Payroll involves activities of a company that are related to employees’ salaries and wages, employee’s benefits, withholding taxes from employees package and transfer of employee’s net pay into their accounts.
Payroll thus involves.
i. Identification of components that makes up employees annual/monthly/daily salary package,
ii. Classification and distribution of employee’s salary components to minimize taxes and social contributions paid on employee’s salaries by both the employer and the employee,
iii. Calculation of withholding taxes on employee’s salaries using the correct ‘tax base’ and ‘tax rate’ accordingly,
iv. Calculation of social contributions on employee’s salaries using the correct base and rate accordingly,
v. Deduction of withholding taxes and social contributions from employee’s salaries to get the net salary amount available for payment,
vi. Transfer of employee’s net salary to their various accounts/cash payment of employee’s net salary,
vii. Payment of employee’s withholding taxes and social contributions to the appropriate offices,
viii. Printing and distribution of employee’s pay slips.
Payroll outsourcing is thus defined as a practice where a company or firm contracts another firm to handle its payroll services. Some companies outsource payroll in order to concentrate on their core activities while others outsource payroll because they are small and it will be more expensive to hire a payroll expert so as to do the services in-house.
In general the benefits and advantages of payroll outsourcing are as follows:
1. Cost Savings:
a) On Fees
Big businesses can afford to maintain payroll departments. For small businesses, with fewer than 20 employees, there’s a very good chance that they will save money by outsourcing their payroll operations. Because if we do the math on the salary of a qualified payroll expert in-house compared to the service fee charged by a payroll service provider, then it would most likely be seen that the cost of the service provider is quite low. Also, if we factor in the money spend in-house on tasks like printing and distributing checks, creating tax documents, and the like. We would probably be surprised by the difference of the costs in-house and that of the service provider.
b) On Infrastructure or Maintenance Costs:
In-house payroll management means investing in paid payroll software plus upgrade costs. Since companies need the latest tax tables installed on their systems all the time, that’s an extra time and money consuming strenuous activity a company can’t evade; however, by outsourcing payroll a company can say goodbye to these maintenance and infrastructure cost with utmost ease. Also, it also eliminates the possibility of incorrect filings leading to penalties.
Payroll management is a time-consuming activity. With this burden removed, employees can focus on doing more productive things, and the company may even be able to trim staff’s size. Also Outsourcing payroll can free up staff time to pursue more important value-added and revenue-generating activities.
Payroll mistakes can be painful, angering employees and ‘ more ominously ‘ the government. A good payroll-services provider is far less likely to make a serious error than an in-house staff. Furthermore, if a big mistake is made, the company can seek financial restitution from the provider, and this is something a company can’t do with its own employees.
In-house payroll activities function as reliably as the people doing the work. With a payroll service provider, output speed and quality won’t vary in accordance with vacations and illnesses. A company also won’t have to spend time helping new hires understand payroll system.
Since payroll-services providers are specialists with vast technical resources at their disposal, they can process even the most complex payrolls at lightning-fast speed. Unlike most employers, they can also accommodate a temporary influx of seasonal workers without acquiring new systems that will remain dormant the rest of the year.
A good payroll-services provider will know all the ins and outs of payroll-related tax laws and regulatory mandates at all levels. In-house employees could try to achieve the same level of understanding, but it would take a considerable investment in time and effort.
If payments are delayed or paperwork is mishandled, it’s the payroll-services provider’s responsibility to fix things. If the provider can’t (or won’t) remedy the situation to the company’s satisfaction, then the company can sue. The company can also switch to another service provider in a snap; even if the company have to eat a portion of an existing service contract. Try firing, hiring and training an in-house payroll staff is not anything less than several weeks.
Boring, repetitive payroll work can act like an anchor on a company’s business. But the in-house staff, when freed from payroll responsibilities, will be free to focus on other, more creative work.
Does the company have the time and energy to closely supervise its in-house payroll for time and rate abuses and other shady activities? Most payroll services firms have technologies that can spot and alert clients to various types of payroll fraud, such as payment manipulation and “phantom workers.”
There’s a lot to be said for the peace of mind that outsourcing payroll services can bring to a company or business owner or manager. No headaches, no hassles: The Company is left to focus on running a profitable business.
11. Avoid Technology Headaches:
A constant question for small companies is whether they have the latest version of their payroll software and the most recent tax tables installed on their computer. Using the wrong tax tables can result in stiff penalties. Outsourcing payroll removes those headaches and keeps payroll running smoothly.
