Payroll outsourcing: Pros, cons and getting started

What is payroll outsourcing and how does it work?

Payroll outsourcing is shifting a company’s payroll function from in-house to a third party. Generally, the payroll provider will:

• Calculate employee wages.
• Issue paychecks.
• Process direct deposits.
• Handle payroll tax calculation, filing and reporting.

When a company outsources payroll-related tasks, it frees up time and resources for more strategic matters. Leadership can also feel confident that payroll will be processed accurately and on time.

Legal considerations 

Paying your employees correctly and on schedule is an essential responsibility as a business owner. There are several Department of Labor Wage and Hour Division (WHD) payroll-related regulations that your company must comply with regarding minimum wage, recordkeeping and wage garnishments.

Your firm must also understand and follow payroll tax laws enforced by the IRS, as well as state and local taxing authorities. Some of the main concepts and payroll tax forms you should know and use include:

• Pay as you earn (PAYE): PAYE is sometimes known as an income-driven student loan repayment plan, but it’s also a tax withholding system. Tax gets withheld from each paycheck rather than requiring employees to make lump sum payments to satisfy their loan liability.
• IRS form W2: Your firm must file this form for each employee who earned $600 or more and had tax withheld from their pay (or would have had tax withheld).
• IRS form 940: Your company must use this form to report your annual Federal Unemployment Tax Act (FUTA) tax.
• IRS form 941: Your business must use this form to report quarterly income, Social Security and Medicare tax withheld and pay the company’s Social Security and Medicare tax bill.

Depending on your company’s location, you may have to comply with federal, state and local payroll-related regulations. Partnering with a payroll provider can help you rest easy, knowing your business is compliant.

Keep in mind, outsourcing your company’s payroll function doesn’t absolve your firm from its legal responsibilities. Your business is liable for paying payroll taxes. It’s wise to keep your organization’s address as the address of record (instead of the payroll provider’s). That way, you’ll receive prompt notice of any issues with your tax accounts.

Featured payroll software offers

OnPay

Learn More

Via OnPay’s website

Monthly fee

$40 per month plus $6 per employee

Direct deposit

Yes

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

Yes

Rippling

Learn More

Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

Advantages of outsourcing payroll

There are many advantages to outsourcing payroll. Kim Robinson, FPC and product manager at BambooHR, said those “advantages typically include the expertise in payroll management, time efficiency and cost savings such as reduced labor needs.” Outsourcing payroll to an industry expert can also help your company stay up-to-date on the latest regulatory changes and data security best practices.

Many payroll providers also offer services that go beyond payroll processing and tax filing. For example, Roll by ADP includes new hire reporting and assistance with challenging situations, like wage garnishments. Patriot Software can help you set up a 401(k) retirement savings plan for your employees.

Added perks can make your HR department’s job easier. Depending on your business operations, you may want to consider outsourcing all of your HR and payroll functions to a professional employer organization (PEO) like Rippling. Doing so can free you and other team members to focus more on growing the business and less on complying with payroll and employment-related legislation.

What features do payroll outsourcing providers offer?

Basic payroll outsourcing features range from simply processing payroll, including by direct deposits or printing checks, to more complicated tasks such as tax compliance and filing.

However, our top picks for the best payroll software and service providers offer more than just the basics. Here are some examples:

• OnPay: No tiered pricing, so one plan comes with all available features, including unlimited monthly pay runs.
• Rippling: Integrates with other business and finance software, like QuickBooks.
• Patriot Software: Provides an employee portal where workers can view pay stubs, W2s and more. 
• Homebase: Includes time tracking, so your company doesn’t need a separate service or software.
• Gusto: Gives employees a Gusto debit card, allowing them to access their pay easily.

Every payroll outsourcing partner provides a different suite of features, so it’s important to research and compare several options until you find the solution that best meets your company’s needs.

How to choose a reliable payroll outsourcing partner

Robinson said that choosing a reliable payroll outsourcing provider is a nuanced decision. “It’s often helpful to consult others in the industry to see which provider is working for them and to gather insights. Review sites can also be super helpful. When searching, you should factor in user experience, employee experience, level of customer support, data security and compliance.”

Chris Baker, president of Switch Payroll Services, said business owners should also gauge a payroll provider’s experience processing multi-state or international payroll and offering customer advice.

Costs of payroll outsourcing

The costs of payroll outsourcing vary dramatically, depending on the provider you select. For example, you can get payroll assistance without spending a dime through Payroll4Free. On the opposite end of the spectrum, QuickBooks Payroll can run up to $100 per month. Generally, if you choose a paid solution, you can expect to pay between $30 to $80, on average.

While the price of payroll outsourcing should be a consideration as you compare options, it shouldn’t be the sole determining factor behind your choice. Some of the low or no-cost providers may have significant limitations. For example, Payroll4Free is only free for your first 25 employees. If your company is larger than that, or soon will be, you’ll need to pay for the service.

Payroll outsourcing examples

Here are a few payroll outsourcing examples to help guide your decision-making process.

Let’s say you own a small company with three employees. You have a minimal budget for business expenses and you don’t need a payroll solution packed with extra features. In this case, a payroll outsourcing partner like Payroll4Free could be exactly what you need.

On the other hand, if you own a company with 30 employees, use QuickBooks accounting software and have a healthy budget for expenses, QuickBooks Payroll may be the ideal solution for your company. While it’s more expensive than many other payroll outsourcing providers, its seamless integration with your accounting system could justify the additional expense.

However, if you’re looking for a median-priced payroll provider that can also help you with other HR-related functions, Gusto could be what your business needs. In addition to payroll processing, the platform offers:

• Time tracking.
• Benefits administration.
• Paid time off management.
• Employee onboarding.

How technology supports payroll outsourcing 

Baker said technology helps payroll outsourcing because it “removes the manual processing that has been in the past, which ensures accuracy, compliance and is more cost effective. [It also] supports data security and enhances [the] employee experience [with] the ability to access personal payroll information at their fingertips.”

However, it hasn’t always been this way. The earliest payroll records were found on clay tablets from 7000 B.C. More modern payroll techniques started emerging during the Industrial Revolution, but paying employees was still a paper-based and manual process.

When 20th-century computers arrived on the scene, employees could start receiving wages through direct deposit instead of paper checks. Then, the advent of the internet ushered in the era we’re still in, making cloud computing and mobile apps common in the payroll industry.

Featured payroll software offers

OnPay

Learn More

Via OnPay’s website

Monthly fee

$40 per month plus $6 per employee

Direct deposit

Yes

SurePayroll

Learn More

Via SurePayroll’s website

Monthly fee

$29.99 per month plus $5 per employee

Direct deposit

Yes

Gusto

Learn More

Via Gusto’s website

Monthly fee

Starting at $40 plus $6 per month per employee

Direct deposit

Yes

Rippling

Learn More

Via Rippling’s website

Monthly fee

$35 per month + $8 per user

Direct deposit

Yes

Frequently asked questions (FAQs)