Advantages and disadvantages of outsourcing payroll

Apr 05, 2024

Outsourcing is the smartest way that businesses follow to delegate complicated and time-consuming tasks.

One such elaborate process that qualifies to get outsourced is managing payroll. Though HR professionals are competent in handling payroll and there are ingenious payroll software available to work on this, outsourcing payroll is still preferred by the majority to smartly manage their resources.

Business payroll outsourcing is when a company hands in its entire payroll process to a third-party team.

This payroll provider will get access to the in-and-out employee registry, salary, incentives, and other benefits details to estimate and send monthly earnings to all of their employees. 

What is payroll outsourcing?

When your company chooses to outsource your payroll, this means that you’ll be relying on a third-party company to do your payroll processes. Their job will be to take care of payroll administrative work, taxes, legal compliance, and many more.

You can ensure that employees will get their salary sent on time and accurately even without going through the complicated processes yourself.

Why do businesses outsource payroll?

There are many stories around the world to prove how beneficial payroll outsourcing was to companies and specifically HR teams. The major reason is to have a small yet fully functional and highly productive team.

Companies who have migrated to payroll outsourcing solutions reportedly have seen a 40 to 50% reduction in their HR team strength.

As the time-consuming job makes its way out, your limited HR staff can effectively work on other tasks and employee engagement activities.

The next reason is improved efficiency and fewer mistakes. Payroll providers assign dedicated employees for each client to proactively handle the tasks and avoid mistakes and disarray.

On the other hand, the internal HR team has other responsibilities to focus on too. This shift from one task to another can lead to errors that can be irreversible.

Businesses also do payroll outsourcing to ensure compliance needs. To stick with the local government regulations is one of the important obligations. These regulations change frequently too. Not paying heed to them and following the old terms can lead to penal charges against employers. 

In short, businesses outsource their payroll activities to get them done quicker, efficiently, and without mistakes, and additional expenses.

Advantages of outsourcing payroll

Before outsourcing payroll, you must know the pros and cons of this process to weigh up how it can work in favor of you. Here are some of the advantages.

1. Saves time & cost

Saves time by unhooking your HR team from a long-drawn-out, complex task and saves cost by letting you maintain an undersized HR team as the workload is manageable.

Ultimately, the overall employee management from hiring to dismissal falls under the shoulder of the HR team.

Including payroll management to that can only increase their working hours leading you to add more and more professionals to the team.

2. Reduce errors

Errors are unavoidable while managing payroll due to the nature of its work.

Imagine having 50 to 100 employees each with different sets of wages per hour, working hours, and work benefits. The calculation can go wrong, salary can get credited to the wrong account or a different employee, and additional hours might be excluded.

Any insubstantial mistake like this can bring forth huge discrepancies and in the end, your employee will be disappointed if they don’t receive the right remuneration. These payroll errors are burdensome for everyone.

Payroll providers don’t let this happen as their sole assignment revolves around this.

3. Accurate tax calculation

The payroll task contains employee tax calculations too. Employers should report to the IRS how much salary they pay to their employees along with other inclusions.

This tax-filing should be done on time and should not contain errors. Filling the form can take hours or even days and must be done painstakingly.

The regulations can vary based on your local bodies. Upon outsourcing payroll, you wash away this responsibility and let your payroll provider file taxes on behalf of your company.

4. Avoid tax & compliance risks

It costs you money every time you miss adherence to your local government regulations or file employee taxes incorrectly.

The penalties can be high and you need to work on them till you get it right. It’s also a matter of reputation. 

Businesses often find it hard to catch up to the changes in ordinances and regulations and find it lighter when someone does it for them. That’s where business payroll outsourcing comes in to free them up. 

5. Enhanced security

Payroll data demands utmost security while being stored and no big corporation will take up the risk of storing this on their own company network.

Amidst data theft and other security issues, your responsibilities increase to store them safely on the cloud or use expensive payroll software. 

Payroll fraud can be committed internally too where one employee can get favored and opt to receive more than what the company owes to them. You can put a full stop to this unjust favoritism by outsourcing payroll.

6. Easier for filing the taxes

Some payroll providers do only tax estimation while some do the tax filing by themselves. In either case, you are doing lesser or nothing at all.

When the hard job has already been completed, you can file taxes by yourself on time and avoid fines. Outsourcing payroll lets you accurately estimate and fill in forms on time.

If you're looking for an efficient and secure way to manage employee payroll, our article on employee payroll card is a must-read. Discover how payroll cards can streamline payments, reduce administrative costs, and enhance financial inclusion for your workforce. Our article cover everything from benefits and features to implementation and best practices. 

Disadvantages of outsourcing payroll

There are some drawbacks to outsourcing payroll too. Though negligent, this should be paid attention to as well.

1. Loss of control over your data

Your employee payroll data can be bulk, chunky, unintelligible pieces of information that can be hard to process. But they are still your data and when you hand them to a payroll provider. You can have no or less control over this data even if it’s a responsibility off your limits.

