
Processing Payroll is Complicated | Why Not Outsource It?
Processing Payroll can be a time-consuming task that might seem daunting. But don't stress just yet. Learn how to stop processing and outsource your payroll to make your life easier. You will still be in control, but the process will be smoother than ever. Handing the job off to a specialist is the best way to ensure it gets done the right way AND on time.
Key Takeaways
- Collecting precise employee data and keeping records current are essential to ensure payroll is processed legally and without mistake.
- Human Resources professionals often possess the greatest compliance and regulatory payroll knowledge.
- Utilizing payroll automation and integration tools saves time and centralizes data. It simplifies repetitive tasks and minimizes the risk of manual errors.
- Consistent payroll schedules and recordkeeping encourage prompt payments and facilitate compliance with cross-jurisdiction.
- Regular audits, training, and worker classification are crucial to reduce compliance risks and legal exposure.
- Outsourcing payroll can provide expertise, technology, and cost savings, particularly as your organization grows more complex.
- Keeping up with technology and changing labor laws is key to streamlining payroll and keeping your team happy.
Processing payroll is about precice calculation and paying the right wages to the right workers, deducting correct taxes and making payments on time. Most large corporations use internal HR experts while mid and small-sized companies use either payroll software or a payroll provider to accomplish these steps error-free.
Utilizing tools and vendors keeps you within legal regulations and your employees happy. Getting familiar with every stage — from recording time worked to calculating taxes and printing pay stubs — simplifies the task.
But... Outsource Payroll to HR? What Does That Mean?
We find that there are a few different payroll function structures that are common, no matter what size the company. These most repeated structures are:
|
Payroll Responsibility: |
Payroll Operational Design: |
Role or Payroll Processor: |
|
Finance or Accounting |
The payroll is treated as an accounts payable or expense account. |
A CFO, Controller, or staff Accountant runs the payroll along with all their other accounting duties. |
|
Payroll Department |
Large corporatiuons often have a dedicated payroll department |
Multiple expert processors assigned to different divisions or functions. |
|
Owner or Manager |
Small companies will see this structure where an owner, an owner’s family member, or a trusted manager has the responsibility. |
Owner, family member, executive, or manager. |
|
Whoever is available |
Whoever was unlucky enough to be free on payroll processing day got stuck with the job. |
An admin, receptionist, marketing manager, recruiter, etc. |
|
Human Resources Department |
Many Human Resource functions will own the payroll process working with Finance or Accounting for integrations. |
An HR Generalist or dedicated payroll person with an HR background. |
|
Human Resources Outsourcing Firm |
More and more, companies are realizing the efficiency of hiring an outsourced firm that runs all payroll operations and can also handle HR. |
A Payroll Expert with specific knowledge in payroll compliance and related tangential payroll requirements like unemployment, disability, or garnishments. |
Sometimes payroll is just too much for one person, or an extreme waste of time for a very busy person or department.
That is when it makes most sense to outsource to an expert. If you have an internal HR department or a Human Resources professional on staff, it is oftentimes the most compliant and efficient area in which to place payroll responsibility. HR is already dealing with employees on a daily basis and Human Resources professionals have a breadth of compliance knowledge that most others do not. Even accountants running payroll are not trained in human resources areas of payroll like garnishments, unemployment, disability, leave tracking, etc. So, HR outsourcing or insourcing is a smart choice for many companies, accounting departments, or non-experts in payroll.
There are also Human Resources Outsourcing companies that have all of the HR expertise and all of the payroll compliance know-how locked up into one convenient source. These companies, good ones anyway, will take all of the stress, time, and compliance off of your plate. It may also be a good idea to actually outsource your HR and outsource your payrroll of there is a trust or confidentiality issue with your internal staff. Not every executive wants a low-level payroll person knowing what they make.
First, we will walk you through how to process payroll if you have to DIY. Next, we’ll walk you through each step to outsource payroll with clear advice.
How to Process Payroll
Payroll is something that needs to be handled with a careful eye for data, accuracy, and compliance. A reliable payroll process ensures your organization can compensate its teams promptly and comply with legal requirements while maintaining accurate payroll records for audits.
We work with businesses that can still do manual payroll with spreadsheets but mistakes and inefficiency are much more prevalent with manual methods.
