Three Reasons to Outsource Payroll
When is the best time to outsource any or all of the various pieces that make up the payroll process? Since each company is unique, the answer to that question will vary, but there are some general guidelines that a business owner can follow to make that determination. In the context of this article, when we refer to “payroll” we are including the logistical payroll process itself, legal requirements for withholding and remitting certain amounts from compensation, as well as the various other deductions handled through the payroll process. payroll does not include various human resources matters that are directly connected to the payroll process, even though the two functions are closely related. Outsourcing payroll involves hiring an independent third party to perform some or all of the steps necessary for completion of the payroll process.
Payroll is a basic business process that involves several types of inputs, the organization, filtering, and accumulation of those inputs, and then the creation of several types of outputs. For the process to operate efficiently and effectively, it requires confidentiality, consistency, and compliance, as well as other quality related factors. Each of these factors can influence the decision regarding when outsourcing is appropriate.
Above all else, the payroll process (as well as other HR matters) must be performed with strict confidentiality. Information regarding an employee-employer relationship is very sensitive, and the inappropriate disclosure of such confidential information can cause unnecessary disruption within a company. There are also legal implications that come from the disclosure of confidential information, so the process must be handled carefully. In most owner-managed businesses, because of the risks involved, the owner or a very trusted employee must take on most of the duties involved in the payroll process.
Since payroll is a very routine process that must be performed in the same order at the same time during every payroll cycle, the person (or persons) doing payroll must be able to schedule their time accordingly. Due to the confidentiality issues mentioned above, this generally puts the owner (or his designee) in the position of having to block out certain time periods, creating constraints on their ability to be involved with other facets of the business.
Since you, as an employer, are required to withhold and remit payroll taxes at the federal, state, and various local levels, administering those tax requirements can be a significant part of the payroll process. The administration functions include gathering, managing, and reporting the information, as well as paying the appropriate taxes. The payment timing requirements and amounts vary by tax type, so the time required to manage the entire process can be fairly significant.
Many employers also offer a benefits package and/or a retirement plan that involve employee participation and are commonly handled through a payroll deduction process.
Similar to the various types of payroll taxes, the administration of these programs includes gathering, managing, reporting the information, and paying the various amounts to the various providers, and again, the time commitment required can be a significant one.
When to Outsource Payroll
Generally speaking, the best time to outsource payroll is when it becomes more cost-effective to have a third party perform parts of the process than to perform them internally. This cost can be measured in terms of the compensation and benefit cost of the person responsible, as well as the opportunity cost of that person’s time. When the business owner is the person handling payroll, it is typically easy to justify the decision to outsource, since the owner should be focusing on adding value to the business.
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