Outsourcing Payroll

Learn everything you need to know about outsourcing payroll for your employees. Includes informative steps, tips, and frequently asked questions.

Updated on July 15th, 2020

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Payroll outsourcing refers to hiring a third-party service provider to handle payroll. The outsourced payroll provider is responsible for calculating payroll, payroll taxes, and managing all tax compliance and administrative requirements related to payroll.

Pros and Cons of Outsourcing Payroll:


  • Saves time and money.
  • Payroll is more likely to be on time and accurate.
  • Payroll is taken care of by professionals who are more familiar with laws.
  • Better compliance with government regulations.
  • Payroll outsourcing can offer enhanced security.


  • You have less control over your payroll.
  • The wrong payroll provider could result in inaccurate payroll.
  • Additional costs for services you don't need because of "all-inclusive" packages.

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When to Outsource Payroll:

1. To save time and money.

Whether you're a small business or large enterprise, it takes time to perform payroll as it demands excellent attention to detail. In addition, in-house payroll will require you to either hire a professional worker with expertise in payroll functions or train a current employee if you decide to do payroll manually. If you use online payroll providers, you'll need to purchase software, which may require additional implementation and monthly costs.

2. To maintain compliance.

Depending on your state, there are a host of government laws that could affect your payroll processes. A professional payroll provider will be responsible for staying up to date with state and federal payroll laws, which are constantly changing. Payroll service providers employ individuals who specialize in the complexities of payroll taxes and compliance with government regulations.

3. To improve security.

Whether you use in-house or outsourced payroll, you always risk identity theft, embezzlement, or record tampering. However, with a professional service, you'll typically have better security. Payroll service providers often supply backup options, multiple server locations, and high-grade systems for storing and securing company information.

How to Outsource Payroll:

1. Decide if outsourcing payroll is for you.

Not all businesses require outsourced payroll services. Depending on your budget, business size, and the expertise of your employees, you might be able to keep your payroll in-house. If your business already has a dedicated and trained employee that conducts payroll every month, then you may not need to hire a third-party payroll service provider.

However, the in-house payroll option could be costly and requires extensive training. In fact, the IRS reported that every third business that conducts in-house payroll in the U.S. makes a payroll mistake, either missing important details or misunderstanding laws. This could result in hefty penalties and fines.

How much does it cost to outsource payroll?

The costs for outsourcing payroll depends on the service provider you choose, the and frequency of payroll, the number of employees you have, state and federal tax requirements, and service bundles. Generally, small businesses can pay anywhere between $40.00 and $250.00 per month.

2. Determine your business's payroll needs.

Before you approach any professional payroll service providers, make sure you're aware of the payroll requirements needed to successfully and legally perform payroll. Because every business is different in terms of size and location, the payroll functions will differ.

Ask the following questions:

  • Do I have permanent employees or contractors?
  • What taxes do I need to pay?
  • Will I perform payroll weekly, bi-weekly, or monthly?
  • Do I have the proper licenses or permits needed to conduct payroll?
  • What benefits does my business provide?
  • Do I payout bonuses or expenses?

Once you've determined the specific payroll requirements of your business, you'll be able to approach a professional company with a clear outline. This will also save you time and help speed up the implementation process.

Which payroll processes can be outsourced?

  • Calculating employee pay.
  • Calculating state and federal payroll taxes.
  • Directly transferring funds or issuing checks.
  • Making tax withholding payments.
  • Filing any required reports.
  • Administering employee benefits.
  • Withholding social security and pension contributions.

3. Research various payroll outsourcing options.

When researching different payroll options, you should consider the size of your business as most of them offer services that are either ideal for small businesses or medium to large-sized businesses.

Outsource payroll options:

  • Hire an accountant.
  • Make use of professional payroll firms.
  • Hire major payroll service providers.

Small businesses have a wider variety of outsourcing payroll options available when compared to that of medium to large-sized businesses. With a small business, you could either hire an accountant or make use of local payroll firms or online payroll SaaS companies.

4. Evaluate your pros and cons.

Before you make your choice, you need to assess the different pros and cons of each option. For example, hiring an accountant means you'll have a professional expert overseeing your companies' payroll and reporting processes. However, this option can be quite costly, especially if the accountant charges per line.

On the other hand, online companies like Wave are great options for small businesses that want to save money and time, as their payment structure will be based on the services they use. This will generally be a subscription model.

For this step, it's best to directly reach out to companies and accountants. This process will reveal the services they offer, the benefits, prices, and any other minor details you might have overlooked.

5. Make a decision.

Now that you've zeroed-in on the outsource payroll option best suited for your business, it's time to start shortlisting your options. Make a list of the different options and include the pros and cons you've mentioned before, the prices, and any other details you learned when contacting companies in the previous step. Once this is complete, you can make a clear decision about what's best for your business.


How does outsourced payroll work?

A business outsources payroll when they hire a third-party service provider to administer payroll. These include hiring an accountant, using a local payroll firm, or large service providers.

Is outsourcing payroll cost effective?

This depends heavily on the size of your business. For example, small businesses with under 20 employees can save money by outsourcing payroll. However, large businesses should consider investing in in-house payroll because payroll service providers can get expensive as your business grows.

When should you outsource payroll?

The decision to outsource payroll will depend on your business size, tax requirements, and your business payroll needs. The top three reasons businesses opt for outsourced payroll include saving time and money, improving security, and maintaining compliance.