Guide to payroll outsourcing

When repetitive payroll tasks are weighing you down and costing your team valuable energy, running a business can start to feel like it’s in second place. Between the compliance rules, time-consuming tasks, and the risk of errors, it can feel like a labyrinth of spreadsheets and forms.

That’s why many small and medium-sized businesses decide to outsource the work, as a way for business owners to hang up one of the many hats they wear. As your business grows, outsourcing payroll can help scale your business, and reduce the administrative burden.

Read on, and learn more about the cost of outsourcing payroll, along with the pros and cons of in-house vs. outsourced payroll. 

Outsourcing payroll: In summary

• Payroll outsourcing is when you choose a third-party service provider to handle your payroll operations, including salary calculations, payroll compliance, payments, and even reporting.

• Payroll outsourcing comes with additional costs, but these may be worthwhile, especially if you’re looking to save time and minimise potential errors (and penalties).

• Outsourcing payroll makes sense compared to in-house payroll if you have the budget, have more than a couple of employees, and want the expertise of payroll specialists. 

What is payroll outsourcing?

Payroll outsourcing is when a business contracts a specialised, third-party payroll service provider to manage its payroll needs. It’s almost like having your own payroll team, except they are not employees, and all your payroll needs are handled out-of-house. You pay them for a service, and they work with you to deliver it. 

When you choose to outsource, you’re delegating your payroll management obligations, including salary calculations, payroll tax deductions, pension contributions, and compliance reporting, to an external service provider.

 There are three types of payroll outsourcing, and each will carry a different cost:

• Full Payroll Outsourcing — a service in which a specialised third-party will handle all your payroll needs,

• Payroll Processing Only — payment processing focuses on the administrative work for distributing (and calculating) employee pay, but nothing more in most cases.

• Payroll Advisory Services — this service involves providing businesses with consultancy, as well as compliance and strategy advice for payroll duties.

For many businesses, outsourcing payroll can reduce the administrative burden of running a business and provide clarity and assurance, compared to in-house payroll management. 

Payroll outsourcing vs in-house payroll

Interested in what outsourcing your payroll could do for your business? Discover whether it’s for you by comparing the pros and cons of in-house and outsourced payroll:

In-house payroll

Setting up your own payroll in-house means handling things yourself, dedicating the time and attention that comes with payroll, or employing dedicated staff and implementing systems. While there’s an upfront investment in software and training, you maintain complete control over any processes. You also have absolute responsibility for compliance and any penalties if you fail to meet that. 

Outsourced payroll

Outsourced payroll reduces your administrative burden and provides transparent ongoing costs. With outsourced payroll, what you lose in the control of in-house payroll, you gain in terms of time, help with compliance, and peace of mind.

How to outsource payroll

If you’re wondering how to outsource your payroll, then don’t fret — we’ve got the answers. From comparing payroll outsourcing costs to service levels and payroll schedules, here’s everything you need to get started:

1. Assess your current payroll needs. Take note of the number of employees, the frequency of pay runs, important benefits of deductions you need to include, and any scaling predictions. Get a full scope of your current needs, so that you can accurately and factually determine if a service provider has the right solution for your business.

2. Research potential payroll outsourcing providers. Don’t jump at the first service provider you see. Check reviews, collate some options, and conduct thorough research.

3. Compare costs and features across options. Look at what each third-party payroll service provider can do for you. Compare costs and services and try to consider how they align with your growth goals.

4. Review contracts and service levels. Determine what service level you need and educate yourself on the ins and outs of the contract. This helps you plan, understand your responsibilities, and ensure you’re getting the service you need.

5. Transfer payroll information to your chosen provider. Once you’re set up, you’ll need to gather and transfer any payroll information requested to your service provider. This includes bank details, payment methods, salaries, deductions, and so on.

6. Establish a schedule for payroll runs and reporting. Determine when payroll runs and reporting happens on your terms.

7. Maintain regular communication with your provider. Just because outsourcing payroll offers less control, doesn’t mean you need to be in the dark. Maintain regular contract with your service provider.

How much does it cost to outsource payroll?

The cost of outsourcing payroll can vary per competitor and plan — that’s why research is essential. In general, payroll outsourcing providers tend to use one or more of these pricing structures:

• Per-employee-per-month (PEPM) fee — a common type of payment plan, with costs scaling per employee. 

• Fixed monthly fee — a fixed amount per month for a defined service.

• Transaction-based pricing — a payment model where the cost is equivalent to completed actions.

• Tiered pricing based on company size — the cost scales at set breakpoints based on the size of your business.

With this in mind, we can point to several factors that will directly impact cost, even before you start to compare between service providers:

• Number of employees — the more employees you have, in almost all cases, the more you will pay in some form.

• Frequency of pay runs — the more transactions you need to do run, the higher the costs you’ll incur.

• Complexity of payroll (bonuses, commissions, etc.)  — the more complex the work is, the higher you can expect to be charged for it.

• Additional services (HR, pension administration, etc.)  — the more a payroll outsourcing company must do, the higher the cost.

• Level of support provided — many companies will give you options for different tiers of support, each with its own cost.

Is it cost-effective to outsource payroll?

