What Do Payroll Outsourcing Companies Do?

If you’re overwhelmed by running payroll yourself and are considering options to lessen your burden, you may be thinking about using a payroll outsourcing company. Before you decide to go this route, you may be wondering just what outsourcing your payroll entails.

Download our free Complete Guide to Payroll Solutions and determine if outsourcing is right for you.

To help you understand if an outsourcing company may be the best fit for your organization, we’ll answer the most common questions about this approach, including:

What is outsourced payroll
What services do outsourced payroll companies provide
What are the pros and cons of outsourcing
How long is the initial setup with outsourced payroll
What support can I expect
Is my payroll data safe
How much does outsourced payroll cost

After reading this article, you’ll know what payroll outsourcing companies do so you can determine if partnering with one is right for you. For more guidance about understanding the scope of payroll services—and how they align with your organization’s needs, consider downloading our complete guide to payroll solutions.

What is outsourced payroll?

Payroll outsourcing means exporting some or all of your payroll administration to a specialized third-party organization. The payroll company will handle as much or as little of the administrative and compliance tasks associated with payroll as you’d like. For example, you may just want a provider to process payroll and take care of tax filings. Or you may want to offload more responsibility and outsource other functions as well like time and attendance and HR.

What services do payroll outsourcing companies provide?

Depending on the needs of your company, you can opt to just outsource basic services like processing payroll. However, there are many other offerings outsourced payroll companies can provide. These include:

Tax filing (single or multi-state)
Garnishment payments
General ledger interface
Paperless pay options like direct deposit and pay cards
Customized file transfers for 401(k) and workers’ compensation reporting
Quarterly and year-end reporting
Form W-2/1099 and 1095 processing
Affordable Care Act (ACA) reporting

In addition, many payroll companies offer other workforce management solutions, such as integrated:

Time and attendance
Scheduling
Workers compensation pay-as-you-go
HRIS
Applicant tracking and recruitment
Benefits enrollment
Performance management
Onboarding
Learning Management Systems

What are the pros and cons of outsourcing?

If you’re debating between continuing to do in house payroll vs. outsourcing, it can help to recognize the pros and cons of outsourcing.

Advantages

You’ll reduce your exposure to tax fines and penalties since payroll providers are typically responsible for the accuracy and timeliness of collecting and paying payroll-related tax liabilities.
You can increase the accuracy of payroll and tax calculations thanks to technology that helps eliminate common math errors associated with calculating hours from time and attendance.
You’ll spend less administrative time on payroll. This allows you and your staff to concentrate more on revenue-generating functions.
You’ll consistently provide timely payment to employees, which can boost satisfaction and retention.
By providing timely and accurate pay, you’ll be in compliance with various federal and state requirements regarding payments to employees.
You can leverage the vendor’s expertise to make sure everything is done right and access support from the company if issues come up.

Disadvantages

You’ll have to pay the costs of using the provider, which can run about $200-$250 per employee per year. Keep in mind that even if you are offered a package at a discounted price to start, that may double after 90 days, 6 months or 1 year, or you may face annual price increases that happen more than 1x per year.
Some payroll companies push you to do payroll yourself with no support so make sure you know what you’re getting into or this can add to an already stressful situation.
There can be hidden fees like tax filing or courier and delivery charges, especially if you don’t clarify exactly what’s included in your service or there are a lot of ancillary services tacked on that you’re paying for but don’t need or use.
If there’s a lot of turnover at your payroll vendor, you may get bounced between reps, which could impact your service level.
Since you’re relying on an outside agency, it can take longer to resolve mistakes, issues, or even just to access employee data.
You don’t have any control over the security of your data, which can be unnerving to some people.
There’s a chance the payroll company could go out of business or divert your funds.

How long is the initial setup with outsourced payroll?

