The Ultimate Guide to Payroll Outsourcing

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The Ultimate Guide to Payroll Outsourcing

With the changing times in hiring and working with a global team, paying your employees the proper compensation while being compliant with the relevant laws can be challenging. 

The payroll process covers compensating employees with their annual paycheck and withholding: 

  • Necessary local income tax amounts and, 
  • Other statutory deductions. 

The income tax amounts and statutory deductions can be complex when you have a global team and can vary depending on the:

  • Annual compensation paid to an employee
  • Relevant laws the employee resides in and, 
  • Employer’s location.

When you look to expand your team in different cultures and geographies, payroll outsourcing can be a great option to pay your employees through a third-party payroll provider. 

This article aims to provide a quick guide on payroll outsourcing, its advantages and disadvantages, and why you should outsource payroll when expanding your global team.

What is Payroll Outsourcing?

Payroll outsourcing comes into play when an organization collaborates with a trusted external third-party solution to handle its payroll. 

Therefore, when you  outsource payroll, you start the process by partnering with an external service provider to manage payroll functions, which include: 

  • Payroll administration that involves efficiently compensating your employees and,
  • Compliance functions involve withholding taxes and deducting statutory contributions.

The payroll outsourcing process is a powerful alternative to in-house payroll management as 

  • It reduces the training efforts and, 
  • Reduces costs of hiring an internal team to take care of all the payroll functions. 

In other words, you save considerable administrative time and reduce expenses by partnering with an effective payroll outsourcing partner while focusing on your core business operations. 

Why Outsource Payroll?

Having your in-house payroll can be challenging, especially for smaller businesses or companies that do not have HR and accounting professionals as their staff. The process of payroll outsourcing in such scenarios can avoid hiring additional employees. 

Companies, therefore, outsource payroll for several reasons that include: 

  • Avoiding expenses of having an in-house payroll team 
  • To stay compliant with relevant payroll requirements and laws that are required from a business 
  • Ease of administrative tasks such as payroll changes when hiring or terminations, filing reports to respective government authorities, etc. 
  • Tax compliance requirements and ensuring penalties do not arise

Partnering with a GEO service will help operate, hire, and process payroll in newer markets without having to establish a legal entity

‍Benefits of Payroll Outsourcing

With the number of businesses opting to outsource payroll functions, outsourcing has advantages.  

Time-saving  

Irrespective of the size of your organization, payroll requires constant attention to every detail, including individual payments, taxes, reimbursements, and much more. Letting somebody else handle it for you saves a lot of time you can spend making strategic business plans and serving your customers better.  

Accuracy 

When you hand over your company's payroll responsibilities to a payroll management expert, you have every right to expect it to be done more effectively than how it was done in-house. Plus, accuracy every step of the way is the benchmark of a good payroll specialist.

No Report Maintenance

As long as your payroll processing is confined in-house, it is your responsibility to generate reports every time payroll is processed. HR payroll outsourcing helps you eliminate this monotonous practice as you will no longer have to process payroll in your company. 

Zero Regulatory Risk 

When you entrust the payroll process to an external party, you can avoid tensions regarding legal compliance, especially when you have an international team to manage because your payroll partner takes care of it for you.

When Should a Business Outsource Payroll? 

You must consider several factors when the question of payroll outsourcing arises. A few factors include: 

  • The number of employees or the headcount of your business 
  • Relevant local and foreign laws 
  • Whether you have a several domestic and foreign entities 

In several cases, you must also consider the time taken and the cost you incur when setting up a local payroll team. If the time taken to process payroll and the costs are high and cannot be justified, outsourcing payroll to an external payroll provider is the best bet.

Outsourcing payroll can benefit all types of companies, whether small, medium, or large; especially when your employees travel on a business trip into a new market. A local payroll provider or a global PEO service such as Multiplier can help in such instances. 

Depending on your business requirements, you can customize the payroll services you want to outsource while retaining control of certain aspects. 