For many businesses, whether small, medium, or enterprise-scale, outsourcing payroll can be a cost-effective choice, with a strong return on investment. While there are monthly fees, the time saved and risk reduction of outsourcing payroll could well justify the cost.

Outsourcing payroll could cost a specific rate per employee, per month, while some payroll service providers may instead charge a flat fee, depending on what is delivered. In comparison:

• In-house payroll software could cost more per employee, scaling in workload with additional staff, not including setup costs.

• An in-house payroll team may cost significantly more again per annum, plus training.

• You will spend additional man-hours on payroll, with a higher risk of penalties from compliance issues or errors.

Because prices depend on the number of employees, the complexity and frequency of work, the services offered, scale, and provider price differences, it can be difficult to produce an exact figure.

Additionally, some payroll providers may offer diminishing per-employee rates as employee numbers increase.

Benefits of outsourcing payroll

Outsourcing payroll can be highly beneficial, depending on your needs and goals as a business, such as:

• Time savings and reduced admin: Free up internal resources to focus on core business activities, higher value work, or other tasks. Get rid of manual payroll processing and paperwork that could otherwise bog you down.

• Error reduction and compliance. Minimise calculation errors, get help with compliance, and remain up to date with changing legislation, payroll tax laws, or pension requirements.

• Scalability.  Reduce the workload of processing payroll for new employees, making growth easier. Additionally, the reduced workload gives you the time and room to scale, with flexible plans that adjust to your business size. 

• Access to expertise. Access and benefit from expertise from professionals, getting important questions answered accurately and quickly, as well as getting detailed, precise, and clear reporting.

• Enhanced security. Rest assured that sensitive employee financial data is being handled securely and professionally. 

• Peace of mind. Let the professionals handle your payroll needs, so you can offload responsibility, enjoy peace of mind, and focus on the things that matter. 

Learn more about the pros and cons of outsourcing payroll.

When is outsourcing payroll right for my business?

Depending on certain factors, in-house management or outsourcing may be better for you. If you’re wondering if outsourcing payroll is a good idea for you and your business, you should consider whether:

• You have (or plan for) a rapidly expanding employee headcount in the near future.

• Your company or employees come with complex payroll requirements.

• Your business has a limited in-house accounting capability compared to your requirements.

• You have the budget to allocate to payroll services providers.

• Compliance certainty is a priority for you.

In-house payroll management may be better for you if:

• You run a very small team, about 1-2 employees, without ambitions to scale any time soon.

• You have a very simple payroll structure, without any complex considerations.

• Direct control is an important benefit to you.

• Your company operates with existing robust payroll systems that allow you to scale as needed.

Key considerations around outsourcing payroll

When outsourcing payroll, you don’t want just anyone to do the job. There are several key considerations you must keep in mind when looking for a payroll outsourcing provider:

Service Level Agreement

The provider should clearly outline response times, availability, and support channels. You need to know how long you can expect to wait for assistance, when you can get it, and what other channels you can access. 

Security and Data Protection

Ensure that your employee’s sensitive payroll information is safe. Check for compliance with data protection regulations such as GDPR and ensure that strong security protocols in place.

Integration Capabilities

Before choosing a payroll provider, confirm if their systems integrate with any existing accounting software or HR systems you’re already using. This can minimise potential data transfer issues, reduce set-up time, and lead to a better experience.

Compliance and Expertise

When you outsource your payroll, you’re putting a lot of responsibility on a third party. It’s essential to confirm that your payroll outsourcing provider remain current with payroll tax law changes, regulatory updates, and pension requirements.

Scalability and Flexibility

Not every payroll outsourcing service provider can take on ever-increasing workloads. Before you choose a provider, ensure they can meet your scalability aspirations and can handle ever-increasing numbers of employees. Knowing a provider can adapt to changing needs is both convenient and safe.

Payroll outsourcing FAQs

Can I switch payroll providers if I'm unhappy?

Yes, you can switch payroll providers if you’re not happy with the service or if the service doesn’t meet your current needs. However, consider that switching can be tricky, and you need to ensure it’s done in such a way that doesn’t interfere with compliance regulations or payment dates. Additionally, you need to ensure you have the flexibility in your contract to switch.

What happens to my payroll records if the provider goes out of business?

If your payroll outsourcing provider goes under or stops trading, your payroll records should move to the insolvency estate. However, you may be able to make backups of your payroll records, and it can be a good move. Either way, there are processes in place to ensure minimal impact on your operations.

Do I still need an accountant if I outsource payroll?

Yes, even though you’re outsourcing your payroll, you still need an accountant. Accountants handle accounting and advisory services, such as important financial strategy, year-end tax planning, and overall tax compliance, not just payroll accounting. They’re an important part of your business and can’t be replaced by outsourcing payroll. It’s also worth noting that many accountants also offer payroll processing as part of their wider offering, so you may be able to get an all-in-one service that covers both.

The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.

This information is intended to outline our general product direction, but represents no obligation and should not be relied on in making a purchasing decision. Additional terms, conditions and fees may apply with certain features and functionality. Eligibility criteria may apply. Product offers, features, functionality are subject to change without notice.