How Does Payroll Outsourcing Work?

by Ann Johnson; Updated September 26, 2017

Save Time and Money

Payroll can be prepared by employees within a company, or it can be outsourced to a payroll service. Many businesses have discovered that outsourcing payroll to a professional service actually saves the company time and money.

Employee Costs for In-House Payroll

When a company opts to prepare its payroll in-house, there are employee expenses for the preparer, such as payroll, social security and Medicare contributions, worker's compensation insurance, possible medical or retirement benefits and training. When a company hires an employee to handle a company's payroll, that employee must be trained in accounting and be able to calculate payroll and deductions, along with preparing payroll reports and making timely tax deposits.

Avoid High Penalties

A company will be responsible for any of the errors made by the employee. Those errors can be costly if taxes are not property filed or deposited, and if calculations have errors. Reputable payroll services guarantee their work, and will pay penalties, providing it was their error. It is entirely possible for a company to actually pay more in fines each year, than what the cost would have been for outsourcing payroll. Had they used a payroll service, either the errors would have been avoided, or the payroll company would have been responsible for penalties.

Duties of Payroll

The duties of payroll include writing checks to employees, properly calculating pay and payroll taxes, overseeing timely tax deposits and keeping accurate reports. If the employee responsible for preparing paychecks is out sick, paychecks still have to be issued. Payroll services insure that payroll is issued on time each pay period, with minimal effort from in-house company employees.

Cost of Outsourcing

The cost of hiring a payroll service is typically based on the number of employees. When the company signs up with a service, accounts are set up with the company bank and payroll service, allowing the payroll service to issue paychecks and tax deposits. Some companies opt to have the paychecks delivered directly to the company, where the checks can be signed and issued to the employees. Other companies authorize the payroll company to directly deliver or deposit the checks to the employees.

Getting Started

When setting up an account with a payroll service, company tax information and employee W-4 forms are given to the service, along with the pay rate for each employee. During each payroll period, the company contacts the payroll service and informs them of how many hours each employee worked during the recent payroll period. The payroll service then calculates the pay, any payroll deductions, and also instigates the federal tax deposit. Payroll services will also prepare and issue end of the year W-2s and 1099s, along with filing monthly, quarterly and annual payroll and tax reports.

Resources

About the Author

Ann Johnson has been a freelance writer since 1995. She previously served as the editor of a community magazine in Southern California and was also an active real-estate agent, specializing in commercial and residential properties. She has a Bachelor of Arts in communications from California State University, Fullerton.