Payroll processing goes beyond collecting employee hours, calculating wages, and issuing paychecks. Payroll administrators must meet federal, state, and local requirements. Outsourcing payroll can help employers save time and money. Employers can focus on business growth initiatives by not having to spend hours on administrative tasks, and increased accuracy can avoid costly penalties.
What is the payroll?
Payroll involves more than mailing checks. It includes a wide variety of tasks, not all of which must be performed by the same entity. The process begins with integrating employees into the payroll system and extends to tax liability at the end of the year.
Payroll “functions” include collecting employee information, setting up automatic payments and direct deposit, tracking hours worked or schedules, calculating back pay, distributing pay stubs, and even withholding wages following court orders. It also includes managing information related to taxation processes, such as health insurance and workers’ compensation claims.
The term “payroll” can describe both the list of employees to be paid by the company and the total amount of wages and salaries the employer owes. However, in modern business, payroll generally refers to paying employees or the entity responsible for the process.
What is outsourcing?
For most of the 20th century, corporations attempted to own and control all functions and assets of a business. The economic theory at the time called for growth in all reasonable directions to take advantage of economies of scale. This vertically integrated mindset extends to the company’s internal operations as well. It wasn’t until the late 1980s that many companies, hampered by bloated internal structures, began to see the overall strategic value of “hiring” after internal work was done. Once the potential cost savings of this approach become more apparent, there is no turning back.
This act of outsourcing or “outsourcing” job functions is now recognized as a broadly viable business strategy, even if its ethical implications and social, economic, political, and cultural consequences are often overlooked. Moreover, globalization has dramatically enhanced its financial value as a short-term cost-cutting measure, opening up access to international labor at an immediately lower price than domestic labor.
Purpose Of Outsourced Payroll
In the early days of strategic outsourcing, companies were most willing to hire for low-skilled tasks outside sensitive work areas. However, many companies do the opposite today, outsourcing essential functions like customer service and money management. This has grown to include many activities typically performed by administrators or human resources – including payroll duties.
Allowing third parties to dominate corporate funds and manage compassionate information may have been unthinkable before. However, much of the payroll process involves routine tasks and follows established guidelines, so responsibility can be delegated to a trusted partner without giving up decision-making power.
Reasons to Outsource Payroll
Employers needing administrative resources or expertise to manage payroll may seek a third
party’s professional assistance. Other reasons to outsource payroll are that it helps:
Save time
When employers reduce payroll, they often have more time to monitor other initiatives critical to business growth, such as product development, customer service, and sales.
Outsourced payroll is a standout outcome for improving company efficiency. As a result, HR teams can focus on more strategic goals, such as increasing employee engagement to improve organizational productivity, rather than spending hours each pay cycle processing payroll, an onerous administrative task.
Minimize compliance and regulatory risk.
Regulatory changes affecting payroll happen quickly, making staying compliant difficult and time-consuming. For example, in Malaysia, four regulators set rules for payroll processing. They each send out notices when laws change, and your company must ensure those changes are accurately translated into payroll formulas.
It’s easy to make mistakes when updating payroll formulas, especially when they contain logical IF, AND, and OR functions. If the procedure is correct, the payroll calculation is correct, leading to problems such as wages and taxes being paid or underpaid. Unfortunately, you may only realize a mistake happened once you receive a hefty non-compliance fine.
Ability to understand reports.
Payroll operations can be a complex topic to learn and understand. When considering outsourcing, receiving payroll reports tailored to your company is a huge advantage. An outside payroll firm can help interpret the data in a way you can understand. Consider hiring a full-service firm that will provide union reporting and more as needed.
Payroll can be processed online.
Ensuring the company you hire can offer online payroll processing is vital. Online payroll processing gives your employees 24/7 access to their information, such as current pay stubs or last year’s W-2 forms. Employees can request changes to deductions and more without spending time running your business.
Data Integration
It improves data accuracy and makes information more accessible through single sign-on When payroll is fully united with time and attendance, benefits, and other HR applications.
