Outsourcing continues to be a crucial part of international business strategy in 2021: The Deloitte 2020 Global Outsourcing Survey shows that businesses continue to pursue international outsourcing, despite Covid-19 disruption. While many different business processes can be outsourced, payroll, as a core business process, is a commonly outsourced function — particularly for larger organizations.
In this article we ask ‘what is payroll outsourcing?’, ‘how does payroll outsourcing work?’ and ‘what are the advantages and disadvantages of outsourcing payroll?’. We point out the top five benefits of outsourcing payroll and offer some tips on how to find the right payroll outsourcing provider.
1. Outsourcing payroll means engaging a third party to process the payments to your employees.
2. In a usual outsourcing process, a payroll outsourcing provider will withhold income taxes, payroll taxes and compulsory contributions, distribute payments on a regular schedule and make regular reports to the tax authorities and their client about payroll.
3. Major benefits of outsourcing payroll include cost savings, time savings, access to experts, prioritising your core business and enhanced compliance.
4. When choosing a third party to outsource payroll to, consider their reputation, compliance capabilities, information security and their ability to provide any other associated HR services.
What is Payroll Outsourcing?
A typical business has a range of services, functions and processes. Some of them will relate to the particular business in question (e.g., only businesses which are customer-facing will have a customer service department). But there are some processes which apply to nearly any business: Any business that has employees has a payroll process.
For more information on payroll itself, see What is International Payroll Processing?
These processes can be carried out either ‘in house’, or by a third party. When a business contracts with a third party to provide the service, this is known as outsourcing. Outsourcing payroll is one of the most common forms of business process outsourcing.
Note, it is possible to have a hybrid model as well, where some functions are carried out internally and some are carried out by a third party. This is sometimes known as ‘payroll co-sourcing’ (the payroll equivalent of ‘co-employment‘).
Payroll outsourcing may be performed by an accountancy firm, a specialist payroll company, (sometimes called a ‘payroll service bureau’, or ‘payroll outsourcing provider’), or, it may be carried out by a ‘professional employer organisation‘ or ‘PEO’. Where an international PEO is engaged, all employer obligations — not just payroll — are taken over by the third party company. An international PEO is also sometimes know as a global employment organization.
Payroll outsourcing may occur within country (domestic payroll processing), or internationally (global payroll processing).
Through outsourcing payroll, the following services are usually provided by a third party for the benefit of your company:
What Payroll Functions Can Be Outsourced?
Payroll is not just ‘one’ simple activity. It is a group of activities performed in tandem. When you outsource payroll, you generally outsource the following functions:
Does Payroll Outsourcing Also Cover Payments to Contractors?
It is becoming increasingly common for businesses to engage independent contractors or freelancers, rather than employees, especially when operating across international borders. Payment processing for contractors can also be outsourced, much like payroll. This is known as Contractor Management Outsourcing (CMO).
A CMO provider makes payments in international currencies, ensures that applicable taxes (such as Value-Added Tax or Goods & Services Tax) are processed, and streamlines the contractor invoicing process.
To find out more about outsourcing the payment of independent and international contractors see How to Increase Revenue through Contractor Management Outsourcing.
How Does Payroll Outsourcing Work?
While the process may differ somewhat depending on the state or the country that your business is operating in, the general process for outsourcing payroll is as follows:
What Are the Benefits of Outsourcing Payroll?
The benefits or advantages of outsourcing payroll commonly include the following:
What Are the Disadvantages of Outsourcing Payroll?
While acknowledging the benefits of outsourcing payroll, what are some of the potential downsides or disadvantages of payroll outsourcing?
It is worth noting that these perceived disadvantages can all be addressed by due diligence in choosing the right partner for outsourcing payroll.
Ideal payroll outsourcing partners will have rigorous contracts in place which ensure that all data is protected, errors are promptly fixed and that employment rules are followed.
Is Outsourcing Payroll a Good Idea?
Ultimately, the decision as to whether you should outsource your payroll means weighing the pros and cons of payroll outsourcing for your particular business. Outsourcing payroll is often a good option for:
- Small businesses and start-ups that need cost-efficient payroll processing in full compliance with the law;
- International expansion, where an enterprise is entering into a new market and are unfamiliar with local payroll processes;
- Growing businesses, that are hiring more staff and need to scale existing payroll processing;
- Mergers and acquisitions, where the new entity does not have a compliant payroll process in place.
Tips on Finding a Company to Assist with Outsourcing Payroll
Now that you know the difference an outsourced payroll provider can make to your business, you need to know how to find a trusted service provider. Consider these tips when searching for a company to provide outsourced payroll services for your business:
Before meeting with a potential provider, prepare a list of questions about the services you are considering. A good payroll provider will spend the time necessary to explain their services, and the value they can bring to your business.
Contact New Horizons for Payroll and Global PEO Solutions
New Horizons Global Partners is a specialist payroll outsourcing and shadow payroll provider. New Horizons is able to process payroll for all your employees around the world, no matter where they are based (150+ countries covered).
In addition to payroll outsourcing, New Horizons can become the Employer of Record, or ‘Global PEO’, for your international workforce, taking over all employer obligations and liabilities on behalf of clients. Contact us to learn more or to get a bespoke quotation for your business.