Outsourcing continues to be a crucial part of international business strategy in 2021: The Deloitte 2020 Global Outsourcing Survey shows that businesses continue to pursue international outsourcing, despite Covid-19 disruption. While many different business processes can be outsourced, payroll, as a core business process, is a commonly outsourced function — particularly for larger organizations.
In this article we ask ‘what is payroll outsourcing?’, ‘how does payroll outsourcing work?’ and ‘what are the advantages and disadvantages of outsourcing payroll?’. We point out the top five benefits of outsourcing payroll and offer some tips on how to find the right payroll outsourcing provider.
Key Takeaways
1. Outsourcing payroll means engaging a third party to process the payments to your employees.
2. In a usual outsourcing process, a payroll outsourcing provider will withhold income taxes, payroll taxes and compulsory contributions, distribute payments on a regular schedule and make regular reports to the tax authorities and their client about payroll.
3. Major benefits of outsourcing payroll include cost savings, time savings, access to experts, prioritising your core business and enhanced compliance.
4. When choosing a third party to outsource payroll to, consider their reputation, compliance capabilities, information security and their ability to provide any other associated HR services.
What is Payroll Outsourcing?
A typical business has a range of services, functions and processes. Some of them will relate to the particular business in question (e.g., only businesses which are customer-facing will have a customer service department). But there are some processes which apply to nearly any business: Any business that has employees has a payroll process.
For more information on payroll itself, see What is International Payroll Processing?
These processes can be carried out either ‘in house’, or by a third party. When a business contracts with a third party to provide the service, this is known as outsourcing. Outsourcing payroll is one of the most common types of business process outsourcing.
Note, it is possible to have a hybrid model as well, where some functions are carried out internally and some are carried out by a third party. This is sometimes known as ‘payroll co-sourcing’ (the payroll equivalent of ‘co-employment‘).
Payroll outsourcing may be performed by an accountancy firm, a specialist payroll company, (sometimes called a ‘payroll service bureau’, or ‘payroll outsourcing provider’), or, it may be carried out by a ‘professional employer organisation‘ or ‘PEO’. Where an international PEO is engaged, all employer obligations — not just payroll — are taken over by the third party company. An international PEO is also sometimes know as a global employment organization.
Payroll outsourcing may occur within country (domestic payroll processing), or internationally (global payroll processing).
Through outsourcing payroll, the following services are usually provided by a third party for the benefit of your company:
Outsource international payroll with Horizons EOR services.
What Payroll Functions Can Be Outsourced?
Payroll is not just ‘one’ simple activity. It is a group of activities performed in tandem. When you outsource payroll, you generally outsource the following functions:
- Employee payroll account set up. All necessary personal information for processing the individual’s payroll is acquired.
- Payment method set up. The desired payment method for the company, whether that involves automatic payments/direct deposits, or pay checks is established.
- Withholding of all applicable income and payroll taxes.
- Remitting payroll taxes to the tax department. Note, where this is outsourced, it is still usually the obligation of the employer, rather than the third party, to remit taxes that are owing. Therefore, when this is outsourced, employers still need to be aware that they will usually still be liable for any required payments.
- Managing any applicable employee deductions, such as health insurance and workers’ compensation and recording these in the employee’s paystub
- Managing any end-of year tax forms and declarations.
Does Payroll Outsourcing Also Cover Payments to Contractors?
It is becoming increasingly common for businesses to engage independent contractors or freelancers, rather than employees, especially when operating across international borders. Payment processing for contractors can also be outsourced, much like payroll. This is known as Contractor Management Outsourcing (CMO).
A CMO provider makes payments in international currencies, ensures that applicable taxes (such as Value-Added Tax or Goods & Services Tax) are processed, and streamlines the contractor invoicing process.
To find out more about outsourcing the payment of independent and international contractors see How to Increase Revenue through Contractor Management Outsourcing.
How Does Payroll Outsourcing Work?
