Payroll Outsourcing

Payroll outsourcing has become very lucrative for companies that provide payroll services. The majority of business comes from the United States.

There are both advantages and disadvantages when using any outsource provider. Either way, it has become a popular way of handling the complexities associated with aspects of payroll. Many companies simply do not have the time to manage this area of business. Plus the savings long term cannot be ignored.

Common Payroll Services Routinely Outsourced

  • Paychecks and stubs
  • Direct deposit
  • Cost allocation reports
  • Withholding taxes, payroll deductions, and garnishments
  • All Federal and State payroll tax deposits and returns
  • Paid time off (vacation-sick-personal) tracking

Payroll Is Considered Horizontal Business Process Outsourcing

This type of outsourcing is called horizontal because the same specific functions are performed in many different industries across the board. In other words, the tasks associated with payroll processing are essentially the same for every kind of business. No matter what their primary business consists of.

Statistics

The Most Popular Services

Payroll processing – 32%
Payroll tax filing – 25%
Background screening – 24%

Facts

In the U.S. approximately 70% of all companies outsource their payroll processing.
The U.S. has the largest BPO market in the world.
Number one reason for payroll outsourcing is to save money.
Companies contract IT outsourcing providers at a higher rate.

Current Trends

The BPO market in the U.S. is trending downward. Since the U.S. is the largest buyer of this kind of outsourcing, when the U.S. spends less the entire industry begins to lose ground. The growth rate is expected to continue to slow. In 2011 the growth percentage is at 6.3%. This number is on track to drop to 5% in 2012.

The Pros

  • Outsourcing these services can save a company the expense of hiring and maintaining an in house staff. This option is particularly appealing to small companies who may not have the space or the finances to hire specifically for this area.
  • Can eliminate IRS fines for errors in payroll taxes. The IRS tax laws are extremely complex. Outsourcing companies are up to date on the changes and use sophisticated software to track tax law changes. They are able to make adjustments accordingly faster and more efficiently.
  • Eliminates concerns regarding employee turn over rate. With an outsourced staff, the company does not need to worry about hiring and training new employees if they leave the company.

The Cons

  • A company can end up contracting with an outsource provider that does not deliver as promised. Missed deadlines can mean spending more money.
  • Allowing a third party access to employee’s private information can be risky. Social security numbers, banking information etc…in the wrong hands would be devastating.
  • If a payroll provider fails to pay the correct tax amount required due to their error, the company outsourcing their services will still have to pay the taxes owed plus penalties. Even though it was the mistake of the payroll service. The IRS will still hold the company responsible.

Offshore vs Onshore

The majority of U.S. companies choose to outsource their payroll onshore. Meaning, they contract with a third party located in the U.S. The reasons vary, but many companies do so because they are not comfortable outsourcing to a foreign country.

With so much confidential information available to the outsourcer the risk of security and theft (embezzlement) is cause for concern.

Other companies are more comfortable dealing with onshore outsourcing because they know they can pursue legal matters quickly if ever necessary. On the other hand, the costs and time of pursuing a company not based in U.S. can be very difficult.

Conclusion

Based on the high percentage of U.S. companies that outsource their payroll, it’s clear it is a trend that will continue. Since most companies consider payroll processing an area they do not have time to focus on. It is beneficial from both a cost perspective and from a time perspective to contract this part of their business to an outsource provider.

Most of the areas mentioned as disadvantages can in many cases be avoided if companies take the proper steps to do extensive background checks on any payroll outsourcing company they are considering for hire.