Payroll outsourcing: How it works and benefits

27 Jun 2022 | Finance

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Hooshang Bakht

Brego Business was started with a mission to make entrepreneurship easy. Our goal is to help business owners grow and scale without having to deal with the day-to-day stress of running a business. We specialize in providing services that help business owners grow their businesses, including Digital Marketing, search engine marketing (SEM), social media marketing (SMM), LinkedIn marketing, video production, accounts receivable (AR), accounts payable (AP), internal audit, VCFO, and recruitment. We have helped more than 500 brands grow their businesses. We work closely with clients to understand their unique needs and develop customized strategies that deliver measurable results.

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Payroll Outsourcing

Payroll outsourcing in simple words means delegating the job of paying wages and salaries of your staff to a 3rd party payroll provider. The payroll system should be efficient, accurate and needs to be finished on time. This is why managing payroll seems time-intensive and challenging to do. For this reason, many organizations outsource this work to a payroll provider. By doing this, the organization saves time and is able to focus its resources on its core domain.

What is Payroll Outsourcing?

Payroll outsourcing is the hiring of a 3rd party payroll service provider for handling the administrative and compliance procedures of paying staff members. A payroll outsourcer will calculate payroll, set up direct deposits for the employees, do benefits administration, provide reports and also manage the tax filing and legal compliance pertaining to this area.

How Payroll Outsourcing Works

The first step is to select a payroll service provider. Through careful research, comparisons and commendations you can select the provider fit for the job.

Set up an account after selecting the service provider. Your service provider will need access to payroll information that includes the number of personnel and their working and billable hours. Other information includes vacation policy, sick leave policy, benefit copays among others. All this information is required to calculate payroll. They will also look after details like reporting, compliance, and payroll tax remittance. Depending upon the contract and company policies, the service provider may also disburse payroll funds from your company’s account for salaries and other payments.

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What is Payroll Outsourcing For Different Companies?

Different companies have different payroll needs and require service providers that can provide the services catered to their specific needs. To select the optimum fit, understand your payroll goals first. A small business with a few employees has different payroll needs than a large organization with a multitude of employees. Some organizations offer benefits and pension plans, and some do not. A company with a multinational presence will require a payroll provider that has the knowledge, skillset and offers services on an international scale. So, select the payroll service provider based on your company-specific needs. Also evaluate other parameters like the tenure and market experience of the service provider, quality of customer service, and other miscellaneous services offered beyond payroll.

How Payroll Outsourcing Works-Functions?

An organization may outsource certain payroll services while retaining control of some functions. The main payroll functions designated to a 3rd party service provider are as below.

  1. Running payroll services, workers’ payments, and withholding calculations.
  2. Issuing checks or direct deposits to the employee’s accounts.
  3. Calculation of state and central payroll taxes, and making tax withholding payments.
  4. Submitting required government reports.
  5. Administration of employee benefits
  6. Withholding pension, provident fund, and gratuity contributions.

Benefits of Payroll Outsourcing

Given below are some of the major benefits of payroll outsourcing.

  1. In-house payroll can be difficult for small businesses and companies that do not have qualified human resources and accounting professionals on their staff. Through outsourcing, they can save expenses on hiring full-time HR and accounting staff and instead use the services of a payroll provider.
  2. The payroll service providers have expert professionals who can administer complex payroll proceedings that include keeping track of employees joining and leaving, decreasing or increasing in salary structure and wading through complex tax filing, and submitting reports to the concerned government departments. These professionals also ensure that no mistakes are made and thus tax compliance penalties are avoided.
  3. For a multinational business, it makes sense to partner with the payroll service providers of the countries they are entering in. These payroll service providers have deep knowledge of the payroll rules and taxes of their country which the multinational business may be not familiar with.

Questions to Ask When Deciding on Payroll Service Provider

Ask these questions before deciding on the payroll provider so as to ensure high service quality.

  1. The basic and add-on services offered by the service provider.
  2. What steps do they take for securing confidential data like employee and payroll data?
  3. Their prior experience and recommendations of their previous and existing clients.
  4. Are tax withholdings calculated for every employee?
  5. Rates charged per employee and concessions for a higher volume.
  6. Do they provide assistance with generating tax forms for local tax filing purposes?


What is payroll outsourcing? We hope, you got a fair idea of it from the above article. Payroll outsourcing will help your business whether it is a small business or a large organization. Select the service provider as per your specific needs to ensure full employment and payroll compliance.

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Frequently asked questions

What is Payroll Outsourcing?

Payroll Outsourcing refers to the practice of hiring a third-party payroll management company to handle the payroll processing and management functions of a business.

Why do businesses choose to outsource payroll?

Businesses choose to outsource payroll to save time and money. Payroll processing can be complex and time-consuming, and outsourcing allows businesses to focus on their core competencies while leaving payroll management to experts.

What services do Payroll Management Companies provide?

Payroll Management Companies provide a range of services, including payroll processing, tax filing, direct deposit, time and attendance tracking, and employee benefits administration.

What are the benefits of outsourcing payroll?

The benefits of outsourcing payroll include reduced costs, increased accuracy, compliance with tax laws, improved security, and access to expert advice.

How much does payroll outsourcing cost?

The cost of payroll outsourcing depends on the size of the business, the complexity of the payroll processing requirements, and the services provided. Typically, payroll outsourcing companies charge a flat fee per employee per pay period or a percentage of the payroll.

What is the process for outsourcing payroll?

The process for outsourcing payroll involves selecting a payroll outsourcing company, providing them with employee data and payroll information, and establishing a service agreement that outlines the services provided, fees, and other details.

Is outsourcing payroll secure?

Yes, outsourcing payroll is secure. Payroll outsourcing companies use secure systems and protocols to protect sensitive employee and business information.

Can businesses customize their payroll outsourcing services?

Yes, businesses can customize their payroll outsourcing services based on their specific needs. Payroll outsourcing companies offer a range of services and can tailor their offerings to meet the unique needs of each business.

What are the risks of outsourcing payroll?

The risks of outsourcing payroll include the potential for errors or omissions, compliance issues, and the loss of control over the payroll process.

Is outsourcing payroll right for every business?

No, outsourcing payroll is not right for every business. Businesses with simple payroll processing needs may be able to manage their payroll in-house, while businesses with more complex payroll requirements may benefit from outsourcing.