What are the pros and cons of outsourcing a company’s payroll function?
Managing payroll services in-house often requires an individual, or a team, with a thorough knowledge of the PAYE tax system. If your business doesn’t have these skills in-house, you can organise your payroll by outsourcing it.
What is payroll process outsourcing?
Payroll outsourcing involves hiring an external company or an individual to handle all payroll functions. The level of services you can outsource varies. Some suppliers provide a basic service; others provide the full package including liaising with the HMRC and maintaining full compliance so your business never has to deal with payroll.
Typically, businesses outsource payroll to:
- an accountant or bookkeeper
- a specialist payroll company
Outsourced payroll pros
Experience and knowledge
Payroll outsourcers are experts in everything related to paying employees, taxes and government compliance. Complexity increases greatly when you operate across multiple states and countries. Are you taking advantage of all possible tax breaks? Penalties are high even when mistakes are honest. A payroll outsourcer bases their business on knowing all the intricate details and stays up to date on the new and upcoming legislative changes. Payroll outsourcing agreements usually have a liability aspect that protects you in the event of an audit, if the taxman comes back with questions about what has been declared and filed.
Cost
Smaller companies in particular may struggle with the costs of doing payroll. Training internal staff, procuring the necessary equipment like check stock and printers plus arranging contracts for things like direct deposit transfer all add up. An outsourcer is able to offer an affordable cost as they are doing payrolls for a number of companies so you’re getting a volume discount. As you consider an outsourced payroll vendor, compare their prices to all of your internal staffing and hardware costs to get a true picture.
It allows for more payroll services to be offered.
Outsourcing payroll can allow a small business to offer additional services, such as direct deposits and 401k contribution deductions, that they may not be able to do on their own.
Payroll taxes become much easier to file.
Outsourcing payroll will also generally create the financial reports needed to make filing payroll taxes a lot easier for a small business. For some businesses, they may even find that they can even outsource the filing process so they don’t have to even really worry about the tax paperwork.
Payroll outsourcing can offer greater security.
With data security becoming a great concern for employers and employees alike, outsourcing payroll can give a small business a more secure data system then they could establish on their own. One contract may provide multiple servers, backups, and other security technologies that protects their employee data.
The Cons
- Difficulty obtaining wage and employee data — Depending on your payroll service provider, you may encounter hurdles in accessing payroll figures and other employee data because the information resides on another company’s server.
- Delayed corrections to payroll errors — If mistakes occur, a payroll firm may not respond as quickly as you or your employees wish.
- Cost — Not all vendors tailor services and prices to your company’s size. Do research on vendors beforehand and purchase only those services that make sense for your financial situation.
- Risk of vendor going out of business — It happens — payroll administrators, especially newer ones, fail. In this unfortunate situation, you may lose access to your payroll data, or worse, your money.
What are the risks of outsourcing payroll?
The downside of outsourced payroll is mainly associated with the lack of in-house personnel. While many HR and payroll companies have 24/7 help to ensure you’re never caught in a payroll emergency, the lack of face-to-face contact can be a pain-point for some employees.
Similarly, the loss of control that is inherent to outsourcing may not be suitable for your business, as you’ll be permitting another company to access your team’s private information. has been designed to offer better security around data, but the idea that your information is no longer secured within your business may not rest easy with you or your staff.
You should also be aware that your legal responsibilities won’t lapse because you’ve chosen to outsource. Keeping channels of communication open and constantly updating your supplier is important, and of all the risks of outsourcing payroll, the assumption that your chosen provider no longer requires your involvement is perhaps the most likely to cause issues.