What is Payroll Outsourcing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 November 2019
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Payroll outsourcing is a business practice that involves contracting with a business service to handle all functions related to a company payroll. Using an outsourcing service makes it possible to manage the payroll process without the need to maintain a large payroll department. Payroll service providers manage such diverse functions as the calculation of wages and salary, withholding of taxes, the distribution of withheld funds to the proper government agencies, and the direct deposit of net pay into the bank accounts of employees.

There are many reasons why a company may choose to go with a payroll outsourcing option. The most common is to save time and money on the handling of financial tasks associated with a payroll. By contracting with an outside vendor, it is possible to restrict the payroll team to one or two individuals within the company. Often, these two designated individuals are authorized to supply basic data to the payroll service, which then handles the rest of the details. As a result, there is no need for anyone to spend a majority of the workweek calculating hourly wages, taxes, and dealing with various types of withholding issues.


Since most payroll outsourcing services offer the option of cutting checks or direct deposit, it is possible for each employee to choose which format he or she prefers. When checks are selected, they are usually sent by courier to the client, who then distributes them to the employees. In situations where the direct deposit option is selected, employees often find their money is credited to their account the evening before their actual pay date, or early on the standard pay date.

Another benefit to using a payroll outsourcing service is that the employer does not have to keep up with changes in regulations that impact the calculation of taxes. Since the outsourcing service constantly updates their information to comply with current laws, the employer never has to worry about incurring late charges and other penalties, due to an improper calculation of the taxes due. This benefit alone can save a large corporation a significant amount of money over the course of a year.

Payroll outsourcing also prevents an employer from having to deal with technology woes. Since the payroll is processed off-site, there is never a need to upgrade payroll software or spend time and money on program or hardware glitches or any of the system issues that can occur and slow down the payroll process. As a result, employees are consistently paid on time and remain happy.

While payroll outsourcing does mean incurring another business expense on a regular basis, even small businesses often find that using this type of service saves time and money each month. Most outsourcing vendors will offer several different payroll plans that are likely to be ideal for businesses of different sizes. In terms of convenience, keeping the payroll records up to date, and keeping the withholding accurate, going with a payroll outsourcing service just makes sense.


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Post 2

@Logicfest -- don't blame taxes for all the difficulties in handling a large payroll. You've got 401(k) contributions, garnishments, health insurance and a whole host of issues that must be dealt with efficiently.

Post 1

It's a sad fact of business -- the more money you make and the more successful you become, the more cash you have to spend. When a company gets large enough, it is faced with the choice of either adding full-time employees to deal with payroll or outsourcing.

The sad thing is that things could be a lot easier if withholding taxes were streamlined. There are just too many things to keep up with when a company reaches a certain size. It is unfortunate that things are that way, but dealing with state and federal taxes is a part of doing business.

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