Outsourcing Payroll - Pros and Cons

Outsourcing Payroll: The Pros and Cons

Payroll is a critical aspect of any business, just like marketing and sales. It not only affects the company’s financial stability but also the spirit of team members. Payroll solutions involve the calculation of salaries and net worth after adjusting taxes along with other deductions. However, embracing digitization is not an easy task for every business, particularly startups and small businesses that are short on essential resources. Therefore, it's now becoming common practice for firms to outsource certain processes that are not feasible to control with the in-house team, and that require technological solutions. One such example is payroll outsourcing.

A typical in-house payroll has many major concerns, besides the task of issuing checks, it may have to do so for many business locations where tax rates differ, employees need to pay on different dates and tax reporting to various state governments must be made on various forms. All these problems and additional costs can be avoided by handing over the payroll procedure to a third-party vendor.  However, deciding whether or not to outsource services is challenging. Thus, it's necessary for businesses to understand the pros and cons of outsourced services, so that they can make choices wisely.

What is Payroll Outsourcing?

Payroll outsourcing is a service that is provided by an external firm that provides legal, tax and accounting support to startups and even enterprises to ensure that their employers get paid on time and every other due is cleared before deadlines with a minimal level of risk. By partnering with external providers to handover company payroll process, businesses can simplify legislative compliance and can pull off the extra burden from their in-house team

Outsourced payroll service providers offer

  1. Handle, manage and record payroll data
  2. Calculate and distribute payrolls to employees according to  decided plans
  3. Calculate commission, bonus and other payments that are not an essential part of employees’ salary
  4. Helps to remain compliant with regulatory obligations including the data protection and privacy standards

Is Payroll Outsourcing Right for Your Company?

Despite the type, size and location companies of all industries can enjoy benefits from outsourced payroll services, however, they need to check the quality of the services, the credibility of the outsourced firm and the technology they are using to perform the function.

Outsourced payroll services are useful if businesses:

  1. Does not have in-house financial analyst or accountants 
  2. Requires that the fiance team focus on more strategic tasks outside of payroll
  3. Operates across borders but does not require payroll experts in each country
  4. Needs seamless payroll reporting but lacks a robust and reliable data recovery system
  5. Concerned to comply with every-evolving series of regulations 

While the above-mentioned reasons are valid and justified, every business along with its operational models are different. Therefore, they need to perform a critical analysis of their standing to choose an appropriate outsourced service provider.

This analysis includes the following factors;

  1. Number of people and size of the in-house team handling payroll operations 
  2. Whether the business has an optimum level of payroll expertise and knowledge or lacks at any point

Workflow of Outsourced Payroll Services 

Once the startup or any other business decides to partner with an outsource service provider, they have to define goals, guidelines, and requirements to ensure reliable and seamless services. To get started, businesses need to establish an information-sharing system through which they can share critical data about their operations with the outsourced company, such as names, wages, timesheets and every bit of other information required for calculating payroll. Since the information being shared requires utmost privacy, the partnering firm must also ensure that they are committed to protecting the data and fulfilling regulatory obligations of securing PII along with ensuring confidentiality protocols. A detailed data protection policy is also needed. Once, the communication channel is developed and the data begins to share, the outsourced firm can start working on converting raw data into usable to prepare payrolls. They further take care of payroll taxes, reporting and compliance.

What Are the Pros of Outsourcing Payroll?

1) Payroll Taxes Becomes Easier to File

Outsourcing payroll service providers provide financial reports required to file payroll taxes seamlessly which startups may find hard to do through an in-house team. This completely pulls off the stress of doing tedious paperwork for tax preparation from the business owners.

2) It Saves an Enormous Amount of Time

Among other accounting functions, payroll is ranked the second most costly administrative operation that must be done by every firm. However, when this task is outsourced, it is done at less cost as it also saves the amount of time that can be used in other core business functions.

3) Small Businesses can Experience Cost Savings

For startups and small businesses, the cost of calculating wages, printing or distributing paychecks, developing financial reports and preparing payroll taxes can be quite high. Thus, by opting for this, startups, as well as small businesses, can save money as it overcomes the need of expanding in-house teams.

4) Payroll Outsourcing can Offer Greater Security

With data security and privacy concerns becoming critical for businesses, outsourcing payroll services can give an edge to startups and small companies by providing an additional layer of security then they can develop on their own. Hiring an outsourced firm and signing a contract can provide businesses with multiple servers, backups and various other tech-savvy security tools to protect their employees or customer data.

5) Help to Stay Compliant with Regulatory Standards 

Startups, as well as small medium-sized businesses, need to deal with payroll taxes but are also required to comply with the ever-evolving regulations. Case of non-compliance or failure to stay put with local or international laws can lead them to face penalties, fines and sanctions. However, outsourcing can help companies to stay compliant without indulging in the challenges of doing it all on their own.

What Are the Cons of Outsourcing Payroll?

1) It Might get Challenging to get Access to Data

As much part of the payroll data is going out and to be maintained off-site, it could be more challenging for startups and small businesses to get hands on the information they might need at any moment. Even where there are options of cloud connection, data access may be kept purposely limited to keep it more secure and protected from breaches.

2) Mistakes can take Extra Time to Correct

Payroll processing is not always 100% accurate. There is a minimal level of risk of errors like employees do not receive their total salaries, therefore contacting the payroll company to make updates can sometimes be a lengthy process. In addition to this, in case of correction is required, business owners need to rely on the outsourced firm to resolve the issue.

3) Cost Savings is not Always Experienced

In the diverse market, there are some outsourcing firms that provide low costs services based on the size of the companies. While some others offer non-customizable services or costs. This means the business owners need to do proper research before hiring one. However, there may some areas where there is no such service provider offering budget-friendly payroll services that are feasible for small businesses or startups.

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