Payroll Outsourcing in 2023: Top 6 Reasons to Consider
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- Payroll outsourcing is becoming a standard practice, with 73% of organizations outsourcing their functions in the last year.
- By outsourcing payroll, you minimize the risk of misclassification and fines that can cost hundreds of thousands of dollars.
- Outsourcing payroll can reduce inaccurate data input, which is the top barrier to effective payroll operations.
Paying your workers—whether domestic or foreign—doesn’t only involve giving them their salary at the end of the month. Today’s payroll processes can be time-consuming and stressful, which is why 73% of organizations have turned to payroll outsourcing.
Outsourcing can make tax filing, calculating payroll, and other payroll-related matters easier and more efficient, whether you’re a small business owner or a payroll specialist at an enterprise company.
Through Deel, you can unify contractor payments, employer of record (EOR) services, and payroll management in one platform.
In this article, we explore the benefits of payroll outsourcing and explain how to choose the right payroll service provider, so you can make payroll processing more cost-effective and straightforward for your team.
What is payroll outsourcing?
Payroll outsourcing is the practice of hiring an external service provider to handle the payroll functions for your company. A payroll service provider ensures that:
- All payroll funds are distributed on time and according to your employee agreements
- Payments are made accurately and compliantly with local laws
- Payroll documentation and employee information is safely and securely managed
Payroll service providers only handle making payments to your employees. Some mistakenly believe outsourcing payroll services include HR services that help you hire new people, but HR and payroll outsourcing are different. Human resources can be outsourced to a separate service, and while some companies offer both (like Deel), a payroll company only handles payroll.
Top benefits of outsourcing payroll services
Why outsource payroll? Handing some or all of your payroll functions over to a third party can help streamline payroll processes, reduce the risk of non-compliance, and ensure correct tax payments and pay stubs. Let’s take a closer look at the advantages.
Reduced risk of non-compliance
Whether you’re running payroll domestically or internationally, you must ensure you’re operating in compliance with the employee’s payroll laws.
Payroll laws vary by country—and sometimes by state or county. These laws dictate how employees can receive their compensation, when you have to pay them, and their payroll deductions, such as health insurance and social security.
If your team isn't familiar with local labor classification laws, you may be at a greater risk for misclassification. Working with a global payroll provider that has experience with international payroll laws can reduce that risk, which could otherwise lead to fines and penalties that cost hundreds of thousands of dollars.
Keeping up with compliance laws in one region requires a lot of time and expertise. If your company expands internationally, that workload grows. By outsourcing these payroll responsibilities to a service provider with localized specialists, your team will gain peace of mind and reassurance that you comply with international payroll and employment laws.
Typically, outsourcing payroll services costs less than creating an in-house payroll department. These cost savings are greatest for companies in high-cost-of-living regions, where recruiting, hiring, onboarding, and training an entire payroll department is a significant investment (unless they hire remote workers).
Payroll outsourcing also enables globally dispersed organizations to save money if they use one global payroll provider. Hiring and paying employees in multiple countries requires more payroll administrators and legal advisors.
Using a full-service solution that combines payroll, HR, and more in one platform—like Deel does—will provide even more valuable insights.
Tom Benians, Head of Finance, Fidel API
Better experiences for scaling teams
Processing payroll and maintaining compliance standards is difficult for overwhelmed payroll departments, especially if their organization is growing quickly. This overwhelm can often lead to payroll delays and mistakes.
If your business is growing, you need a payroll provider that can grow with you. By outsourcing tasks, you can ensure your payroll is getting the attention to detail it requires to run smoothly. Your in-house accounting team can instead focus on core tasks to support your team as you grow.
Increased data security
Outsourcing payroll can ensure maximum data security and even prevent embezzlement, identity theft, and other risks.
If a provider handles payroll data for employees in the European Union (EU), they have to meet General Data Protection Regulation (GDPR) standards. Your provider should also have a data processing agreement (DPA), which outlines how the parties will process and store your data in compliance with the GDPR. This includes appropriate security policies, encryption, physical data protection measures, and risk assessments.
Fewer payroll mistakes
For organizations, inaccurate data is the top barrier to effective payroll operations. A payroll provider's sole responsibility is to ensure payments are made correctly and tax laws are followed. As a result, the chances of making a mistake are lower than with an in-house accounting team.
Payroll errors can negatively impact your workers, disrupting their budgets and lives and causing unnecessary stress. Payroll mistakes and delays can also dilute their trust and positive perception of your organization and lead them to question your financial status and management capabilities.
Sometimes, the consequences of a payroll error are more severe than having an employee complain about a portion of money missing from their paycheck. Inaccurately filed federal payroll taxes may result in penalties and legal issues with local government agencies.
More efficient processes
Most payroll service providers stay up to date with the latest technology because it allows them to take their service to the next level and provide the best for their clients. This includes automation and AI capabilities, which allow payroll professionals to focus on optimizing your payroll system, ultimately making it more efficient and reducing human error.
To further increase payroll efficiency, look for a centralized payroll provider, such as Deel.
How does payroll outsourcing work?
Hiring a third-party service provider means you’ll need to share your workers’ information. Before you hire a payroll provider, make sure to have a proper DPA in place, if necessary, to avoid potential legal issues in case the outsourcing service mishandles the payroll data.
The payroll company may need the following employee data:
- Employee contact information
- Pay rate
- Job title
- Hire date
- Type of contract
Do your employees use time cards or time-tracking software? The payroll service will likely need access to that information to calculate and deliver payments via payroll checks or direct deposit.
Payroll providers can also handle payroll taxes and ensure you comply with local tax regulations, regardless of where employees are from. You may need to supply specific tax forms and other necessary information about workers, like their Social Security numbers or Tax Identification Numbers (TIN).
