The Pros and Cons of Outsourcing Your Payroll Function


Payroll is a crucial part of any company that constitutes a company’s record of payments, including salaries, bonuses, withheld taxes, and wages. Managing payroll services requires a team or an individual knowledgeable in the PAYE tax system.

If the company lacks skilled personnel, it can opt to outsource the services. Payroll outsourcing is hiring an individual or an external company to handle payroll functions on behalf of your business.

The Pros and Cons of Outsourcing Your Payroll Function

The payroll function can be assigned to an accountant or a specialist payroll firm. Payroll functions include:

  • Calculating payments and after that distributing accordingly.
  • Calculating other benefits involved such as incentives, commission, etc.
  • Simplifying legislative compliance such as data protection regulations.

How Payroll Outsourcing works

When a firm decides to use a payroll outsourcing service, it must establish procedures and practices to guarantee that everything works successfully.

Firstly is to set up a system for exchanging information such as earnings, names, daily or hourly rates, timesheets, sick and vacation day policies, expense allowances, and any other information used to calculate payroll.

Because the data is sensitive, the company must also guarantee that the firm or individual involved agrees to keep it safe and secure by signing a non-disclosure agreement.

The payroll service provider can utilize the information to compute payroll and distribute it to its employees on time once the system is set up and the procedures are defined. Payroll taxes, legislative compliance, and reporting can all be handled.

Outsourcing does not necessarily mean you do away with your payroll staff if they are there. Instead, this frees up these specialists to focus on more vital accounting chores like resolving arising difficulties and examining financial reports.

The Pros of Outsourcing your Payroll Function

Improves Convenience

Companies can concentrate on other primary business activities by outsourcing payroll functions.

Exchanging information such as earnings, names, daily or hourly rates, timesheets, and sick and vacation day policies with a payroll services provider will make it suitable for handling benefits programs and compensation and tracking payroll expenses.

Also Read: Filing Your Tax Return Simply, Quickly, And For Free With These Top Tips

It eliminates the need to hire payroll personnel

The most significant benefit of outsourcing the payroll function is eliminating the need for dedicated payroll personnel. Recruiting, hiring, and retaining highly qualified payroll professionals is time-consuming and costly.

It can free up essential staff and cash within the company by outsourcing the payroll function, allowing them to be transferred to core business areas.


The expenses of computing salaries, printing and issuing paychecks and paystubs are much more challenging for small businesses.

This function can be outsourced to save money over doing them internally. Outsourcing allows companies to save money by avoiding the costs of hiring a payroll specialist or an IT expert.

Whenever outsourcing the payroll function is not cost-saving compared to hiring a bookkeeper or clerk, maintaining payroll internally might be a better option in such instances. A small business with a limited budget may spend the same amount to outsource payroll as a huge corporation.

Errors are avoided

You can reduce the likelihood of errors, omissions, missed deadlines and delayed payroll tax filings by involving professionals whose primary duty and focus is payroll.

Time Saver

Another significant benefit of outsourcing the payroll function is the time it saves a company. Internal payroll teams frequently spend substantial time processing payroll each week or month.

One survey found that small firms spend 5 hours per pay period on the payroll. This amount of time could be better spent elsewhere, especially for small businesses. Companies can reclaim that time and use it on other business-related duties through outsourcing payroll functions.

Helps in the absence of a qualified professional

Outsourcing payroll may be a good idea if you do not have the necessary expertise or a qualified professional. Wages, bonuses, overtime pay, commissions, and other types of compensation are often covered by payroll services.

Benefits, pensions, retirement savings schemes, and taxes are also taken care of. Great startup CEOs who have trouble keeping a record of contract-labor filing paperwork, making direct-deposit payments, providing paystubs as scheduled, and dealing with periodic payroll tax adjustments usually seek assistance from third-party payroll professionals.

The Cons of Outsourcing your Payroll Function

Loss of Control

Giving a third party control over your payroll activities provides you less impact on the financial details and confidential data involved. Furthermore, because the data is housed on the payroll firm’s system, it may be less visible to your company.

Payroll contains the most sensitive and personal information about employees. Internally storing confidential information may pose fewer hazards. A payroll company that does not – or cannot protect this information exposes your business to employee identity and theft lawsuits.

Coordination issues

Companies must still set aside time to coordinate specific activities and tasks with the hired payroll providers, which is still time-consuming. Also, the business must cooperate all through to ensure that the third party gets the required outcomes.

Also Read: All You Need To Know About Different Salary Components

Confidentiality threats

It is critical to secure the company and employee information and implement data protection policies and contracts. Sharing company and employees’ details with a third party may weaken their secrecy.

Payroll processing is outsourced for a variety of reasons. Most firms choose to outsource this service to save time, improve convenience, eliminate payroll personnel in the company, and save money by avoiding expensive payroll system fees.

Conversely, payroll outsourcing shortcomings include businesses losing control over payroll functions, coordination issues, and confidentiality threats. Before deciding to use an outsourcing firm for payroll functions, assessing both pros and cons is critical.


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