When you outsource payroll, there are certain key functions that a third-party payroll provider performs, which include - 

  • Process employee compensation and withhold necessary calculations 
  • Direct deposits or issuance of checks to your employees 
  • Calculating essential local, state, and federal payroll taxes and withholding payments 
  • Filing statutory government reports and updating necessary records 
  • Administration of employee benefits 
  • Withholding necessary contributions toward social security and pension funds

When you have a global team, ensuring that all of the payroll tasks mentioned above are processed correctly and on time can get hectic. Therefore, outsourcing payroll in such a scenario will help you focus on your core business operations and help you hire the right people globally.

How does payroll outsourcing work? 

As an employer, it is crucial to understand the responsibilities of paying your employees. An incorrect payroll process can turn out to be expensive and would lead to legal and financial trouble. 

Below are the steps that a payroll outsourcing company follows: 

1. Choosing the right payroll frequency

Most employees across the globe are paid in the following approved payroll frequencies: 

  • Weekly (52 times a year) 
  • Biweekly (26 times a year) 
  • Semimonthly (24 times a year) 
  • Monthly (12 times a year) 

Although salaried employees are paid on a semimonthly or a monthly basis, certain categories of employees prefer getting paid in any of the mentioned payment frequencies.

2. Classifying your employees into the right category 

When processing payroll, it is essential that your payroll outsourcing firm classifies your employees correctly. Classifying your employees correctly is a critical factor in deciding: 

  • The business tax amount or VAT you would pay annually 
  • Amounts to withhold from an employee's paycheck 
  • Tax documents that must be filed on their behalf 

Misclassifying employees would attract penalties and hefty fines for non-compliance, not paying employment taxes, and filing correct tax returns.

The most common categories of employees include:

Another type of misclassification is exempt vs. non-exempt employees. Certain employees can be exempt from the regulations depending on the job function and the local regulating laws; certain employees can be exempt from the laws. 

For example, in the US, a non-exempt employee must be paid minimum wages and overtime pay, while an exempt employee is not protected by the Fair Labor Standards Act (FLSA). Similarly, three main categories of duties are exempt in the US, which include: 

  • Executive 
  • Professional 
  • Administrative

3. Processing Payroll and Taxes for Remote employees 

With the rise in businesses having a global remote team, withholding accurate tax amounts for your remote employees is crucial. 

Payroll outsourcing firms ensure that the responsibilities and complex challenges of processing paychecks in different regions and withholding necessary taxes are done efficiently. 

Employee payroll taxes are withheld depending on where the work is performed and apply to employees who commute between satellite offices. 

A payroll outsourcing firm ensures you are compliant with different regulations, depending on where your remote employee is conducting work, such as 

  • Registering with the relevant Income Tax Department or the Department of Revenue and, 
  • Collecting and remitting the state/municipal/local income taxes where the work is being performed.

4. Managing employees the right way 

When working with employees who are required to work on a 24/7 shift (such as employees in the medical industry - nurses, etc.), payroll outsourcing partners ensure that: 

  • You have the necessary policies in place 
  • Documenting their work timings and other crucial aspects of employment 
  • Ensure their paycheck is processed on time and all statutory benefits are catered to.

5. Detecting and preventing payroll fraud 

An outsourced payroll provider ensures that payroll system checks and payroll audits are conducted on a timely basis to ensure no anomalies with the existing payroll processes. This ensures that you do not run unnecessary payroll fraud complications while ensuring prevention policies are in place. 

6. Executing wage garnishments 

Wage garnishments are the statutory deductions such as income tax amounts and social security contributions that must be deducted from an employee's paycheck and credited to the respective authorities, such as the income tax departments. 

A payroll outsourcing company will ensure that the employee’s paychecks are credited on time, and the necessary deductions are credited to the respective government departments.

With how payroll outsourcing platforms function, it is clear that they are experts in the countries where they operate and ensure payroll accuracy and compliance are maintained.

How to choose a provider for outsourcing payroll?

All payroll risks and challenges can be mitigated when you outsource payroll tasks and challenges to an external service provider.