1. Gather Data
To begin with, gather employee timesheets, punch cards, or approved attendance records. For hourly teams, this is your source for wage calculations. Manual input is error-prone when managing larger teams.
Digitization time-tracking tools reduce errors and expedite data entry. Verify each employee's classification and wage. Misclassifying employees or contractors causes tax and legal headaches.
Central record: Update and store job titles, pay scales, and contract terms. Employee benefits impact deductions. Collect current benefits enrollment forms to log health, retirement, and other contributions.
If an employee is new or changes status or pay, update all records immediately.
2. Calculate Gross Pay
Hourly employees get paid by multiplying hours worked by hourly rates. Keep tabs on overtime, too, as that has to be paid at a premium, usually one and a half times the regular rate.
Salary workers get a flat amount per pay period, but need to include bonuses, commissions, or one-off incentives. Double-check every calculation. This step is not insignificant.
A mistake can cascade through taxes, deductions, and payouts. A quick example: An hourly worker logs 44 hours at $20 per hour in a week. They pay the first 40 hours at $20, and the next 4 hours at $30 for overtime.
The gross pay equals $920.
*Nothing in this article is tax advice. Consult with a tax professional for your particular situation.
3. Determine Deductions
Include all necessary deductions like income taxes, social security, and Medicare. These amounts vary based on location and prevailing tax regulations. For global teams, consider country-specific taxes.
Include optional deductions, such as 401(k) or health care deductions. There will be certain employees who have wage garnishments or child support orders. Record each of these deductions.
Transparency is important. Provide staff with a detailed explanation so they understand what is deducted and why.
4. Compute Net Pay
Gross pay minus all deductions equals net pay. This is what we actually pay the employee. Verify the output to prevent expensive errors.
Manual processing amplifies the risk, so verify every step. Print paychecks or arrange for direct deposit payments of these amounts. Print pay stubs showing gross pay, all deductions, and net pay.
This establishes confidence and aids with any future conflicts.
5. Disburse Funds
Pay schedules differ. Biweekly, semi-monthly, and monthly each have advantages and disadvantages. Choose a schedule that complies with your local laws and suits your business needs.
Send funds promptly via direct deposit, wire, or check. Make sure each one is secure and correct. Payroll records should be maintained for a minimum of two years.
This isn’t only best practice; it’s the law in a lot of jurisdictions.
6. Remit & Report
File payroll tax forms on time. Late filings can bring penalties. While automated payroll tools can assist with forms and calculations, manual processors must rely on IRS Publication 15 (Circular E) for US tax rules.
Generate payroll reports displaying wages, deductions, and tax liabilities. Send withheld taxes to the government on time.
Save all payroll and tax documents in a secure, organized system for future access during audits or reviews.
Common Payroll Challenges
The payroll process is fraught with risks that can impact payroll accuracy, compliance, and trust. By learning the common payroll processing cycle problems, you can reduce mistakes, avoid fines, and develop smarter methods.
Regulatory Compliance
Payroll compliance is about more than just paying on time. Labor laws change on short notice. Overtime, minimum wage, tax rates, and benefits rules are all different by region. For a company with offices around the world, this can be challenging.
One error, whether it’s applying an incorrect tax rate or overlooking a filing deadline, can result in fines. Periodic audits of your payroll records aid in identifying these gaps ahead of time. Training that’s relevant to payroll includes changes in employment law, tax codes, and benefits rules.
Payroll software with compliance tools can track changes and flag issues. It’s time-saving and less prone to error.
Data Accuracy
Little errors in payroll information can lead to large problems. Incorrect employee information or hours worked can result in pay mistakes, tax issues, or disgruntled employees. Verify employee data prior to each pay run.
Relying on automated payroll tools reduces typos and omissions. Time tracking is another issue. Overtime recorded incorrectly, skipped breaks, or untracked travel time can all result in errors. Allowing workers to update their own info keeps things fresh and assists HR.
|
Issue |
Cause |
Solution |
|---|---|---|
|
Overtime miscalculation |
Manual entry errors, policy confusion |
Automate overtime tracking |
|
Inaccurate break time |
Missing or unlogged breaks |
Digital timekeeping system |
|
Incorrect leave accrual |
Wrong accrual rates, outdated contracts |
Review accrual rules regularly |
|
Wrong shift differential |
Not updating shift codes |
Regular payroll audits |
Worker Classification
Misclassifying workers leaves you vulnerable to tax problems and lawsuits. An employee versus an independent contractor has different tax rules, benefits, and protections. Begin with precise job descriptions so roles align with the appropriate category.
