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Could payroll outsourcing be great for your business? Understand the pros and cons

Managing salaries and taxes is a time-consuming and demanding task, which is why many companies choose to work with a payroll outsourcing provider.
Stock image of calculations to accompany article on payroll outsourcing

Managing salaries and taxes is a time-consuming and demanding task, which is why many companies choose to work with a payroll outsourcing provider.

This can be particularly attractive to businesses with team members overseas — or who are considering hiring overseas — because means they do not need to worry about getting to grips with unfamiliar regulations.

SEE ALSO: How to start a successful global mobility program in 4 steps

Partnering with a company that offers this service means forgetting about complex calculations and reporting, leaving you to focus more on other areas of your business.. 

If you are interested in hiring professionals overseas and having their payroll taken care of, while avoiding the need to set up a local legal entity, contact us today.

What is payroll outsourcing? 

To know what payroll outsourcing is, we must first be clear about what payroll is. Payroll entails calculating salaries, adding additional hours or bonuses, and also guaranteeing that employer costs are also properly determined.

It also involves the payment of the likes of medical insurance, when those form part of a professionals package.

Managing payroll properly means guaranteeing that all such costs are paid in a timely manner, because failure to do so can result in legal difficulties and financial penalties, as well as discontent among team members.

Payroll outsourcing simply means passing these responsibilities over to third-party provider, which will generally bill you for the payroll, with a commission added on top.

It is a key element of international professional employer organization (interantional PEO) services — whereby the provider, known as an employer of record (EOR) — hires overseas staff on behalf of a client.

While the speed with which overseas professionals can be hired, as well as the ability to avoid setting up an entity in the country where they are based, are a key attractions of this service, so too is the fact that it also includes payroll outsourcing. Meaning that compliance with all local laws related to maintaining those overseas team members is fully taken care of.

Whether used with overseas or domestic employees, payroll outsourcing is popular because payroll is a multilayered puzzle with lots of moving parts.  

In a January 2023 article, Forbes Advisor notes that in the past many companies struggled to “own and exercise control over all of their business functions and assets.” Hampered by their “bloated internal structures,” many companies saw outsourcing as an escape valve that, over time, became standard business strategy. 

Having a third party handle a critical function within a company, such as the administration of funds and the handling of confidential information, was once unthinkable. However, handing over control of basic procedures to experts can help save time, minimize errors, improve security, maintain compliance with government regulations and reduce costs.  

Payroll can also be hybridized and is known as “payroll co-sourcing.” Under this model, some payroll processes are performed in-house while an expert executes others. This allows particularly security-conscious businesses to retain control over sensitive or confidential information. 

How to start payroll outsourcing?  

The payroll outsourcing process differs depending on the territory in which a company and payroll service provider operate, but it usually starts with agreeing on the terms between the two parties: what the contract will cover and what the costs will be.  

When outsourced, the expert handles the payroll setup, the method of payment, the withholding of all applicable income and payroll taxes, the administration of employee deductions, the administration of any forms, and the year-end tax return. 

SEE ALSO: Call center outsourcing: 5 great destinations to consider 

Payroll processing is usually outsourced to an accounting firm or a specialized payroll firm (also called a payroll service bureau or payroll outsourcing provider). However, as highligted above, when hiring overseas, this also forms part of international PEO / EOR services.

While payroll outsourcing fees can be caluclated in a number of different ways, such as a flat fee for a given project, or a percentage of the payroll being processed, an EOR will usually charge a flat fee per employee they are administering.

How does payroll outsourcing work? 

To begin working together, the EOR or payroll outsourcing provider will ensure that its client has all the necessary records and licenses. And also, will request access to all employee information to manage payroll. 

A stock image to accompany article on payroll outsourcing.
Payroll outsourcing can save time and money

This will often involve the infromation related to those professionals being entered into a paltform that the provider manages.

After exchanging the requested information, the payroll is processed periodically, according to the client’s payment cycle or local legislation.

That will include the payroll provider withholding the necessary income and payroll taxes and deductions, with the client being provided access to all records and calculations for their own due diligence and monitoring purposes.

The payroll outsourcing provider will also submit regular reports, as well as contribute to periodic reporting to official entites according to the law.

The benefits of payroll outsourcing 

Payroll outsourcing offers a range of benefits, not least the opportunity for a company to concentrate in-house resources on other — usually customer-facing or profit-generating — areas of the business.

It can also be a major time and money saver, especially when it concerns overseas team members, due to the fact that there is no need to go through the process of learning about foreign regulations.

It also comes with the convenience of knowing that the EOR or payroll outsourcing provider will be keeping track of all changes or modifications in relevant legislation, and relaying them to you, as well as guaranteeing that they are complied with.

Tax and labor compliance mistakes can be time-consuming and costly, especially for medium and large companies with complex payrolls. This is why leaving payroll processing to an expert ensures that it is carried out using efficient management systems. That means payroll outsourcing is not only beneficial to the HR operations, but also those of the legal team.

Another key benefit of payroll outsourcing when it comes to administering overseas professionals is the fact that the provider will often be carrying out its functions in the same time zone as the employees being administered — who may be working on a completely different schedule to the client’s HQ.

Payroll outsourcing challenges 

One of the downsides to payroll outsourcing is that while the client company retains authority and is obliged to monitor its supplier, it may not be aware of every aspect of how payroll is run at all times.  

Also, when outsourcing to a payroll service provider, there is more risk of decreased data security for the firm and employees. While many companies have reliable programs, they are not exempt from violations of their security systems, and the reality is that a client does not have full control over the protections that a provider implements.

That’s why some payroll outsourcing deliberately limits the services offered. By cutting back in some areas, companies will avoid having to share some sensitive data with their payroll outsourcing provider. Of course, this is often cheaper as well. 

It is also why finding a reliable and trustworthy EOR or payroll outsourcing provider is a must. However, the organization that contracts these services will still be responsible for legally compensating its employees and remitting taxes. 

Of course, working with a well-established and reliable partner will generally entail paying a premium, meaning that outsourcing payroll can also be more expensive than managing it in-house, especially for smaller companies with limited budgets and small workforces. 

Identiftying the best provider to suit your needs is therefore critical. 

Serviap Global offers payroll outsourcing as part of EOR services 

Serviap Global is able to assist clients with international PEO / EOR services in over 100 countries worldwide.

We also offer global talent acquisition services to assist those who wish to find overseas professionals to hire directly, and our well-established recruitment networks can help you start onboarding people in a matter of weeks, if not sooner.

We are a family-run business that started in Mexico more than 12 years ago, before expanding throughout the world. While our vision is global, we are committed to the sort of service excellence and individualised treatment that comes with working with a local provider.

Contact us today to find out more about how we can assist you with global mobility.

If you were interested in this article about payroll outsourcing, check out more of our coverage here. Or read more about us.

Payroll outsourcing is a key element of EOR services

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