No matter what vendor you choose, getting up and running with a payroll company will happen pretty quickly – less than a week for a simple payroll. Generally, all you’ll need to do to get started is:

Sign some documents
Provide banking information
Provide information on how you’re on file with the IRS and state agencies
Share your payroll data for the current year to include terminated employees for W-2's
Share information about your employees like W-4 details, direct deposit and so on

Keep in mind, however, that each business is unique so a number of factors will impact the actual time required, including:

Whether you’re a new or existing business. If you’re just getting started, there will be a few extra steps involved, like requesting a federal identification number or registering with your state’s department of revenue or unemployment assistance.
The number of employees. Onboarding a business with a couple of employees will be faster than one with 500 workers.
The scale of implementation. If you are purchasing other solutions like time and attendance or HRIS, that can cause the transition to take longer.
The time of year. Whether you partner with a vendor at the start of a new year or at some other point in time can affect the time required to get up and running.

To make the transition go as smoothly as possible, ask if the provider offers initial training so your team is properly prepared to run your first payroll. Some vendors offer self-learning courses while others have live sessions. And you’ll want to find out what ongoing assistance they offer after you’ve gotten up and running, which we’ll discuss next.

What support can I expect from payroll outsourcing companies?

With any vendor, you’ll likely have some questions about your payroll. In these cases, you’ll want to make sure you have the level of support you need to address your issues promptly so your payroll is timely and accurate. Each outsourcing payroll company has a unique service mode,l so you’ll want to understand exactly what you’ll get.

Ask if you get live support or only access to online resources like a knowledgebase or chat. If they offer live support via phone, find out if you’ll be assigned one representative. Such an arrangement will ensure you’ll reach the same point of contact who is knowledgeable about your business each time you call. When you’re new to outsourcing, having access to the same specialist can be helpful in easing your transition. And, if you prefer to speak to someone face to face, ask if they have office locations near you.

Is my payroll data safe with payroll outsourcing companies?

With the number of headline-making security breaches in recent years, including a tax and salary data breach at ADP that impacted one of the company’s employer clients, it’s not surprising to worry about placing sensitive employee data in someone else’s hands if you’re thinking about moving from in house payroll vs. outsourcing.

We understand this fear, even though incidents like this are extremely rare. When you’re evaluating payroll providers, you’ll want to make sure they’re reputable and have policies and procedures in place to protect your data. Here are some questions to ask:

What accreditations are your processes and infrastructure compliant with
Where is the data hosted
Who can access the data
How is the data backed up
How is the data stored and transmitted
What on-site security is there
What firewalls/antivirus protection is used
In the unlikely event of a breach, what are their protocols

How much does outsourced payroll cost?

While pricing for payroll outsourcing depends on a number of factors, you can generally expect to pay about $200-$250 per employee per year, no matter which of the three different ways vendors charge customers for their services:

Per Frequency: Charging fees per pay frequency is the predominant way payroll companies charge for their services. That means however often you pay employees (weekly, bi-weekly, semi-monthly or monthly), you’ll be charged a base fee and a charge for each employee you pay. With this approach, you can expect to see individual employee charges that run from $1.50 to $5 per employee and base fees per pay period between $20 and $70.
Per Employee Per Month (PEPM): This pricing structure is increasing in popularity because it often results in savings for employers. Rather than paying fees for each payroll, with PEPM, you can run unlimited payrolls and just pay one monthly base fee plus a fixed rate for the number of employees you pay each month. With this option, you can expect to pay a base fee of about $75 and around $6 per employee.
Fixed Pricing: In some situations, especially with Do-It-Yourself (DIY) online solutions, a payroll company will charge a fixed rate per month that covers a set number of employees or a range such as $65 for 1-9 workers, $125 for 10-20 and so on. That’s the only fee you’re charged for payroll processing, no matter how frequently you pay your employees each month. Be aware that some companies may cap the number of employees you’ll be able to process payroll for, so this may not be an option for every business.

In addition to payroll processing, you’ll want to understand what else is included in the price you’re quoted. In many cases, any ancillary products or services you want may be an additional cost. Think of it like an a la carte menu at a restaurant where you may have to pay separately for each service like tax filing and general ledger interface.

How to Know if Payroll Outsourcing is Right for You

Outsourcing is a good option for companies who are worried about the complexities and compliance involved in doing payroll themselves and want to rely on the expertise of a provider to get it right – and don’t mind paying a little extra for that help. If this sounds like you, find out the top considerations when choosing a payroll outsourcing company. After reviewing these factors, you may find Complete Payroll Solutions could be a good fit. Find out what getting started with us is like in our implementation guide.