Review these profiles whenever you hire new talent or modify a position. Educate HR and payroll teams to identify typical risks, like misclassifying a full-time employee as a contractor or vice versa. Labor laws might shift, so checking workforce classification isn’t a one-and-done task.
It’s a process that requires regular care, particularly as remote work and gig positions grow in popularity.
Payroll Challenges Checklist
- Keep up with labor laws and tax rates for each location.
- Audit payroll records at least once every quarter.
- Train staff on legal basics and regular updates.
- Use payroll software to automate compliance and data checks.
- Set up clear time tracking and approval steps.
- Check all employee info before each pay run.
- Let workers update their own personal details.
- Keep job roles and contracts up to date.
- Review worker classifications as laws change.
- Avoid data lags by keeping payroll and HR systems in sync.
- Keep records for a minimum of seven years for audits and legal checks.
Optimizing payroll is about finding ways to save time, reduce errors and remain compliant everywhere you operate. Companies encounter legacy tools, sluggish processes, and fractured information. These pain points lead to frustrating delays and mistakes, particularly when teams rely on manual processes.
A payroll step audit can help identify where you lose time or miss important details.
- Check for duplicate data entry across systems.
- Find steps that remain manual and take the most time.
- Review how errors are tracked and fixed.
- Look at how payroll and HR data are shared.
- For example, it is important to ensure that the system addresses all legal and tax requirements in every region.
Automation
Payroll automation software handles duties that would otherwise consume hours, such as data entry, payslip generation, and tax computation. This transition liberates personnel for higher-level tasks and reduces errors.
Automated reminders ensure you won’t miss a payroll run or tax filing deadline, preventing expensive late fees or compliance problems. If you have a time-tracking tool, the data can feed directly into payroll, so hours are accounted for with less opportunity for human error.
The system’s built-in rules mean payroll calculations and reports are always based on up-to-the-minute figures, leaving less room for confusion or delay.
Most modern payroll vendors provide some level of software that provides guardrails like these. Payroll providers will often charge a fee for greater automation and convenience. But if you are still doing your payroll manually with an accounting system, there are standalone packages that can give you the automation you need without too many bells and whistles.
Integration
Connected payroll systems communicate with your accounting, human resources, and other business applications. For instance, integrating payroll with accounting provides you a real-time perspective on your business’s expenses and cash flow.
If your HR systems integrate with payroll, then changes in employee information, like promotions or new hires, pop up everywhere simultaneously, not just in one silo. That lowers the chance of underpaying, overpaying, or overlooking tax updates.
Third-party app integration can enhance compliance and allow you to administer global payroll from one place, making it simpler to maintain records and remain secure.
One platform means less time checking provider discrepancies or correcting data mismatches. It makes audits easier, with all your payroll, tax, and HR files in one location. This is particularly useful for global companies, where regulations and payroll differ by location.
Scalability
Scalable payroll tools that grow with your team if you hire a few more or open a new office. If your business has mixed pay schedules or varied employee types—hourly, salary, or contract—scalable systems can flex to encompass them all.
Selecting a scalable provider from the beginning indicates you will not be trapped with restrictions as your requirements evolve. Periodic reviews identify the weaknesses of your system and allow you to schedule upgrades before issues impinge on your life. Optimizing Your System
Optimizing payroll is about finding ways to save time, reduce errors and remain compliant everywhere you operate. Companies encounter legacy tools, sluggish processes, and fractured information. These pain points lead to frustrating delays and mistakes, particularly when teams rely on manual processes.
A payroll step audit can help identify where you lose time or miss important details.
- Check for duplicate data entry across systems.
- Find steps that remain manual and take the most time.
- Review how errors are tracked and fixed.
- Look at how payroll and HR data are shared.
- For example, it is important to ensure that the system addresses all legal and tax requirements in every region.
Automation
Payroll automation software handles duties that would otherwise consume hours, such as data entry, payslip generation, and tax computation. This transition liberates personnel for higher-level tasks and reduces errors.
