Outsourcing Payroll: How It Works, Pros & Cons, & Costs

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How does outsourcing payroll work and is it worth it?

Payroll is the process of more than just giving your workers their wages on time. The process is much more complicated and includes tracking worker time, accounting for worker benefits, and setting up direct deposit and other automations. 

This is an essential process you can do yourself. But, have you thought about whether it might be better to hand this function off to someone else?

Let’s find out!

What Is Payroll Outsourcing?

Payroll outsourcing is the process of partially or fully handing off payroll processing duties to a third-party company or service provider. These entities usually make use of online payroll software to streamline the process. 

For partial outsourcing of this process, the provider takes care of most of the technical aspects. The rest of the more administrative tasks, like tracking time and updating worker information, fall to someone within the company. 

For full-service payroll outsourcing, the outsourced party handles pretty much everything. Full-service payroll often includes other added benefits, too, such as HR support, built-in project and time tracking, and reports.

How Payroll Outsourcing Works

Two women with a laptop talking about outsourcing payroll.

Preparation Stage

This stage primarily consists of three parts:

  • Establishing your needs – Determine whether you need a “from the ground up” solution, or just someone you can hand off the process to. This is where you figure out whether a partial or full-service payroll plan is for you. 
  • Establishing your budget – Determine how much you can set aside to hire a service provider 
  • Researching your options – Find the top-rated and reviewed providers out there. If you know people who have used payroll services in the past, ask them for advice.

Deliberation Stage

Following the research process, you have the vetting process. Most payroll service providers offer to schedule a call to discuss your needs and the services they provide. Since you’ve established your needs and budget in the first stage, you can use this stage to vet out some candidates. 

Once you’ve selected a payroll provider, you can begin the real onboarding process. Clarify the degree and depth of service you need, go through roles and responsibilities, and finalize payment terms.

Implementation Stage

You will work with the service providers to get them all the information they need to set up your payroll processing. This includes tax forms, job applications, worker information, payment amounts, benefits information, time sheets, and bank information for direct deposits. 

The process is then underway. During this, you can schedule check-ins and regular evaluations of the payroll company’s performance. This is how you determine how good of a job they are doing and stay accountable for the work you agreed on. 

Pros to Outsourcing Payroll

A woman calculating the cost advantages of outsourcing payroll.

Time Savings

One of the main outsourcing advantages regardless of the task is time savings. This can especially be true with payroll. If you do payroll in-house, you have to consider all the time it takes to research and follow the correct process of setting it up. Think about managing it, too, and finding ways of automating different processes. You need to collate and enter worker information and learn about a whole lot of other things to do it accurately. 

With outsourcing, you’re handing that task over to someone who already knows how to get everything set up for you in a fraction of the time. This frees you and your team up to focus on more core functions like actually making sales and developing your products and services. 

Minimize Payroll Errors

Speaking of accuracy, that’s probably one of the most important benefits of outsourcing payroll. Dealing with errors in paying a particular worker can take a lot of time. What’s worse is it reflects poorly on you as a business owner and company. 

Improved Data Security

Payroll service providers typically have the infrastructure in place to handle crucial data securely. It’s important to hire a company that is well-known and has transparent security policies in place. Certain authorities hold these companies accountable to protect your information.

outsourcing payroll

Stay Compliant

Tax compliance and compliance with state, federal, and other applicable regulations are a must. The thing is, it can be quite time-consuming to not only learn about these but to stay updated on them all. It can be quite confusing sometimes. Because you probably have other things on your plate to think about, it’s easy to make errors without even realizing it. A payroll outsourcing company solves that for you. Part of their job is to make sure they stay in the know about these regulations. They make sure that the withheld tax is calculated properly, and they can even handle things like wage garnishment.

Integrate Data

When moving to a payroll service provider, integrating all the previous systems you have in place can be very easy. If you have certain HR solutions, benefits packages, or time tracking, you can let them know and they’ll typically be able to accommodate you. 

Facilitate Worker Self-Service

Some payroll solutions include the addition of a worker portal. Through this portal, they can check when payday is coming, claim pay stubs, check their hours, request paid leave, and view important HR documents. 

They can also contact payroll support which is sometimes an included benefit. 