12. Access to Payroll Expertise:
Most small companies and controllers don’t have time to keep up with constantly changing regulations, withholding rates, and government forms. By outsourcing payroll, a small business can take advantage of expertise that was previously available only to big and established companies.
Payroll Service Providers are staffed with payroll experts who can answer employee’s queries on the phone, and act as a single point of contact for a company’s employees.
They can also conduct standard or specialized training sessions for a company’s staff whenever there are changes to payroll rules and regulations.
Most payroll outsourcing companies can even come down to a company’s office to conduct in-house training sessions or have a hands-on consulting session with the management & staff.
13. Direct Deposit:
Providing direct deposit is difficult if a company doesn’t use an outside payroll service. Increasingly, small businesses recognize that employees want direct deposit. Not having to make a trip to the bank is an important convenience for them. More importantly for business owners, direct deposit eliminates time-consuming and error- prone paper handling and the need to reconcile individual payroll checks every month.
14. Avoid Payroll Knowledge walking Out the Door:
If a company’s bookkeeper or controller gets a new job, they will walk out the door with their knowledge of the payroll process and what will the company do to move on. Using an outside service eliminates this business risk.
15. Complex rules and calculations:
With so many rules, by-laws, provident fund percentages for different groups, employee benefit programs, employees joining & leaving and taxes to consider, it is becoming extremely challenging to process the exact salary and reimbursements of each employee. A company must also be able to answer its employee’s queries about their payroll confidently and clearly.
Even if a company can do all this by itself, how can it be sure that everything has been taken care of? How will it verify the accuracy of its calculations? Does the company have a safe and secure mechanism to do a proper audit of its payroll processing?
16. Professional payroll processing services:
Payroll outsourcing companies provide basic to complex payroll administration for businesses. They maintain individual payroll files for each employee and compute all the salary and reimbursements on time. Annual bonus, increments, longitivity etc. are processed with ease. Printed or electronic pay slips are delivered for each employee accordingly. Such enhanced services ensure that HR professionals can focus on real HR work like staff training & development or compensation planning.
17. Avoid Internal Revenue Service’s (IRS) Penalties:
Payroll mistakes are not to be taken lightly, because while this can upset a company’s employees, filings with omissions or incorrect details raise a red flag. These mistakes lead to undesirable events such as heavy penalties and even audits.
Besides, it’s almost impossible for a small enterprise to be on the ball with the latest changes in tax regulations. Outsourcing payroll function to a professional payroll service provider saves the company from these hassles and spending time. Since professional payroll service providers have to stay abreast with all state regulations all the time, they can manage calculations and filings with utmost ease at a very nominal cost which if managed in-house otherwise, would cost the company several labor hours and penalties.
18. Increased Security:
Payroll accounting is quite a complex process which involves loads of monitoring due to inherent risks involved. Theft of personal information can cost a fortune to company. Yes, in-house employees are trustworthy; however, it requires extensive monitoring and security. Without appropriate measures of security, tampering with company information and abstraction of funds may come about which again can incur pretty heavy losses. Payroll service providers are liable to have such measures in place. With state of the art technologies in place, timely alerts are raised in case of any payroll fraud which reduces the need of 24’7 manual intervention. Data storage and protection measures, multiple server locations and backup facility ward off any potential possibility of payroll fraud.
Payroll outsourcing service providers usually invest heavy amounts of money to have such avant-garde measures in place which is not possible for a small company to have in-house. Manual bookkeeping cannot help prevent fraudulent activities like these technological systems can do. Hence, outsourcing payroll function to a vendor is a smart move to make.
19. No Risk of Losing In-House Payroll Employee:
Outsourcing payroll functionality will help a company streamline payroll process without much complication. Also, an overworked payroll employee doing multi-tasking may quit his/her job anytime and walk out with the knowledge acquired during the tenure.
The risk always looms large particularly on small businesses relying on an employee to manage multiple responsibilities. Outsourcing payroll accounting to an outsourcing service provider relieves a company from this stress. Also, output in terms of quality and accuracy will always justify the company’s investment.
20. Robust Human Resource Management System:
Having a robust HRM system is essential for any enterprise today. Outsourcing payroll accounting equips a company with a robust human resource management system offering faster processing of information and better employee management than an in- house manual human resource management system. Choosing the right payroll outsourcing service provider can give a firm a competitive edge.
List of References
1. 10 Reasons to Outsource Payroll, By John Edwards on September 24, 2007
3. http://www.payrollserve.com.sg/Articles-five-reasons-why-companies-outsource-their- payroll.html
Compiled by: Ngwese E. King, ACCA; September 2017