Payroll Outsourcing

Payroll outsourcing is the process of awarding a contract to a third-party service provider to handle all or some of the payroll processes. Companies do not need to handle payroll functions by themselves anymore; they delegate these responsibilities to external vendors or payroll service companies (PEOs or MPSPs). Outsourcing payroll tasks may involve activities including but not limited to, calculating of employee wages, processing of payroll taxes, issuing of paychecks or direct deposits, administering of employee benefits and generation of payroll reports. Outsourcing payroll functions allows organizations to simplify administrative processes, lower the costs, provide higher accuracy and compliance, and concentrate on the core business activities instead.

Example of Payroll Outsourcing

A popular manufacturing company with medium-sized operations decided to outsource its payroll operations to a specialized payroll service provider with a view to improving its administrative processes and efficiency. The company undertakes a contract with the payroll services supplier specifying the range of services, service-level agreements, pricing structure, and confidentiality aspects.

The payroll outsource agreement entails the service provider processing payroll for all employees. This involves computing the payment based on the number of hours worked, the salary rates, bonuses, and comissions, as well as the additional payment for the overtime, deductions, and taxes. The payroll service provider as well does the dispensing of paychecks or direct deposits to employees on the specified dates of pay.

Furthermore, the payroll outsourcing company takes care of payroll tax compliance by withholding and remitting federal, state, and local taxes, fill out payroll tax returns and issue tax forms such as W-2s to the end of the year. The provider keeps himself updated on the changing tax laws and regulations to secure compliance and lower the risk of penalties or fines to the manufacturing company.