Wanting to check or manage this payroll data will result in interference with their tasks. You can still monitor but if you need to make any changes, it should happen on your provider’s end. 

2. Delay in paychecks and response

Initially, it can be a cumbersome process to find a payroll provider and get your company onboarded. There can series of meetings to update and coordinate with them.

Since communication happens mostly through email, there can be delays in responses.

Some payroll providers send paychecks on a predetermined date according to their convenience and not to your preference.

3. Paying for unwanted services

While Outsourcing payroll, you can choose packages that suit your requirements. Not all packages are useful and required to carry out your basic payroll functionalities.

You might end up signing up for more services than you need.

Without checking your necessities, outsourcing payroll can cost you an arm and a leg.

Common misconceptions about payroll outsourcing

1. Loss of control

It’s natural to think that outsourcing can lead to a loss of control over your payroll process, but it doesn’t have to.

To reap the full benefits of payroll outsourcing, you want to develop a good relationship with your potential provider. This way, it will be easy to communicate with them and ensure that you don’t lose control.

2. Expensive

Contrary to popular belief, outsourcing your payroll isn’t necessarily more expensive than doing it in-house.

While in-house costs may not immediately be obvious, the truth is payroll outsourcing can help you save money. You won’t have to spend funds on recruitment and training. Plus, your payroll will be done much faster by outsourcing.

3. Data security risks

Understandably, most businesses are wary of trusting a third party with their data. But the truth is you won’t run into any issues if you choose to go with a payroll outsourcing company that is reputable.

In fact, your data could be even safer, considering that payroll providers will invest a lot in data security and protection.

4. Loss of employee trust

Without knowing the benefits of payroll outsourcing, it’s easy to believe that it could create distance between you and your employees and result in losing employee trust.

However, payroll outsourcing providers are actually big on employee experience, ensuring everyone receives their pay accurately and on time. You can combat this misconception by educating employees.

5. Transition complexities

You might think that it’s too much of a hassle to change from the current processes you already have.

Good providers, however, will let you enjoy the advantages of payroll outsourcing without requiring all the complexities. They should be able to absorb your existing processes and help you make the transition easy.

6. Lack of customization possibilities

You get more than just hassle-free transitioning with payroll outsourcing. If you have specific processes that you did in-house, most payroll outsourcing companies will be able to offer you customization to ensure that you’re not making sacrifices.

The goal of payroll outsourcing is to meet your business needs without having to break a sweat over it.

Factors to consider when outsourcing payroll

1. Expertise and compliance

Any payroll outsourcing provider that you choose to partner with should have both payroll expertise and compliance knowledge.

To make payroll processing easy, the company must be knowledgeable in local regulations and be able to comply with the law. This will also get you the benefits of payroll outsourcing such as a hassle-free audit season.

2. Scalability and flexibility

Your business might have different needs now compared to later in the future after a lot of growth has happened.

When you pick a payroll provider, you want to enjoy the advantages of payroll outsourcing long-term. You should consider whether your provider will be able to adjust and scale up their scope of service along with your business.

3. Integration capabilities

Having integrations offered to you is especially important if you already use a human resource information system, or HRIS, for managing your employee data.

You want your payroll provider to have the technology that supports integrations with these systems. Overall, it will make both the initial setup and the following processes much easier.

4. Customer support

You want to know that you’ll be able to count on your payroll outsourcing partner. This means that you want a provider that is open to communication and can support queries or requests you may have, especially when payroll is a sensitive matter. Look for a payroll provider that is known to have great customer support.

5. Transition process

When the benefits of payroll outsourcing include saving time and energy, the last thing you want is for the transition process to be too complicated.

Your provider should be able to provide you with assistance and have the appropriate technology to make the transition from in-house to using a payroll outsourcing provider easy.

If you're planning to streamline your payroll processes, automate calculations, and ensure accurate and timely payments, our article on the best payroll software is a must-read. We've curated a list of the best payroll software options, each offering robust features like automated payroll calculations, tax management, direct deposit, and compliance tracking. 

How can Volopay help process employee payroll?

Want to have the best of both worlds where you can efficiently take care of payroll data and automate paychecks?

Volopay is your genie then that can combine spend management and business payroll outsourcing for you. With Volopay, you can process both local and international transactions swiftly securely and automatically.

This cloud-based payable management solution also has other payment features like unlimited virtual cards and physical cards for employees, budgets, reimbursement platform, and smart accounting integrations with other applications.

Employee expenses administration is another painful task for the HR team. Not anymore as Volopay has a streamlined reimbursement portal. Your employees can submit bills through the app and money is disbursed once the request is approved.

You can also have virtual credit card for teams or employees to handle their business expenditure.

Coming back to payroll outsourcing, you can use the payroll software ‘Talenox’ that’s integrated with Volopay. So right within your payment application, your HR team can manage employee profiles, leave management, not to mention payroll. Business payroll outsourcing is not desired and so are expensive payroll software solutions.  

Process domestic and international transactions swiftly and securely