The 5 Most Frequently Asked Questions about Payroll Outsourcing
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By Dave Foxall
Pointing the Way to Payroll Outsourcing Via Q & A
The outsourcing of the payroll function is one of the most long-standing business practices in place. In fact, organizations of all sizes often look to payroll outsourcing as a way to avoid the necessity of maintaining specialist knowledge and practice in-house—contracting out worries over tax filing, deductions, and even statutory compliance. Indeed, according to the AccountancyAge report Payroll Outsourcing, “It is conservatively estimated that around 95% of businesses in the UK outsource at least one of their business processes.” Yet the motives for this widespread adoption of outsourced payroll don’t necessarily revolve around the same issues for all organizations. Rather, the strategic drivers for payroll outsourcing can fall under any number of categories; including the broad headings of economy, efficiency, or specialization/downsizing. Regardless of the reason for considering payroll as a candidate for outsourcing though, the questions organizations tend to have about this process are strikingly similar. Here, we’ve put together the most common of these questions—offering a payroll outsourcing guide to get started in this first phase of understanding what an outsourced payroll option can provide.
Payroll Outsourcing FAQ #1: What are the potential benefits?
The main reasons why businesses outsource their payroll include:
Cost: outsourcing charges typically work out to be less than maintaining a specialist in-house team.
Confidentiality: payroll details can be held and managed separately to other business information in an outsourcing arrangement—avoiding any accidental or incidental access.
Reliability of Service: as is the case with other personnel-driven business processes, outsourcing payroll will mitigate the effect that sicknesses or other unexpected absences might have on the payroll process.
Core Business Attention: by outsourcing a non-revenue-producing task, organizations can focus on earning activities, as well as more strategic compensation and HR functions.
Employee Satisfaction: payroll certainty coupled with access to better benefits programs (if the benefits function is similarly outsourced) has a sizeable impact on the attraction and retention of employees.
Compliance: while accountability may well remain with the client organization, the responsibility for payroll activity meeting up to date labor law requirements is typically covered by the payroll service provider.
Payroll Outsourcing FAQ #2: How much will it cost?
The cost of outsourcing depends on a number of factors; including the size of the client organization, the number of employees, the frequency of the payroll need, the complexity of working patterns (and reward options), the particular industry-specific compliance mandates, and the exact service that is required (whether it be basic data processing and calculation on up to strategic financial input). Commonly fees are structured as a flat rate per month based on number of employees; however, some providers also charge implementation or start-up fees and as well as “per check” fees. As such, it is critical for organizations to understand the exact cost structure that will be applied prior to the selection of any payroll outsourcing provider’s service.
Payroll Outsourcing FAQ #3: What about compliance responsibility?
One of the benefits of outsourcing payroll is that typically the payroll outsourcing provider processes both payroll and tax filing; takes responsibility for compliance with local, state and federal legislation such as FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act); and handles IRS inquiries—all of which can provide a certain peace of mind for an employer. Further, as a GridPay white paper (Payroll: The Truth Will Outsource) states, “Another argument for outsourcing is a fear of making mistakes when calculating pay, especially in union-intensive industries.” However, while the payroll service provider may contractually take responsibility for compliance, final accountability will usually remain with the employer (although the outsourcing contract may provide for restitution in the event of fines or penalties for non-compliance).
Payroll Outsourcing FAQ #4: Can I lessen my accountability by using a PEO?
Some payroll providers are professional employer organizations (PEOs); and as such take on a co-employment relationship in which the PEO acts as the administrative employer and the client acts as the worksite employer. The client maintains control of the business and is in charge of all business decision-making including performance management and staffing decisions. The PEO takes care of the time-consuming administrative tasks associated with the employment relationship (including payroll). As such, one of the key responsibilities of a PEO is to provide clients with guidance regarding labor laws and regulations. However, as mentioned earlier, ultimately, accountability for complying with regulations will remain with the client.
Payroll Outsourcing FAQ #5: How do I transmit payroll data securely to the provider?
Exchange of data between client and provider is mostly via the internet; with both the submission of the data for pay cycle calculation (e.g. time and attendance, absences, etc.) and the corporate, manager, and employee access to the different levels of information (e.g. payslips, budgets, reports, etc.) maintained by the payroll outsourcing provider. If the client has particular security worries about the internet that the provider cannot assuage, then alternative methods such as telephone and fax can be used. That said, organizations should take note that many of the speed and efficiency savings that accrue from payroll outsourcing are expedited by rapid data exchange—a process that optimally takes place through the internet.
The Payroll Outsourcing Bottom Line
The answers to these questions should act as initial signposts that guide a more detailed discussion of the payroll outsourcing option. Still, as that discussion takes place, organizations would do well not to overlook the ever-increasing flexibility of the services being offered. In fact, as an ADP white paper (Payroll Outsourcing in Europe) notes, “Outsourcing services can be picked a la carte – from simple data processing to the complete transfer of responsibility for a payroll department, from pay-slip production to financial flow management, and from overtime recording at the workplace to answering employees’ questions on their net salaries.” Only by understanding the key issues surrounding what is really offered by payroll outsourcing can an organization select the parts of the menu that will suit them best; both in terms of services and value.
Some payroll providers are professional employer organizations (PEOs) and as such take on a co-employment relationship in which the PEO acts as the administrative employer and the client acts as the worksite employer.”