Cost Savings

One hesitation people have concerns about is the payroll outsourcing cost. Here are a few reasons why outsourcing payroll can actually save you money:

  • By minimizing errors, you minimize the potential for audits and tax penalties 
  • By saving time handling the payroll process, you can redirect your efforts into scaling your business
  • Payroll software is also factored into the cost, which you would have probably needed to invest in any way

Cons to Outsourcing Payroll

A woman in front of a laptop holding her head in frustration about outsourcing payroll.

Longer to Correct Mistakes

Mistakes made by a trained, experienced, payroll outsourcing company are far less likely to occur. That’s one of the reasons you hire one. However, they can happen and often take a much longer time to sort out. This can lead to upset workers, wasted time, and penalties, and the responsibility ultimately falls on you.

Not Getting the Best Value

The benefits of outsourcing payroll can sometimes be a bad thing. In an attempt to give the best service possible, some providers include benefits that may not apply to the average business. The cost of these services is already a concern. However, if you are not getting value out of these benefits, you’re spending extra. 

Data Concerns

When you choose a company, you have to consider its data security infrastructure, protocols, and policies. Not only that, but you also need to consider the portability of your data. That is, if you switch providers, will you be able to switch seamlessly? 

Ultimately, you are handing over sensitive information and control over what is done with it. This doesn’t sit well with a lot of people, and is certainly a major consideration.

How Much Does it Cost to Outsource Payroll?

The cost of outsourcing payroll depends on a few factors. Primarily, we look at how in-depth the service you need is and how many workers you have.

For instance, QuickBooks has payroll services, which is an add-on to any Quickbooks plan. This service can range from $45-$125 per month. On top of that, you pay at least $6-$10 per worker respectively on the plan you choose. 

In the case of Gusto, they have two monthly pricing plans priced at $40 + $6 per worker and $80 + $12 per worker. They also have a Premium plan with exclusive pricing. They they have add-on services like HR and support for $8.

Other companies such as Payoneer and ADP Global Payroll don’t have set pricing. Instead, they encourage clients to schedule a call to get a custom quotation. It isn’t much help when trying to give a concrete answer on how much payroll outsourcing costs. But, that’s just the way it is for some companies. This can be arguably better than having to pay for benefits you don’t use, though.

Best Practices for Outsourcing Payroll

Focus on Provider Reputation and Experience

When you research and vet a payroll company, ask yourself these questions:

  • Have they worked with many companies before?
  • Have they worked with companies in industries similar to mine?
  • How many years have they been in the industry?
  • Are they a recognized company?
  • Is there a place I can go to read reviews of their services?

Remain Aware of Regulations and Tax Burdens

Some think, “Why outsource payroll if I have to know about taxes and regulations anyway?” These payroll service providers are indeed experts in this area. However, it is important to have some kind of idea of how it works so you can check their legitimacy. Not only that, but it’s also important to ensure the payroll company is familiar with local regulations and compliance so you don’t get into trouble.  

Take Your Time

Payroll is one of the most important aspects of your business. This is a decision you shouldn’t take lightly. It is important to get a payroll system set up ASAP. However, it’s worth investing in finding the right provider for that system. 

Frequently Asked Questions

A cork board with pins and yarn connecting frequently asked questions on outsourcing payroll

Is outsourcing payroll cost-effective?

For a company with a large workforce, the per-worker costs may add up to a much greater cost than doing payroll in-house. For smaller businesses, outsourcing payroll can be a great long-term solution for saving time and money. 

Is it common to outsource payroll?

There are still people who are validly a little hesitant. However, there are more safeguards in place than ever that make outsourcing payroll a more secure, cost-friendly, and time-saving solution. (As long as you do your research to find the right provider, that is!)

When should you outsource payroll?

  • When it takes too much time out of your day to process
  • When you don’t have the resources to make your payroll process
  • When you find yourself making errors
  • If learning about payroll taxes and regulations is confusing or time-consuming 

How do I find a payroll company?

We have written an article detailing our picks for the 7 best payroll services out there.

What Is Outsource School?

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This is the exact system Outsource School’s founders, Nathan Hirsch and Connor Gillivan, used to go from zero to 8 figures and 40+ virtual assistants with an exit in 2019.

Since being founded in 2020, Outsource School has helped 1,000+ business owners hire 2,000+ virtual assistants for their companies.

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Payroll is an important business function that can be time-consuming, and costly, and keep you away from core processes. If you do your research, find trusted companies, and can justify the cost with the benefits, outsourcing payroll could very well be the answer for you. 


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