Payroll processing by a service provider may include the following steps:
- The setup period—providing the chosen payroll company with all the necessary information. You will need to confirm the rate and working hours for each employee
- During the pay period, the payroll provider will need the number of hours worked for every employee so they can enter the data into their software and calculate the wages and salaries. You may need to confirm the information for them
- When the gross pay is calculated, the payroll service will make the pre-tax and post-tax deductions, if applicable. These can include taxes, child support, workers’ compensation, and employee benefits
- When the net pay is calculated, your payroll service provider will make deposits or deliver checks to your workers and make other necessary payments, including taxes during tax season
- As the business owner, you will receive payroll reports for each pay cycle
What are your payroll outsourcing options?
When selecting an outsourced payroll provider, consider your budget, expansion goals, and payroll team’s bandwidth.
Full-service payroll company
Full-service payroll companies have broad experience with running payroll and ensuring tax compliance for businesses. If you’re hiring internationally, look for a global payroll provider like Deel that can take on the responsibility of navigating unfamiliar payroll laws and best practices for you.
Deel is an all-in-one HR platform for global teams. When compared to competitors, Deel provides:
- More coverage with payroll in 100+ countries, contractor hiring in 150 countries, and employee hiring in 90+ countries through owned infrastructure
- Faster, more reliable support 24/7, plus a dedicated account manager for every team
- Less manual work with 11+ automations, auto payments and invoicing, and on-platform contract amendments
- More payment control and flexibility with advanced payroll funding options, off-cycle payments, 8+ contract withdrawal options, Deel Cards, and more
Professional employer organization (PEO)
Engaging a PEO will also provide you with HR services such as benefits, compliance, and risk management in addition to handling payroll processing, deductions, and reporting tasks. PEOs are suitable to businesses of all sizes as they have the flexibility and expertise to handle the different legal jurisdictions and tax laws.
A PEO service may come with a higher price tag than basic payroll outsourcing options. However, this cost reflects the wide-ranging HR services it offers. While a standard payroll service just handles paychecks and taxes, a PEO also negotiates for you favorable rates on health benefits, handles claims processing, and manages many additional HR tasks that can consume significant time and resources.
Look for a PEO with both extensive international experience and robust integrations with your existing software. This scalability eliminates the need for additional investments in HR infrastructure, enabling your team to focus on your core operations.
Using payroll software isn’t typically considered outsourcing since it still requires work from your team. But if your team is currently using spreadsheets to manually manage payroll, investing in payroll software is a good first step to improving your processes.
Small businesses may benefit from working with a contractor as it’s less costly. If you choose this option, ensure your contract with the accountant is clear to avoid potential employee misclassification issues.
Frequently asked questions about outsourcing payroll
How do you find the right payroll outsourcing services for your needs?
It’s vital to complete tax-related tasks accurately and make payments on time, whether to the state or your employees. That’s why the first thing you should consider when hiring a payroll outsourcing provider is establishing trust.
Costs and fees: A payroll outsourcing company should always present its offer and costs transparently. Any hidden costs may lead to you ending your business relationship, so thoroughly vet your options before you engage them.
Compatibility: Determine if the payroll provider is compatible with how your company handles payroll. They may not be a good fit for your business if you’re uncomfortable with their processes or values.
Support: Ask how the payroll company will help you manage garnishments, sick leave, benefits administration, and other factors.
Self-service: Check if the company offers specific self-service options, which can help you manage a large workforce. For example, having employees sign in to a program and upload their tax forms can be a great time-saver.
Reporting: Ask the payroll company what reports they provide—for example, if they provide fiscal year-end reporting. You’ll want to track your payroll system’s efficiency and check if everything is going according to the plan.
How Deel helps SafetyWing’s Finance team save $10k annually
SafetyWing is a health insurance provider for remote workers and teams.
Before partnering with Deel, they faced many challenges paying workers across borders, as it had to be done manually without a centralized system. Their processes took a lot of time, and they lacked a network of experts to help them navigate international compliance.
“What made Deel stand out for SafetyWing was the extreme focus on the customer and how friendly and easy [it is] to use the platform. Definitely the best I have seen in this category,” said Karl Schroeder, Head of Finance at SafetyWing.
Thanks to Deel, the HR and Finance teams from SafetyWing have saved more than 30 hours a month on admin and $10,000 USD yearly.
When should you keep payroll in-house?
This may be a critical question for CEOs and other decision-makers. Should you outsource payroll services? How do you know it’s the right thing to do?
Consider the following:
- How many employees do you have?
- Do you have any foreign employees or contractors?
- Do you have the means to purchase payroll or accounting software and its integrations?
- Can you provide the necessary training for your employees or hire new ones to manage payroll?
- Do your employees work different hours every week/month?
Generally, outsourcing payroll can be a time-saving and cost-effective solution if you:
- Have several employees whose working hours vary every week
- Can’t justify the expense of buying payroll software to use in-house
- Often hire foreign contractors
Can my employees use payroll software, too?
Yes, they can, and it’s one of the biggest benefits of outsourcing your payroll to a payroll service provider. Plenty of payroll processing programs allow self-service, which can significantly impact employee satisfaction, as employees can make time-off requests or obtain personal payroll information more freely and flexibly.
Simplify global payroll with Deel
Having an international team increases innovation, creativity, and diversity—but it also complicates payroll management. You have to navigate different currencies, exchange rates, bank laws, and compliance requirements. And as your team grows, so do your payroll needs.
Alex Bouaziz, Co-founder and CEO, Deel
With Deel’s Global Payroll solution, all of that work and worry is taken off your plate. Run payroll in 100+ countries from one platform, streamline international operations, and eliminate the ongoing admin of local compliance, taxes, benefits, and more.
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