processing payroll demands time and attention to detail. This often comes at the cost of valuable time that could otherwise be spent on more pressing business priorities, such as building revenue or serving customers.
By outsourcing payroll to a reputable provider, owners may have more time to focus on what matters most. In many cases, they'll also have a variety of options available to maximize time saved throughout the pay period. Additional tasks, such as new hire reporting or benefits administration, can be easily added into the outsourcing mix, and business owners can specify how often they'd like to be contacted with payroll-related updates. Unless there are discrepancies or problems, payroll outsourcing service providers will likely only need to reach out once per pay period.
Common Time-Consuming Payroll Responsibilities
Once a business has hired its first employee, payroll responsibilities will continue every pay period as long as the business is in operation. The complexities of payroll processing may require a considerable time commitment on a daily and weekly basis — time you can't make up elsewhere. Whether it's calculating payroll amounts, generating in-house reports, preparing and remitting state and federal payroll taxes and returns, or simply printing, signing, and distributing paychecks, the demands on your time can be costly.
Think of the time required for each of the following:
Calculating Payroll Each Time Period
Each pay period, employees must have their hours totaled, verified for accuracy, and multiplied by their designated pay rate(s). Then the appropriate amount of taxes must be calculated and subtracted from the gross pay to determine a net amount.
If the employee also receives any benefits or has other deductions, such as child support or retirement plan contributions, additional calculations must be made. Multiply each of these calculations by the number of employees in your business, and it's easy to see why calculations alone can take a sizable chunk of time out of your week.
Printing, Signing, and Distributing Paychecks or Pay Stubs
Once the pay amounts for each employee are calculated, the physical checks may need to be printed, signed, and distributed. Some employees are likely to have direct deposit, so those amounts must be verified and processed electronically, but pay stubs still must be made available to the employees. In addition, these records must be securely maintained for tax and reporting purposes.
Generating Reports for In-House and Accountant Use
At the end of each payroll period, the amount of pay earned by all employees, any benefits or miscellaneous deductions withheld, and all payroll tax amounts must be carefully recorded for future accounting purposes.
Depending on the size and structure of the business, payroll reporting may be included in any fiscal year-end reports, especially if the business is publicly traded or currently looking for investors. Even if those reports are not required, many business owners evaluate previous payroll reports to make hiring and staffing projections.
Payroll figures are also necessary for tax purposes, both for business year-end income tax filing and for quarterly and annual payroll tax reporting. Keeping this information organized and easily accessible for future reporting or delivery to an accounting professional can take additional time each period.
Preparing and Remitting Payroll Taxes and Returns to Government Agencies
Even after the payroll figures are organized and recorded, there are still additional payroll tax responsibilities each quarter and at the end of each fiscal year. Business owners or designated administrators must calculate amounts and complete a quarterly payroll tax form to show that the proper amount of payroll tax has been withheld. This form must then be submitted, along with the proper amount of withheld taxes, to the IRS each quarter.
At the end of the year, businesses must submit a year-end payroll tax statement that verifies each of the quarterly figures and calculates any remaining taxes due. Like individuals, businesses must also complete a yearly income tax return, and payroll figures are included as a deduction on these forms. When evaluated on a per-payroll period or a monthly basis, a time/cost analysis may well demonstrate the benefits of working with a payroll service provider.
2) Mitigate Payroll Mistakes
Payroll errors can be frustrating and costly to both employers and employees. For employees, a mistake in state tax deductions can require an unexpectedly sizable tax deduction from an employee's final paycheck of the year, at a time that typically coincides with the holidays. Missed hours or improper pay rates can also inadvertently decrease an employee's pay, which may cause frustration and lasting resentment. These mistakes can negatively affect your employees and ultimately result in employer/employee strain.
For the employer, payroll errors can cause fines and penalties for improperly calculated tax obligations. Generally, business owners are not experts in government tax regulations. At the same time, they may be legally responsible for cases of misrepresentation or a failure to accurately report employment taxes to federal and state government agencies.
These mistakes can lead to audits and penalties — situations no business wants or needs. According to the IRS, audits on 1,014,090 businesses resulted in the assessment of civil penalties totaling over $3.4 billion in fiscal year 2022. Even if these errors are caught before they are submitted, they can still cause countless hours of reprocessing employee paychecks and tax returns.
Given these complicated tasks and the potential for mistakes, processing payroll on your own can cost you more overall than what you may save initially with a DIY solution.