Facilitate employee self-service
Outsourcing payroll typically allows employees to view their payroll information, log their hours and manage deductions—all from a mobile device.
Cut the expenses
The payroll provider charges a fee, but outsourcing payroll can save the company money compared to fines and penalties resulting from mistakes.
Saving time also saves you money, which can show up as lower payroll. For example, as companies scale, they can save money by outsourcing payroll rather than spending money on augmenting their in-house HR team to manage growing payroll. You can also see savings for your business by not having to maintain cloud security for payroll software or manage paperwork.
Relieve pressure
Paying employees on time and accurately is critical to your company’s success. As every HR professional knows, there is no room for error regarding payroll. However, effectively managing payroll can be a challenge for in-house teams as they try to keep up with local regulatory compliance while managing growing workforce demands. This is especially true if your company operates in multiple countries in the Asia Pacific region.
Gain local expertise
Having a team of dedicated professionals familiar with Malaysia’s local labor laws is crucial to your company. In addition, your business can benefit from your team’s years of payroll experience without the stringent protocols and multi-level verifications they follow.
This is especially useful for companies operating in different states or multiple countries. An external partner will work with you to ensure compliance in each area, freeing up your internal HR team.
Drawbacks of outsourcing payroll
Not a compatible recruiting solution
Generally, the workforce’s employment must occur in another country than the country in which they are located. This is usually a requirement of tax and employment law. Therefore, more than payroll outsourcing is needed to ensure workers’ compliance when working internationally. This requires setting up a foreign subsidiary in the respective country or using a global PEO solution.
Lost control
When processing payroll in-house, you retain control of the entire process. This means you can closely monitor quality control and ensure all employee personal data is processed following your internal procedures and commitments.
Customer Support
When issues arise with payroll processing, a third party must be trusted to resolve them. Relying on the level of customer support available may complicate fixing any bugs more than it should.
It should be noted that all of these glaring shortcomings can be addressed through due diligence when selecting the right payroll outsourcing partner.
Why should you outsource your payroll?
Employers may consider outsourcing payroll to a full-service provider when:
- They are penalized for incorrect or late tax payments
- Inability to keep up with changing employment regulations
- Failure to meet data security or recordkeeping requirements.
- Lack of resources (people and technology) to run payroll efficiently
Is outsourcing payroll a good idea?
The answer depends on the risks and benefits of outside pay for your company. Risks and benefits must be considered as to how they affect your organization’s operations.
For example, some HR professionals may be reluctant to provide third parties access to confidential company data for payroll processing and tax filing purposes. Therefore, it is worth doing your due diligence and asking what security protocols the payroll outsourcing company uses.
However, many payroll and HR outsourcing providers understand the importance of data security to businesses. As a result, they use industry-standard security protocols and regularly undergo rigorous testing and certifications, such as SOC 1 Type 2 financial audits, to ensure customer data is always protected.
How much does outsourced payroll cost?
The cost of payroll outsourcing usually depends on the payroll frequency, the total number of employees, and the specific services outsourced. Usually, there is a processing fee for the annual BA and Payroll.
Cost to Outsource Payroll.
Payroll outsourcing costs generally depend on payroll frequency, the number of employees, and the specific services being outsourced. There is usually a per-payroll processing fee and an annual base fee. ADP works with employers to determine the right payroll setup for their business, whether a start-up company or an international enterprise.
Conclusion
If you are thinking of outsourcing payroll, consider all the benefits that come with it. The ideal payroll outsourcing partner will have strict contracts that ensure all data is protected, errors are corrected quickly, and employment rules are followed. There are many factors to consider when considering outsourcing HR and Payroll. Partnering with the best accounting firms in Dubai that offer expert payroll outsourcing services can add value to your business. The benefits of outsourcing the payroll function include saving time and reducing compliance risk. Consider the pros and cons of outsourced payroll and the benefits to your organization before deciding.