While the process may differ somewhat depending on the state or the country that your business is operating in, the general process for outsourcing payroll is as follows:
- Agree on terms of engagement
- Your business agrees with the payroll outsourcing provider on how the arrangement will work, and what the costs will be
- Ensure all essential registrations are in place
- The payroll outsourcing provider will ensure that your business has the necessary registrations and licences in place to manage a payroll
- Acquire necessary employment and business information
- The payroll outsourcing provider will require access to all employee information necessary to manage payroll
- Process payroll at regular intervals
- Payroll will be processed on a regular schedule determined by the client business and what is permitted under the law. Many companies choose a biweekly schedule when applicable. All necessary employee income and payroll taxes will be withheld, and deductions will be made, before payments to employees are distributed
- Report to the client as agreed
- Regular reports should be made to the client business from the payroll outsourcing provider so the client can keep a close track on how the business process is performing
- Remit taxes and contributions on a regular basis
- The payroll outsourcing provider will submit payments and any necessary documentation to the tax authorities and third parties.
What Are the Benefits of Outsourcing Payroll?
The benefits or advantages of outsourcing payroll commonly include the following:
- Cost savings
- Outsourcing payroll often saves a firm money compared to carrying out the task in-house. Processing payroll in-house means investing in the necessary computer equipment, payroll or accounting software and providing training to ensure that payroll is processed correctly. It also means constantly checking whether your computer runs slow, if there are any software updates or security patches required, and ensuring compliance with ever-changing tax regulations and labor laws.
- Additionally, employers must stay up-to-date on changes in tax rules, personnel, and accounting deadlines. Missing these matters can be costly and expose the business to additional liability.
- It is especially cost-effective to outsource payroll where employees work varying amounts of hours, you have to pay payroll taxes for multiple regions, you are losing money by manual timekeeping, or you have a high turnover rate.
- Prioritizing core business
- Payroll is unlikely to be a core function of your business. Because it is a non-core function, any time and resources that you devote to it, means less time you have to focus on revenue-generating activities. By placing an expert in control of your payroll processing, you can better use your time in areas more closely related to your core business or revenue centers, such as customer service, sales and marketing.
- Saving time
- Whether you have 10 employees or 100 employees, payroll processing demands significant time and attention. Processing payroll in-house means you or your staff may need to input extensive payroll data.
- When you consider the time spent processing and managing payroll, outsourcing to a trusted service provider may seem attractive. Time is money, after all.
- Additionally, outsourcing payroll can help you avoid unexpected losses of time that may occur if you make a payroll mistake, or if you receive notice of an unexpected audit. Your service provider can help avoid these mistakes and let you focus on your core operations.
- Expert access
- Working with an outsourced international payroll provider means you gain access to their years of expertise. This instant access is especially important if you work in multiple jurisdictions and need an expert who is familiar with all local rules and regulations.
- Outsourced payroll providers hire individuals who have an in-depth understanding of payroll laws and regulations, including complex payroll tax issues.
- Regulatory compliance
- One of the most daunting tasks for small- to mid-sized businesses is complying with laws, regulations and mandatory rules, especially when foreign governments are involved.
- Businesses may need to have an in-depth understanding of various regulations to avoid running afoul of the law. This includes being on top of labor, tax, immigration, anti-discrimination and insurance laws.
- Legal and compliance requirements relating to payroll are often complex. It becomes even more complicated when operating internationally. For example, in some countries vacation or holiday bonuses must be paid, whereas in other countries it is optional. In addition, there can be regional and municipal variations in the law. For example, in the U.S. states of Oregon and Wisconsin, employees need only be paid on a monthly basis, while in most other states workers must be paid more regularly.
- By outsourcing payroll to a trusted service provider, you can delegate this task to a company that is knowledgeable about local, regional and national laws and regulations. You can avoid penalties or unnecessary audits that are triggered by your non-compliance.