However, to ensure you choose the payroll provider that suits your business requirements, you must note the factors below:

  • Accuracy: When outsourcing payroll tasks, you must ensure that the payroll provider you choose has the right skills and expertise to calculate accurately. Therefore, the payroll partner must be accurate in their tax calculations and statutory deductions.
  • References and customer reviews: You must get an overview of your payroll provider's services by checking their customer reviews and references. 

You can check their online reviews on Glassdoor, Google Reviews, Trustpilot, social media platforms, and their website. This can be done by reading the feedback (positive and negative), suggestions,  and the ratings provided by their existing and current customers.

Another way to ensure the services provided are good is by requesting customer references to whom you can talk. A reference client in such cases can give direct, first-hand, and honest feedback on their experience with the services provided by the payroll provider.

  • Statutory compliance: Payroll legislation can be complex, given different regulations in different countries. Outsourcing payroll to the right service providers will be able to deliver accurate, error-free, compliant, and efficient providers is crucial.
  • Convenience: Ensuring that when you outsource payroll, your payroll provider offers convenient services, for example, HR logins, self-service portals, etc. Such services ensure your employees can check basic information with minimal guidance. An example can be downloading payslips or checking their logins and logouts.
  • Data security and legacy data management: Providing payroll and employee information is highly sensitive as the information, and the documents provided are personally identifiable. 

Therefore, you must securely save such information on company servers and while conducting online transactions. 

When you outsource payroll to a service provider, ensuring that they have stringent data security policies, a secure payroll management system, and the right infrastructure is essential. Partnering with the right provider helps in mitigating the data privacy risks.

Customized services: Different businesses have different payroll requirements based on their business requirements. You must partner with a payroll provider that offers flexible, cost-effective, accurate, and customer-centric services when outsourcing payroll.

Important points to remember while doing payroll outsourcing

There are certain essential factors that you must consider when outsourcing payroll for your business, which include: 

  • The basic and/or add-on services a payroll provider offer 
  • The security measures and procedures for payroll and confidential employee data that they follow 
  • The number of clients they have and the tenure each client has used their services for 
  • The process of tax withholding and statutory contributions calculations your service providers follow
  • The charges for the payroll outsourcing services 
  • Assistance for generating tax forms for tax filing purposes 

Customer support features for any assistance when working with a payroll outsourcing firm.

How can Multiplier Help with Payroll Outsourcing?

Multiplier is a powerful technology platform that can address and automate everything about payroll processing. 

The platform allows companies to hire, manage and pay employees anywhere worldwide, all in just a click. The best thing is that you can do all these without a local entity. 

If you want to onboard talent from one country or build an international team with ten people, each one belonging to a different country, Multiplier helps in every step of the way to create your dream hassle-free way. 

Additionally, our platform allows you to employ and pay your full-time and part-time resources and contractors globally, based on your business needs. 

The platform promises zero complications for the company and lets you gain complete ownership over your employees. 

On the other hand, our team of professionals takes care of legal compliance, taxes, and necessary payroll deductions, which can get challenging when you employ a global team. 

In a nutshell, Multiplier simplifies complex payroll and tax payments for companies, saving a great deal of time and resource use at large. The platform makes it easier to keep track of payments and approve and pay employees working for firms from anywhere in the world. 

Happy employees make a successful organization. Pay your employees on time using an advanced, error-free platform and make them even more comfortable while scaling up your business to reach new heights. 

Ready to unleash the benefits of our technology platform for your business? Get in touch with our business consultants at Multiplier today.

Frequently Asked Questions

1. What percentage of companies outsource payroll? 

73% of employers worldwide, as per a survey conducted by Deloitte, choose to outsource payroll. You can additionally learn more about different payroll statistics.

2. How much does outsourcing payroll cost? 

Employers, on average, pay about $200-$250 per employee annually.

However, partnering with an EOR platform such as Multiplier, the pricing typically ranges between $40 to $300 (depending on the type of employee you onboard), or opt for additional plans that start from $20 per month.

3. Is outsourcing payroll cost-effective?

Outsourcing payroll is cost-effective for businesses in the long run. According to a survey, businesses save up to 18% of their payroll costs.

4. How does payroll outsourcing work?

A payroll outsourcing platform follows several steps when processing payroll for their client’s employees.

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.

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