Payroll Outsourcing Cost: A Breakdown of Expenses and Benefits

Introduction

Like most business owners, you always look for ways to reduce costs. One area where this is possible that is often overlooked is payroll.

Payroll is critical for any business. It ensures employees are paid correctly and on time. Though payroll can be complex, it’s often managed in-house. This is exacerbated by a lack of resources and management expertise for small to mid-sized companies. Many choose to outsource payroll to save time and money.

Like any other business expense, the cost of payroll outsourcing must be carefully evaluated against the potential benefits in order to determine feasibility. Payroll outsourcing offers reduced costs, improved compliance with tax and labor laws, and increased efficiency. However, you need to consider possible loss of control over payroll processes and potential security risks, among other potential disadvantages.

The total payroll outsourcing costs are the most crucial factor in deciding whether or not to offload your payroll. Consider the direct costs of paying a third-party provider and the indirect costs associated with transitioning to a new system or training employees on how to use it. Additionally, you will need to account for any ongoing maintenance or support fees.

Once you understand all the costs involved in payroll outsourcing, you can weigh them against the potential benefits. Outsourced payroll saves them money in the long run by reducing their internal staff requirements and freeing up time that could be better spent on other tasks.

Payroll outsourcing costs: a breakdown

What factors into overall payroll outsourcing costs?

• The company's size dictates how many workers need to be serviced by the payroll provider.
• The frequency of pay periods impacts financial scheduling and, in turn, is influenced by different local regulatory requirements.
• The number of employees per location, as the requirements of each location, may vastly differ.
• Fees associated with salary disbursement requirements, with the usual suspects being a direct deposit, cheques, and online payments.
• Additional services are required, such as tax filing services required by law.

These factors are interrelated and rarely mutually exclusive. Furthermore, their relationship is much more complicated for international organizations that span multiple locations or hire and manage workers from several globally distributed sites — even if they’re home-based. This is because of the differences in local labor legislation.

Depending on the various locations of your company’s teams, you may need to even rely on different payment processors, not to mention the usual adjustments, including:

• Exchange rate fluctuations
• Taxation legislation specifics
• Employee and independent contractor differences
• Additional contributions for various social security and other required schemes
• Minimum requirements for attendance, pay rates, and holidays/paid leaves

Compliance with local employment laws makes payroll outsourcing costs more complicated when engaging workers from various international markets. At the same time, for many organizations, that’s also what makes it worth the trouble.

Non-compliance is costly. In many territories, non-compliance comes at the cost of remediation, in which case any back pay or missing compensation needs to be paid in full to the workers involved. There are possible processing and legal fees if the issues escalate into arbitration. Then the most expensive risk is penalties and fines for going against local laws.

Outsourcing payroll to expert providers is universally safer for companies that do not have the in-house resources to handle international payroll.

Payroll outsourcing structure

Payroll companies structure their pricing in several ways, but three methods are the most common. The fee structures usually only cover payroll processing; other services that might be useful to business owners cost extra.

• Pay per frequency: Fees charged per pay frequency is the most common amongst payroll companies. This means that no matter how often employees are paid (weekly, bi-weekly, semi-monthly, or monthly), businesses will be charged for the number of employees paid each pay period. In most cases, your expenses are a base fee and then the fee per employee paid. The per-frequency payment method is ideal for businesses whose payrolls are relatively predictable and don't require extra payroll runs or many changes.
• Per employee per month: Pay-as-you-go payroll services are becoming more popular because they often result in savings for employers. Instead of paying fees for each paycheck processed, with a pay-per-month (PEPM) plan, you can run unlimited payrolls for a set monthly fee plus a per-employee rate. This pricing structure is ideal for companies with occasional or seasonal hires, as it allows them to process bonuses or commissions without accruing extra charges. In addition, businesses with a regular and predictable workforce will find that PEPM simplifies budgeting for their outsourced payroll needs.‍
• Fixed pricing: Some payroll processing companies charge a fixed monthly rate determined by the number of (or range of) employees. This type of structure means you will only be charged one fee for payroll processing, regardless of how often you pay employees monthly. However, it is essential to note that some companies may limit the number of employees you can process payroll for, so this option might only be available to some businesses. If you have a relatively small business with a consistent employee count, this could be a simpler and more affordable way to outsource your payroll needs.

What factors shoot up payroll outsourcing costs?

Several factors can increase payroll outsourcing costs aside from those mentioned above. These are extensions of the factors mentioned above. Their specificity can sometimes make for an unpleasant surprise for companies that have a clear expectation of the breakdown of costs associated with outsourcing payroll:

• The variety of types of employees necessitates different pay rates and benefits packages. It will likely cost more to outsource than if you had a simpler workforce.
• High labor costs naturally impact worker pay. Usually, however, outsourcing providers strategically operate in markets with lower labor costs compared to client locale.
• Reporting requirements for local labor compliance may require monthly, quarterly, or annual extra fees. Countries have different requirements, and the costs for these mandated actions are passed on to you.
• Varied social security and other withholding contribution requirements. While these may go into the compensation packages of your workers, any associated fees not folded in as a percentage of your employee’s gross income typically comes out of pocket.
• Outsourcing platform or service charges, including additional services, maintenance and up training, and updates. Many outsourced payroll providers offer their own platform, and it’s best to be clear about the breakdown of what you get out of their offerings and how much they cost. That way, you can also opt-out of anything you might deem unnecessary.

Product or service fees from providers also tend to increase payroll outsourcing costs. Reliable providers are upfront and transparent about these fees, showing you exactly how much you need to pay, what for, and what value it brings. In most cases, you’ll find that these fees might seem extraneous at first, but their addition affords convenience or smoother payroll processing in one way or another. Ultimately, it would still cost you more to do things on your own, in-house — and shoulder all the compliance risks.

Benefits of payroll outsourcing

That’s the fundamental overview of payroll outsourcing costs, but to balance out the information you’re weighing, here are some of the most prominent benefits of payroll outsourcing that are probably relevant to you:

Cost savings

The most crucial benefit of payroll outsourcing is that it can help your business save money. You no longer have to pay for employee benefits, training, and overhead costs associated with maintaining a dedicated in-house payroll department when you outsource your payroll.

Accuracy and compliance

Payroll outsourcing can also help improve the accuracy and compliance of your organization's payroll processes. By working with a reputable provider that uses best-in-class technology and processes, you can be sure that your employees will always be paid on time and in accordance with all relevant regulations.

Flexibility

Another big advantage of using a payroll outsourcing company is flexibility. With an outsourced solution, you can scale up or down as needed, which means that you can quickly respond to changes in your business without incurring additional costs or logistical headaches.

Peace of mind

Finally, let’s be honest: when you outsource your payroll, you can enjoy peace of mind knowing that your most important asset — your employees — are being taken care of by a team of experts. This can free up your time and energy to focus on other aspects of running your business, and you’re probably no stranger to wanting to secure peace of mind from a stressful business requirement.

Control payroll outsourcing costs with Skuad

Outsourcing payroll can be daunting, especially when it comes to cost. With Skuad, it doesn't have to be unnerving.

If you're considering expanding your business into new international territory, you shouldn't have to deal with the extra HR and payroll complications that come along with it. With Skuad's easy-to-use global employment and payroll platform and transparent pricing, outsourcing your payroll becomes much less of an issue — allowing you to focus on what matters most: continuing to grow your business.

To see just how stress-free running remote HR and payroll can be with Skuad, request a demo from us today.