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Outsourcing Payroll: All You Need to Know

Payroll isn’t as simple as “pay the employees the wage they’ve earned.” Employers have to think about:

  • local, state and federal taxes
  • bonuses and commissions
  • benefits and other deductions
  • timecards and PTO
  • hourly and salaried employees
  • contractors
  • and more

Correcting any of these factors after submitting payroll can require a costly fix or a steep penalty. Even seasoned HR pros could lose days getting the process right manually. Outsourcing payroll, however, helps organizations ensure their compensation is accurate and compliant without drowning HR.

It’s useful for companies of all sizes. Despite fewer employees, it’s still hard on tight HR teams — some made up of just one person — to accurately run a small business’s payroll. For midsized organizations, it can be unreasonable to dedicate one employee to the process (or burden an HR pro with it on top of their current responsibilities).

Unsure if outsourcing payroll is right for you? Let’s explore what it entails and how it gives businesses like yours an edge.

What is payroll outsourcing?

Outsourcing payroll is the process of hiring a third-party entity to pay:

  • employees
  • contractors
  • tax agencies
  • benefits providers
  • and more

Before this practice, it was unheard of for companies to entrust compensation to anyone outside the organization. As tech development has streamlined payroll’s more tedious tasks, however, outsourcing payroll can be more cost-effective.

How does outsourcing payroll work?

Though not every servicer operates the same way, the typical first step to outsourcing payroll involves entering a company’s compensation data into a system or software. This info could include:

  • pay rates
  • positions
  • hiring dates
  • bonus structure formulas

A team or specialist also works the account. If you outsource all your HR functions, they’ll likely be performed by employees of your tech provider. Alternatively, this person or group won’t work directly for the provider, but will have the access they need to run payroll.

Regardless of who’s assigned to the process, they probably won’t build and complete payroll from the ground up. Instead, third parties use tools to automate calculations and step in to manually adjust payroll as needed. After all, the tech won’t necessarily know about:

  • approved PTO requests that weren’t entered
  • certain reimbursements
  • surprise bonuses
  • cash advances
  • and more

That’s why it’s not unheard of for a company employee — like a dedicated HR pro — to verify the outsourcer’s work before payroll runs. At a bare minimum, the outsourcer will notify the employer or key stakeholders when payment goes out.

Why should a business outsource payroll?

The reasons for outsourcing payroll vary among employers, but they all boil down to taking a time-consuming, error-prone process off HR’s plate. This could be invaluable for:

  • small and midsized companies that don’t want to hire a full-time payroll employee
  • leaders who want to focus employees’ time on revenue and development
  • businesses that want their HR pros to focus on people, not an arduous payroll process
  • companies seeking compliance peace of mind from external experts qualified to ensure accuracy of taxes, deductions and benefits contributions
  • fast-growing organizations that don’t want to risk noncompliance or inaccuracy as they scale

But these are specific scenarios. The advantages to using payroll outsourcing companies stretch further than just a phase of your business’s growth.

What are the pros of outsourcing payroll?

The biggest perks of outsourcing payroll involve:

  • reducing bias
  • lower costs
  • accuracy
  • efficiency
  • compliance

For instance, a tight-knit company experiencing overnight growth might not be prepared — or even know how — to compensate new employees fairly. An objective third party, however, won’t fall for favoritism or ethical dilemmas, because the right provider determines that with a merit matrix that rewards employees for performance.

Outsourcing payroll also translates to a lower risk of errors and compliance violations. Instead of juggling every law internally, you can put that concern in the hands of a true compliance expert. At the very least, outsourcing payroll lets you offload this crucial task without needing to hire your own expert with a full-time salary.

Outsourcing payroll pulls HR pros out of the administrative trenches and empowers them to focus on value-adding work, including:

What are the best practices for outsourcing payroll?

Finding the right payroll vendor can be daunting. But you can make the right choice if you know what to look for. Here are a few tips for outsourcing payroll with confidence.

Find a payroll outsourcer that aligns with your company

A cutting-edge tech company doesn’t do the same thing as a popular restaurant. Why would their payroll needs be the same?

While a single software could cover both their needs, those businesses first would need to identify what matters to them most. The tech company may be more concerned with an easy-to-use, configurable interface. The restaurant, however, would need its payroll vendor to also:

  • manage timekeeping and scheduling
  • account for changing head count
  • integrate with its point-of-sale tech for easier tip tracking

For a better employee experience overall, you need a provider that manages more than just payroll — ideally in a single software. With just one login and password, employees can access all the HR data they need, like:

  • pay stubs
  • time-off balances
  • organizational charts
  • benefits and open enrollment
  • training courses

Most of all, don’t settle for an overly rigid vendor. The best payroll providers will work with HR — not against it — to find the best process.

Keep some control

Yes, a payroll vendor can handle a massive burden. This doesn’t mean you need to see every piece of the process, but you should never be cut out of it entirely. Ask your potential provider about your level of payroll oversight.

Build redundancies for accuracy

This doesn’t mean run your own payroll while you’re outsourcing it. Think of it as keeping a backup instead. For instance, run a mock payroll for an employee who has a more complex situation. Then, whenever you’re asked to approve payroll, check how the vendor processed the employee in question. Different figures doesn’t automatically mean they’re wrong; you just need to determine who’s right.

Communicate with employees

By outsourcing payroll, you’re entrusting a third party with the data that matters most to employees. They should know what’s happening and have an opportunity to ask questions. If they have any issues about their pay, the provider should have a clear resolution strategy.

To this end, assign administrative employees to serve as a liaison between your workforce and the payroll processor.

Why should businesses outsource payroll to Paycom?

Paycom helps you manage not just payroll, but all HR functions, right in our single software. This means employees don’t have to hop between disjointed systems to access the data they need. Meanwhile, HR can focus on people through retention and culture initiatives.

Our tech gives you the ideal balance of control and automation. In fact, Beti®, Paycom’s employee-guided payroll experience, automatically finds errors. Then, it guides your people to fix them before payroll submission, all in the Paycom app. As a result, Beti:

  • eliminates costly payroll errors
  • lowers your company’s liability
  • engages employees with their pay
  • simplifies monitoring payroll

HR personnel stay involved in the process, but they don’t have to dig through the weeds or hope payroll’s right — they know it is.

Explore Beti to learn why it’s the ideal choice for outsourcing payroll to Paycom.


DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.