What’s the Big Idea Behind Payroll Outsourcing?


Often the question is asked, “why should I outsource the payroll function of my business?”

I talk to hundreds of companies every year and am frequently asked several questions:

What exactly does payroll outsourcing company do? What are the benefits of payroll outsourcing and how much labor expense can I save by outsourcing payroll? There are a lot of rotating parts to my payroll, what else can you offer?

What exactly does a payroll outsourcing company do?

Before we can get to the bottom of this, it is necessary to understand what parts of the payroll process can be outsourced and what parts cannot.

A few core areas of the payroll function can be completely outsourced: payroll tax compliance including timely payment of payroll taxes, quarterly payroll tax return filing, printing payroll checks, transmitting direct deposits, issuing W-2s, garnishment management and new hire reporting. In each of these examples, the payroll outsourcing or payroll processing company becomes the payroll tax filing agent and is responsible for filing and paying the payroll taxes to local, state and federal agencies.

Most payroll outsourcing companies guarantee compliance and will pay for any penalties/interest that result in an inaccurate payroll tax payment or return. That said, there are companies that offer payroll tax services but actually use a third party to pay taxes – they outsource what you outsourced to them. I would definitely avoid this situation since the third party model adds a layer of complexity to the process that can negatively impact customer service if an issue or question arises.

There are areas of the payroll function that cannot be completely outsourced. This is where technology comes into play. Payroll service companies that own and develop their software normally have expanded capabilities and are growing in popularity. Superior technology in the online payroll software application can bring many benefits to the table, such as:

For areas that cannot be completely outsourced, your payroll service company’s ability to offer superior technology is essential to streamlining the process.

Why should I “outsource payroll” and how much labor expense can I save?

A company should consider a few internal scenarios when it comes to outsourcing payroll. If ABC company hires an employee to handle payroll, and a tax penalty results due to employee negligence, will that employee pay the penalty and interest? Probably not.

If ABC company hires an employee to do payroll, is that all the employee will ever do? In most cases, that employee will grow with the company and start to take on tasks other than payroll processing and tax compliance. The labor expenses saved by outsourcing payroll – paired with guaranteed compliance and access to better technology – usually outweigh the fees charged by the payroll service company.

No one can outsource payroll completely. You cannot simply wipe your hands clean of the payroll function of your business, but some payroll service companies do a good job of streamlining as much of the process as possible.

Your payroll service company should take the payroll processing and tax compliance burden off your company while effectively streamlining the entire payroll function and other HR tasks.

There are a lot of rotating parts to my payroll, what else can you offer?

There are other core areas of payroll that payroll service companies are trying to streamline: time and attendance, hourly data input, accounting/general ledger update, deduction payments, 401k updating and reporting functions.

Payroll is a meticulous and detailed process. Payroll service companies that streamline the process allow their clients to control the data that they need without having to manage tedious back end procedures.

Payroll tax compliance, processing and distribution can be handled effectively by your selected payroll service company to increase efficiency in all areas of your business plan.

Author: Scott Lasseigne
slasseigne@apspayroll.com