3) Enhanced Security of Payroll Data
Payroll processing is a complex and potentially risky business operation. Even with trusted partners, there is a risk of identity theft, embezzlement, or tampering with company records for personal gain.
Outsourcing payroll to a stable, experienced provider can offer a "safe haven" for your confidential payroll data. In addition to redundant backup and multiple server locations, a quality payroll provider invests in state-of-the-art systems for storing and protecting data because they understand the importance of security to clients.
4) Compliance With Government Regulations
Businesses understand how critical compliance is in their operations, but it can be a time-consuming process. Whether you have three employees or 30, having to track every employee's pay rate, hours, and employee status can be stressful and can lead to inaccuracies. Additionally, understanding employee deductions for federal, state, and local taxes — as well as programs like Social Security and Medicare — can be challenging. These taxes must be set up correctly before employees are paid.
When you outsource payroll, you can simplify these processes and streamline your employee and payroll information. Surveyed businesses that leverage a technology-based payroll solution report considerable time savings*: 37% of businesses surveyed saved between 60 and 120 hours annually in preparing and filing taxes. Although business owners are ultimately responsible for meeting payroll accuracy and tax filing requirements, having a provider on hand often helps them feel more confident about staying up to date on regulations. Government rules and regulations often change, and small business owners can’t always stay on top of the latest requirements. Professional payroll providers, on the other hand, are focused on staying current with rules, regulations, and changes in tax rates for all geographic locations.
5) Payroll Expertise
A professional payroll company employs individuals who know payroll processing inside and out. These individuals specialize in the complexities of payroll processing and taxes. It's what they're trained to do and part of the service they provide.
Reputable payroll processors bring expertise in the following areas:
- Knowledge of 401(k) regulations and integration with payroll deductions.
- Updating W-9 forms and adjusting accurate tax deductions.
- Managing voluntary and involuntary employee withholdings and submitting them to the proper government entities or benefits programs.
- Calculating and submitting quarterly and year-end payroll taxes.
- Maintaining eligibility for tax credits and minimizing amounts owed.
- Tracking employee benefits eligibility dates and processing benefits enrollments.
- Handling FICA, Social Security, and Medicare deductions and payments.
- Updating federal, state, and local tax guidelines and adjusting payroll figures as needed to maintain compliance.
While occasional errors are bound to happen, payroll experts are also particularly good at verifying accurate data, finding mistakes, and correcting them before penalties or fines are assessed.
6) Potential To Integrate Payroll and Benefits Data
Many companies offer benefits to their employees, and employee contributions for elective benefit programs must be deducted from payroll. If your company offers multiple healthcare plans, each with different contribution amounts, managing these figures can become quite complicated. These contributions are further impacted by an employee's status (single vs. married, dependents vs. none, part-time vs. full-time, etc.) as well as their salary level.
During the benefits enrollment period, employees may register for multiple types of benefits: health insurance, dental insurance, retirement contributions, life insurance, and other perks. Each of these may require separate contribution amounts for both the employee and the employer to ensure the benefits programs stay active and properly funded. Most benefits programs also require payment amounts to be sent to different companies, which can be handled by the payroll outsourcing company.
Outsourcing the payroll process helps ensure that your deductions are aligned, that what you're offering complies with regulatory guidelines, and that payments to providers are sent on time to avoid interrupted benefits coverage. Reputable payroll companies can provide an integrated benefits platform that allows a business owner to easily add and remove employees from the benefits programs, properly calculate the amounts deducted from each paycheck, and provide benefits information directly to the employees without requiring the owner to handle individual employee benefits issues directly.
How Much Does Outsourcing Payroll Cost?
When a business hires someone else to help with payroll, they might pay a few different fees, depending on the payroll outsourcing services agreement. Some of these fees depend on how many people are employed by the business and the frequency of payroll periods. Other fees might be for extra services like setting up employee benefits or providing reports. Generally, businesses can expect to spend between $30 and $100 per person each month for outsourcing payroll services.
Why Outsource Your Payroll to Paychex
If even one of the above reasons to outsource payroll could improve profitability and efficiency in your organization, it may be time to consider your payroll outsourcing solutions. With many options available, you may question how to choose the right payroll service. Consider first outlining the key features that would benefit your business in relation to your company size, payroll frequency, and industry type. Once you've determined your needs, explore options that meet your criteria. Our experts at Paychex can help you determine whether outsourcing payroll makes sense for your business and which services to outsource for the best operational savings.
*Paychex conducted an online survey of 1,000 HR decision makers of U.S.-based businesses with 20 or more employees. This survey was conducted from April 15 - May 6, 2022.