Outsourcing Payroll: The Pro’s and Con’s
- 02 Jun 2021
- 5 minutes read
Payroll, like sales and marketing, is an integral part of your company. It impacts not only your firm's financial stability but also the team spirit of your employees.
This article will discuss the benefits and drawbacks of outsourcing payroll for your company in 2021. But, before we get into the pros and cons of outsourcing payroll for your company, let's define payroll.
What is Payroll?
Payroll is the total of compensation an employer pays its employees. The compensation has two parts:
- Additions- like salary, bonus, overtime, commission, tips, reimbursement of expenses, holiday pay, sick pay, paternity and maternity pay
- Deductions- like income tax, National Insurance Contributions (NICs), pension contributions, employee benefits like season tickets, private insurance
It is a specialised role that necessitates the use of technical and skilled personnel. It was once assumed to be a simple accounting feature for decades, but that is no longer the case. It is now considered a specialised profession in its own right.
In layman's term, payroll is the cumulative amount of money paid to employees by an employer.
Why Is Payroll Management Necessary?
Any employer must know how to handle payroll.
It is a legal requirement to provide a traceable payroll system that records all payments, provides HMRC with monthly (RTI – real-time information) updates, and offers payslips to employees.
Salaries typically account for a large portion of a company's expenses, so correctly managing payroll is critical to managing your cash flow, which is vital to the overall operation of your business.
Many companies delegate payroll services to their accountants or payroll service providers.
These are good choices for many companies because keeping your payroll data in order and ensuring everyone is paid on time is critical to your relationship with your employees and HMRC.
At times errors are fixable, but there are penalties for late reporting, and if employees despise getting paid late, they hate being informed they've been underpaying tax, and it'll be deducted from their next paycheque much more.
What operations are protected by payroll outsourcing?
Payroll outsourcing encompasses all operations related to payroll processing and other payroll-related functions in general.
Maintaining employee records, estimating employee salaries and benefits, computing and adding incentives, distributing payroll, generating payroll related reports, and complying with government taxation laws are all part of payroll processing.
Why do business owners choose Payroll Outsourcing?
Payroll management in-house may be a costly and time-consuming job that you might be unable to afford on your own. Furthermore, even the slightest payroll error can damage your company's credibility and place you in legal trouble.
As a result, start-ups and small businesses tend to outsource their payroll processing to gain productivity and focus on other critical aspects of their sector.
Outsourcing to a specialised payroll firm often assists you in maintaining accurate records and staying on top of regulations. However, before entrusting payroll management to a third party, you should consider the benefits and disadvantages of doing so.
The pro's and con's of Payroll Outsourcing
While both small and large business owners tend to outsource payroll services to reduce their payroll burden, it also presents some serious risks to the business.
As a result, you must consider the pro's and con's of outsourcing payroll to decide whether it is appropriate for your business.
So, without further ado, let's dig deeper into the benefits and drawbacks of outsourcing payroll.
Pro's of Payroll outsourcing
1. Saves time
In-house payroll management necessitates handling large amounts of data that vary from employee to employee. Calculating deductions and net compensation takes a long time and requires extreme caution to ensure 100 per cent accuracy.
As a result, you cannot devote sufficient time and energy to your core business activities to develop your company. That's where payroll outsourcing comes into play.
When you outsource payroll to a payroll expert, you free up time to concentrate on marketing campaigns to expand your business and boost your company's workflow efficiencies.
2. Accurately calculates taxes
Payroll tax calculation can be complicated; thus, small business owners tend to outsource this task to a third-party vendor for proper tax management.
A payroll service providers calculate the taxes correctly and ensure that you pay them on time.
3. Reduces the chances of receiving fines, penalties, or inspections
Failure to meet PAYE compliance regulations can result in severe financial penalties and wasted management time, employee frustration, and exposure to costly PAYE inspections, particularly under the latest RTI regulations.
It is difficult, particularly for smaller companies, to engage, train, and retain suitably reliable or skilled employees. Moreover, inadequately trained staff can lead to costly mistakes and penalties for noncompliance – new and part-time employees, in particular, leave you highly vulnerable to penalties.
4. Provides you with peace of mind
Outsourcing your payroll to a reputable payroll provider will provide:
- You and your team with peace of mind
- Leading to a greater emphasis on work
- Increased productivity
- Employee loyalty
You will relax knowing that your staff are being compensated correctly - on time, every time - and that your enforcement obligations are being met.
More significantly, outsourcing allows you to gain access to critical skills and information at a low cost.
With almost over 44,000 pay-related cases winding up before an employment tribunal each year, a company literally cannot afford to get payroll management wrong.
Using a trustworthy, reliable, and competent provider to process your payroll in the UK would give you and your employees peace of mind that your payroll duties are being effectively and safely discharged.
5. Lowers overhead expenses
Hiring an adequate payroll service provider will assist you in lowering the direct costs of payroll processing. In-house payroll processing, for example, maybe costly because it necessitates hiring full-time bookkeepers and providing them with a suitable workspace and the necessary equipment and technology for conducting payroll-related tasks.
On the other hand, outsourcing payroll services will save you a considerable amount of money because the costs of hiring a third-party provider are very stable.
Con's of Payroll Outsourcing
1. Security breach and data protection
When it comes to payroll outsourcing, a company's worst nightmare is a data breach and identity theft.
When you send all of your confidential employee data off-site, you rely on a third party to protect your data, which may raise questions.
You could be placing your employees' personal information at risk because hackers know that payroll outsourcers are a great source of exciting data and are often targeted.
Many firms choose to keep payroll in-house because they know they can enforce strict security measures.
When you outsource your payroll, you run the risk of being linked to untrustworthy companies.
Such companies cannot cope with the specific aspects of your company's payroll, resulting in payroll errors.
There is also job efficiency, which you can be dissatisfied with if you have untrustworthy firms performing your payroll functions.
3. Delayed responses
If a payroll error occurs, the payroll service provider may fail to respond promptly, damaging the company's credibility in the market.
4. Additional expenses for the company
Many payroll service providers bundle unnecessary services into their payroll bundles to entice companies to subscribe to them. As a result, you end up paying for services that you do not need.
Not every service provider tailors its offerings and prices to the size of your business. So, choose a payroll plan that suits your budget and satisfies all of your needs.
5. Lack of Control
One of the main concerns of businesses that move from internal to outsourced payroll is a lack of power.
It is no longer possible to rush downstairs shortly after 5:00 p.m. and persuade a payroll employee to immediately input an employee and postpone payroll processing for 10 minutes.
Outsourced contractors adhere to the SLAs (service level agreements), but they depend on you to keep the end of the bargain in terms of scheduling and deadlines.
After considering the pros and cons, it is clear that outsourcing your payroll to a third party is nothing but a real benefit for your company if you choose a reputable and efficient payroll provider.
Payroll policies and regulations are constantly changing, necessitating regular updates. It can also be difficult for in-house employees to manage correctly, putting the company at risk of payroll mistakes and incurring severe fines from HMRC.
So, it is in your best interest to outsource your payroll to a reputable payroll company so that you can have peace of mind knowing that the payroll system is being done correctly and under HMRC.
- Outsourcing Payroll