What is payroll outsourcing?

Payroll outsourcing is the practice of delegating payroll processing to a third-party service provider. The outsourced party then assumes responsibility for payroll tasks, including calculating salaries, generating paychecks, navigating tax deductions, and maintaining all payroll records. Since the payroll process involves many routine tasks, companies often find it beneficial to outsource repetitive work to free up their internal People Ops teams for tasks that require more active involvement, like employee relations and policy-making.

The benefits of payroll outsourcing services 

There are various benefits to contracting a payroll outsourcing company. From reducing costs to streamlining payroll and HR operations, there are many reasons this option continues to gain traction.

1. Accuracy

Payroll errors are a common occurrence across all industries. Whether related to simple miscalculations, tax deductions, or compliance issues, errors in payroll can prove costly and even damage employee morale. An outsourced payroll service may have rigorous quality control methods in place to help ensure accuracy and minimize errors. 

2. Time savings

Processing payroll is a time-consuming task, and even more so as a company grows. By outsourcing payroll, HR specialists are able to allocate more time to other tasks, such as talent development, employee engagement, and diversity and inclusion.

3. Smooth onboarding

Outsourcing payroll can help seamlessly integrate new hires into an organization’s payroll system. This ensures a smooth transition for both the employee and employer, which also reduces administrative burdens.

4. Compliance

Outsourcing payroll also helps organizations remain in compliance. Maintaining compliance with tax regulations and labor laws is a vital responsibility of a human resources department. Those who work in outsourced payroll services often have a deeper understanding of these complex compliance requirements, which can alleviate the burden on HR specialists. This in and of itself has the power to reduce the risk of penalties and costly errors.

5. Cost savings

Outsourcing payroll tasks to an outside company can lead to significant cost reductions for companies. Without the need for payroll software, staff training, or associated overhead costs, companies can save money and avoid costly violations and penalties. Often, payroll outsourcing costs can be significantly less than that of internal payroll processing. 

6. Employee satisfaction

Timely and accurate payroll processing plays a role in employee satisfaction. By ensuring that employees get paid accurately and on time, companies may see their trust in leadership grow. 

7. Company focus

Outsourcing payroll services allows organizations to redirect their internal resources toward their core business functions. By relying on outsourced payroll providers, company leadership can dedicate more focus to strategic initiatives, product development, sales, and customer service.

8. Security

Data security remains of the utmost importance for businesses in the digital age. Protecting employees’ sensitive data is critical. When seeking to outsource payroll services, businesses must consider their data security needs. An outsourced payroll service with a solid reputation in data security may invest in state-of-the-art security measures to safeguard companies’ sensitive employee information from data breaches. Many companies have difficulty replicating advanced security measures internally, making outsourced payroll providers the safer option for protecting employee data.

9. Data management

Payroll outsourcing can reduce errors and improve accuracy. This allows HR staff to maintain meticulous records and reliable data, which can benefit everything from performance evaluations to health-care benefits. By hiring a specialist in outsourced payroll, organizations may have access to more detailed payroll reporting, which can be beneficial when budgeting or auditing.

The prevalence of payroll outsourcing

A 2020 global survey from Deloitte reveals that 73% of companies outsource at least some of their payroll tasks. Outsourcing is more common in regions outside North America, with 81% of respondents from Europe, the Middle East, and Africa (EMEA) and 78% of respondents from the Asia-Pacific region adopting the practice.

The Philippines, in particular, is becoming a startup hub—and that means newly formed entities need third-party payroll support. The business-friendly environment also means international corporations are looking to hire in the country. Outsourcing payroll to the Philippines allows companies to comply with local laws governing salaries, taxes, bonuses, and social security contributions.

Similarly, India’s fast-growing business community has increased the use of outsourced payroll services. This gives small and medium-sized businesses the resources they need to take care of employees so they can focus on delivering their core products and services.

According to 2019 research from the Australian Payroll Association, nearly a third of the nation’s employers outsource payroll tasks compared to 5% in 2016. The association expects this trend to continue as companies focus on efficiency and cost savings.

By prioritizing outsourced payroll solutions for employees, organizations around the world can continue to focus on their core principles and dedicate more time and effort where they’re most needed.