- A top payroll provider will ensure that your payroll process complies with the current rules, and ensure that you have a good understanding of payroll laws.
- Read more about payroll implementation at The Complete Guide to Global Payroll Implementation.
What Are the Disadvantages of Outsourcing Payroll?
While acknowledging the benefits of outsourcing payroll, what are some of the potential downsides or disadvantages of payroll outsourcing?
- Loss of Control
- When payroll is processed in-house, you retain control over the entire process. This means you can have close oversight of quality assurance, and ensure that all employee personal data is processed in line with your own obligations and internal processes.
- Not a Compliant Employment Solution
- Commonly your workforce in another country need to be employed in the country in which they are located. This is essential in order to avoid ’employee misclassification’ (treating employees as if they are independent contractors). This is usually a requirement of both tax and labor laws. Read more at What’s the Difference between Employees and Independent Contractors?
- Outsourcing payroll alone will not ensure that workers are compliantly hired when operating internationally. This requires either setting up a foreign subsidiary in the country in question, or using a global PEO solution.
- Customer Support
- Where something goes wrong with payroll processing, the third party has to be relied on to fix the issue. Depending on the level of customer support available, this can make fixing any errors a more complicated process than it needs to be.
It is worth noting that these perceived disadvantages can all be addressed by due diligence in choosing the right partner for outsourcing payroll.
Ideal payroll outsourcing partners will have rigorous contracts in place which ensure that all data is protected, errors are promptly fixed and that employment rules are followed.
Why Outsource Payroll Processing?
Ultimately, the decision as to whether you should outsource your payroll means weighing the pros and cons of payroll outsourcing for your particular business. Outsourcing payroll is often a good option for:
- Small businesses and start-ups that need cost-efficient payroll processing in full compliance with the law;
- International expansion, where an enterprise is entering into a new market and are unfamiliar with local payroll processes;
- Growing businesses, that are hiring more staff and need to scale existing payroll processing;
- Mergers and acquisitions, where the new entity does not have a compliant payroll process in place.
Tips on Finding a Company to Assist with Outsourcing Payroll
Now that you know the difference an outsourced payroll provider can make to your business, you need to know how to find a trusted service provider. Consider these tips when searching for a company to provide outsourced payroll services for your business:
- Prioritise company reputation
- Payroll outsourcing providers deal with sensitive employee personal information. And, of course, on-time payment is one of the most important considerations for workers. This means it is essential to work with a company with an excellent reputation in the business. In addition, look for a payroll provider with a strong track record of serving businesses of your size and in your industry (ex. an ITES for an IT hiring)
- Look out for additional HR services
- A good payroll provider will offer additional services that complement payroll processing. With companies that process payroll internationally, this often includes visa consulting, PEO services, administrative and HR assistance. The provider may also offer tax preparation (especially if the company is associated with an accountancy firm). Consider the exact scope of services you are receiving when comparing quotes from providers.
- Read more about outsourcing other functions, such as administration at ASO vs PEO: What’s the Difference?
- Check information security
- Most payroll is processed electronically, which means protections need to be in place for employee personal data. In Europe, this means following the GDPR, but most countries have stringent employee data protections in place. All businesses need to do their due diligence on data protection arrangements
- Ask about regulatory compliance capabilities
- Ask your potential provider about how they stay on top of changes in the law and ensure that your business will remain compliant at all times.
Before meeting with a potential provider, prepare a list of questions about the services you are considering. A good payroll provider will spend the time necessary to explain their services, and the value they can bring to your business.
Contact Horizons for Payroll and Global PEO Solutions
Horizons is a specialist payroll outsourcing and shadow payroll provider. Horizons is able to process payroll for all your employees around the world, no matter where they are based (180 countries covered).
In addition to payroll outsourcing, Horizons can become the Employer of Record, or ‘Global PEO’, for your international workforce, taking over all employer obligations and liabilities on behalf of clients. Contact us to learn more or to get a bespoke quotation for your business.
