Payroll outsourcing: Benefits, drawbacks, and steps to do it

Published

Sep 23, 2024

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Running payroll is the bedrock of your relationship with your workforce, but it can also be a time-consuming administrative burden. From calculating compensation correctly to navigating multiple sets of payroll tax rules for different locations to keeping current on important employee data, payroll management can slowly eat away at the time needed for substantive or strategic work. If your HR team spends more time combing through spreadsheets and completing forms than growing your organization, it may be time to consider outsourcing payroll.

In this article, we’ll explore the options for external payroll services, from a total handoff to sharing responsibility for specific tasks. Whether you’re hoping to streamline your payroll management processes, strengthen your compliance, or just ensure that your dedicated employees receive their paychecks on time, we’ll cover everything you need to know about payroll providers, including choosing the best solution for your organization.

What is payroll outsourcing?

Payroll outsourcing involves partnering with a third-party company to handle some or all of the tasks associated with payroll management, such as calculating wages, withholding payroll taxes, compiling mandatory reports, and overseeing pay runs.

Example: Acme Corp. regularly works with contractors worldwide on marketing projects. Rather than hiring a dedicated international payroll specialist, Acme Corp. outsources payroll to a global processor to save costs and reduce the risk of compliance errors.

How does payroll outsourcing work?

Depending on your payroll needs, growth plans, and budget, your organization may opt to outsource the entire payroll function or only select parts of the process.

Payroll software. For businesses with straightforward payroll needs, investing in dedicated payroll software may be enough to relieve the administrative burden of calculating wages, withholding deductions, and preparing tax filings. With payroll software like Rippling, you can run payroll accurately and on time. Just click “Run,” and Rippling automatically calculates your payroll taxes and files them with the correct agencies at the right time, every time.
Contract accountant. If your organization has additional compliance obligations, working with an accountant on a contract basis can give you valuable peace of mind. Businesses that provide services to local, state, and federal governments must often provide additional documentation relating to working time and compensation, and a dedicated accountant can help prepare and submit these important reports.
Payroll company. For HR teams looking to hand off just the payroll function, a dedicated payroll company will tackle all aspects of payroll management. From calculating wages and withholding payroll taxes to completing and filing tax returns to making deposits, these specialist service providers take payroll off your team’s plate.
PEO. If you need more comprehensive HR support, working with a professional employer organization (PEO) can help relieve the burden associated with multiple functions, including payroll. Rippling PEO offers a co-employment relationship that takes payroll, benefits, workers’ compensation insurance, EPL insurance, and claims administration off your plate. You also benefit from access to a selection of quality employee benefit plans.

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6 benefits of outsourcing payroll

Outsourcing payroll services to a trusted partner comes with multiple advantages, ranging from time and cost savings to increased productivity and enhanced security.

1. Save time

Many of the tasks associated with payroll management require a high degree of attention to detail and have a significant administrative component. Depending on the size of your organization and the resources available to your HR professionals, staying on top of payroll-related tasks can easily drain time that would otherwise be spent on work that drives business growth or workforce development.

By handing off payroll to a specialist third party, your HR professionals can focus on more strategic initiatives that contribute to your bottom line.

2. Minimize errors

Errors in payroll, even small ones, can have expensive consequences for your organization and your employees. Miscalculating state taxes, for example, can lead to a hefty deduction from a worker’s paycheck at the end of the year. Did your company file its quarterly payroll tax return late? Depending on the jurisdiction, you’ll likely need to pay a penalty or face other consequences.

In addition to teams of dedicated payroll experts, payroll companies have access to advanced software solutions and other tools to manage even the most complex payroll operations.

3. Reduce risk of non-compliance

Because payroll companies can share the risk of non-compliance with your organization, they have a real incentive to ensure that your employees receive the correct compensation, your taxes are paid on time, and government forms are completed accurately.

For companies with employees and contractors in multiple countries, the expertise offered by a dedicated payroll company protects against mistakes that can arise when trying to navigate unfamiliar regulations.

4. Increase process security

Managing payroll internally requires your organization to purchase dedicated software to encrypt and store sensitive employee data, such as bank account numbers. Depending on location, you may also need to provide training to your HR teams on how to handle private information, which can take valuable time away from substantive work. In the case of mishandled data, your organization assumes liability for any consequences.

Payroll companies, on the other hand, use state-of-the-art hardware and software to protect client data and sophisticated internal security processes to prevent data leaks and loss. In many cases, they’re also subject to national data protection laws such as the GDPR in the EU.

5. Payroll processes executed by experts

Unlike busy HR teams, payroll providers have the luxury of dedicating themselves solely to one function: payroll. In addition to extensive payroll experience, specialists working with global payroll providers have extensive knowledge around international reporting and withholding requirements.

3 disadvantages of outsourcing payroll

1. Scaling constraints

Many payroll providers aim to serve organizations of specific size or geographic region, which can get tricky as your team expands in headcount or distribution. The solution that best aligns with your team and budget now may not offer crucial features that your organization needs to grow, and it’s important to choose a tool with flexibility to avoid having to switch solutions or products.

