How to Outsource Your Payroll — A Step-by-Step Guide

Outsourcing business functions are standard in many businesses.

When it comes to payroll outsourcing, you can choose between a partially managed service, a fully managed payroll service, or even hybrid outsourcing. You can use a large, established internet name or contact a local payroll company. Many accountancy firms may have in-house outsourcing facilities but would probably want to become your accountant first.

Before you decide, it is essential to understand the ‘five building blocks’ of payroll. In the US, the Internal Revenue Service (IRS) delegates responsibility for collecting employee income tax to employers through ‘income tax withholding.’ Similarly, the employer can be required to make payroll tax and social security contributions, as well as apply wage garnishments. Similarly, in the UK, the HMRC delegates responsibility to employers to collect income tax and national insurance through Pay As You Earn (PAYE). But they do not stop there. Unpaid council tax, child maintenance, and student loans are also included.

• Tax withholding and statutory deductions constitute the first building block and are automatically covered by any serious outsourcing company.
• The second block is the distribution of payslips. Most outsourcing options are entirely now paperless. You may have sections of a workforce who are digitally challenged or where it is customary to hand out paper payslips. On the other hand, your staff might work in IT and find the notion of payslips needing to be updated, expecting instead dashboards with connections to a flexible paydown app.
• The third block is deductions for employee well-being and health benefits. In the US, outside the social security system, pension contributions are not compulsory but are a common benefit employers provide. In the UK, the employer is responsible for pension contributions under the Pensions Act 2008. Anyone over 22 earning over £10,000 pro rata must be enrolled in a qualifying workplace pension scheme. Minimum contribution levels must be met, and funds collected must be conveyed to the pension scheme.
• Approved payment for employees of their net pay is another block. The more affordable solutions may send you a spreadsheet of net payments. If you want this burden removed, ask an approved payment option will usually be available.
• Internal reporting. Finally, internal reporting is usually required once the payroll is done and dusted, employees are paid, and tax authorities and other regulators are notified. Some online options integrate seamlessly with software such as Sage and Xero. Others do not. You should always engage the finance department and automate ledger postings to this effect.

By breaking down the payroll into blocks, you can select which ones to outsource, retain, and ponder further.

Why Outsource Payroll?

1. Save time

Many companies consider how to outsource payroll because they know that outsourcing payroll is a time-efficient option for a business. Employing a payroll manager requires a full-time contract. If you run a monthly payroll with cut-off dates for variables such as new starters and overtime, you create a pattern for the payroll month. This a pattern that only a few managers or owners of businesses may notice, especially now that we are working at home or in a hybrid setting. At the risk of becoming instantly unpopular with the payroll profession, until the cut-off date has been passed, there is little for the payroll manager to do.

Engaging a payroll bureau or company streamlines your cost base and time allocation. It is up to the bureau themselves to handle the bottleneck each month. Once they have agreed to your cut-off dates, the subsequent steps must be processed in time for payday.

Payroll bureaus specialize in time efficiency. This is where their profit margin is made. Importing variable data such as bonuses or overtime will all be conveyed by Comer Separated Values (CSV) or compatible software using Application Programming Interfaces (API). Automation is critical, and duplication of any manual entry is penciled in for elimination.

2. Save money

For most businesses, outsourcing remains cost-effective. Prices can start from as little as $50 per month for an employer with fewer than five employees. A fully managed payroll software solution will cost $10-$30 per employee per month if you employ between 1 and 10 people. The larger the workforce, the lower that individual cost becomes, and organizations with over 250 employees can pay as little as $5 per employee per month.

The alternative to outsourcing is in-house employment. You can only employ someone with tax knowledge or pension understanding. To implement a salary sacrifice scheme, such as cycle to work, you need a professional who can explain and check the scheme. In other words, you need to employ talent, and that talent is expensive. If your employee numbers expand exponentially, expect your in-house payroll manager to soon ask for assistants. Outsourcing has scalability built.

Finally, it would be best if you considered purchasing internal payroll software. The move towards cloud-based platforms has provided more flexibility and cost-effective software solutions, but prices can remain as expensive as the outsourced service. Part of knowing how to outsource payroll software is knowing how to run things internally if you need to, so it’s worth investing time here.

3. Ensure compliance

Outsourcing payroll ensures your company is on top of payroll compliance. For example, In this tax year (2022-23), the UK government broke an unspoken understanding by introducing significant changes midway through the year. The Rubicon has been crossed. By increasing the national insurance primary threshold and the lower profits limit from 6 July 2022 and not 6 April, the government has a taste for making changes during a tax year. Expect governments to follow with similarly complex interventions in the future. 

The COVID-19 pandemic also increased the speed of Government regulatory interventions. For example, in the UK, the speed at which the coronavirus job retention scheme (CJRS) was rolled out and then changed inevitably caused errors: 11.7 million employees were furloughed through the scheme for £70 billion to the Government. 

Outsourcing payroll ensures payroll experts can guide and advise on maintaining compliance. 

4. Reduce errors

Outsourcing payroll means that a company with efficient payroll processes and systems is now charged with ensuring employee payments are correct. Gathering variable payroll data most efficiently becomes the priority: Import-friendly spreadsheets replace chaotic Word documents or multiple emails from HR. Every employee becomes a number, not a name, so errors are identified and corrected regardless of earnings or status. 

What Are the Risks of Payroll Outsourcing?