2. Loss of control over the process

Handing over payroll management to an external provider entails, well, handing over payroll management. Your payroll services company will largely determine the processes, policies, and procedures that govern how payroll runs for your company. While you may have insight into how your payroll services provider operates, you won’t have much control.

3. Limited customization

Legacy payroll providers can sometimes be ill-equipped to develop custom policies and procedures that some organizations might need. Likewise, you may pay extra for off-cycle pay runs or one-off requests.

How to outsource payroll

Outsourcing payroll services is a big step that requires some preparation. Standardizing your employees’ information, coordinating access to time and attendance tracking tools, and collecting important tax information can help start the relationship on the right foot.

Analyze payroll outsourcing solutions

When selecting a payroll outsourcing solution, try to strike a balance between your current needs and your plans for the near future. If you know, for example, that your organization plans to hire internationally in the next fiscal year, you’ll likely outgrow a US-centric payroll software solution that feels like a perfect fit right now.

Share information on employee’s TIN, pay periods, pay rates, etc.

During setup, you’ll provide important information about your employees and contractors, including tax identification numbers, pay rates, wage garnishments, and deductions. Some payroll companies also provide time and attendance tracking solutions. Otherwise, you’ll connect your system with the payroll provider for accuracy and efficiency.

If your payroll services provider will also manage payroll tax payments and filings, be sure to provide the information needed to prepare and submit those filings, too.

Approve payments

Once your payroll services provider completes wage calculations and withholds deductions, you’ll need to review and approve the final paycheck amounts for your employees and contractors.

Check reports

Your payroll services provider should provide you with reports for every pay cycle. Review these regularly to monitor internal trends and provide context to decision-makers. Some jurisdictions may require your organization to submit regular reports on wages and time worked, and your payroll services provider can prepare these on your behalf.

How to choose the right payroll outsourcing solution

Looking beyond features and pricing can help narrow the field when choosing a payroll services provider. Understanding the history of the company itself, as much as its products and services, gives you valuable insights.

Analyze reputation and experience

Reputation isn’t everything, but reliable providers have a history of quality service and can produce a roster of satisfied customers and successful user stories on demand. You can also check review sites like G2 and Capterra to see how the provider’s users like the product.

Ensure they comply with local laws

Where possible, check to see if your preferred provider has been subject to any investigations or disciplinary action by regulators. Many jurisdictions make this information available as part of the public record.

Consider their scalability and flexibility

The global payroll provider that feels too complex now may be just the ticket when you begin hiring contractors living halfway around the world. Think about your growth plans alongside your current needs and choose a provider that can accommodate both.

The costs of outsourcing payroll

The costs of payroll outsourcing vary depending on the complexity of your needs and your provider’s pricing structure. Generally, you can expect to pay a fixed setup fee at the start of the relationship to cover the administrative costs associated with your onboarding process, followed by a fixed monthly or annual fee.

Payroll service providers calculate your monthly fee in a few ways, and it’s important to choose a pricing structure that fits your business needs:

Per frequency. The payroll company charges a fixed fee for each payrun, plus an additional fee for each employee. This model works well for companies with straightforward payroll needs.
Per employee, per month. The payroll company charges you a fixed monthly fee, plus an additional monthly fee based on your headcount.
Fixed fee. The payroll company charges you a fixed annual or monthly fee that covers either a set number of employees or a range.

Streamline your payroll with Rippling

A native-built payroll software, Rippling Payroll offers a seamless data pipeline that consolidates all your payroll functions on a single platform for a globally compliant pay run. Pay contractors and employees in over 180 countries and 50 currencies, and never worry about international payroll tax withholdings. Rippling automatically completes and files payroll taxes for your employees worldwide.

Automate the payroll process. Rippling allows you to build custom workflows to automate nearly any payroll task using triggers and events unique to your organization.
Sync HR data with payroll. Rippling’s unified platform automatically syncs your time and attendance, PTO, deductions, and other important information with your payroll system.
Update employee information in a single flow. Small businesses do more with less—less money, less headcount, and less time. All with a 100% error-free guarantee.

Frequently asked questions

Is outsourcing payroll exclusively for big companies?

No, outsourcing payroll can benefit companies of all sizes. Small and medium-sized enterprises can also save time and reduce costs by outsourcing payroll, as well as gain access to expertise and technology they might not otherwise be able to afford in-house.

Is Rippling a good payroll outsourcing solution for small and mid-sized companies?

Yes, Rippling Payroll’s features make it a great payroll outsourcing solution for small and mid-sized companies. By combining HR, IT, and finance into a unified platform, Rippling consolidates all your employee data into a single source of truth that businesses of any size can leverage to make data-driven decisions. An easy-to-use interface, built-in automations, and collection of over 600 integrations reduce the administrative load for leaner HR teams.

What are the benefits of Rippling’s payroll solutions over other competitors?

With Rippling’s global payroll solution, you need just 90 seconds to pay employees and contractors in over 180 countries and more than 50 currencies. The easy-to-use platform offers customizable templates and automations to streamline your payroll process further. It also has more than 600 integrations. Finally, Rippling automatically completes and files your payroll taxes for any jurisdiction.