Automated reminders ensure you won’t miss a payroll run or tax filing deadline, preventing expensive late fees or compliance problems. If you have a time-tracking tool, the data can feed directly into payroll, so hours are accounted for with less opportunity for human error.
The system’s built-in rules mean payroll calculations and reports are always based on up-to-the-minute figures, leaving less room for confusion or delay.
Most modern payroll vendors provide some level of software that provides guardrails like these. Payroll providers will often charge a fee for greater automation and convenience. But if you are still doing your payroll manually with an accounting system, there are standalone packages that can give you the automation you need without too many bells and whistles.
Integration
Connected payroll systems communicate with your accounting, human resources, and other business applications. For instance, integrating payroll with accounting provides you a real-time perspective on your business’s expenses and cash flow.
If your HR systems integrate with payroll, then changes in employee information, like promotions or new hires, pop up everywhere simultaneously, not just in one silo. That lowers the chance of underpaying, overpaying, or overlooking tax updates.
Third-party app integration can enhance compliance and allow you to administer global payroll from one place, making it simpler to maintain records and remain secure.
One platform means less time checking provider discrepancies or correcting data mismatches. It makes audits easier, with all your payroll, tax, and HR files in one location. This is particularly useful for global companies, where regulations and payroll differ by location.
Scalability
Scalable payroll tools that grow with your team if you hire a few more or open a new office. If your business has mixed pay schedules or varied employee types—hourly, salary, or contract—scalable systems can flex to encompass them all.
Selecting a scalable provider from the beginning indicates you will not be trapped with restrictions as your requirements evolve. Periodic reviews identify the weaknesses of your system and allow you to schedule upgrades before issues impinge on your life.
Optimizing Your System
Optimizing payroll is about finding ways to save time, reduce errors and remain compliant everywhere you operate. Companies encounter legacy tools, sluggish processes, and fractured information. These pain points lead to frustrating delays and mistakes, particularly when teams rely on manual processes.
A payroll step audit can help identify where you lose time or miss important details.
- Check for duplicate data entry across systems.
- Find steps that remain manual and take the most time.
- Review how errors are tracked and fixed.
- Look at how payroll and HR data are shared.
- For example, it is important to ensure that the system addresses all legal and tax requirements in every region.
Automation
Payroll automation involves software which handles duties that would otherwise consume hours, such as data entry, payslip generation, and tax computation. This transition liberates personnel for higher-level tasks and reduces errors.
Automated reminders ensure you won’t miss a payroll run or tax filing deadline, preventing expensive late fees or compliance problems. If you have a time-tracking tool, the data can feed directly into payroll, so hours are accounted for with less opportunity for human error.
The system’s built-in rules mean payroll calculations and reports are always based on up-to-the-minute figures, leaving less room for confusion or delay.
Integration
Connected payroll systems communicate with your accounting, human resources, and other business applications. For instance, integrating payroll with accounting provides you a real-time perspective on your business’s expenses and cash flow.
If your HR systems integrate with payroll, then changes in employee information, like promotions or new hires, pop up everywhere simultaneously, not just in one silo. That lowers the chance of underpaying, overpaying, or overlooking tax updates.
Third-party app integration can enhance compliance and allow you to administer global payroll from one place, making it simpler to maintain records and remain secure.
One platform means less time checking provider discrepancies or correcting data mismatches. It makes audits easier, with all your payroll, tax, and HR files in one location. This is particularly useful for global companies, where regulations and payroll differ by location.
Scalability
Scalable payroll tools that grow with your team if you hire a few more or open a new office. If your business has mixed pay schedules or varied employee types—hourly, salary, or contract—scalable systems can flex to encompass them all.
Selecting a scalable provider from the beginning indicates you will not be trapped with restrictions as your requirements evolve. Periodic reviews identify the weaknesses of your system and allow you to schedule upgrades before issues impinge on your life.
To Insource or To Outsource?
HR's Role in Payroll
HR is at the heart of the payroll process, molding how every step aligns with compliance and best practices. They keep payroll on track, ensuring employee wages are equitable and timely. This begins with collecting the appropriate information, like hours, tax codes, and benefits, and concludes with distributing pay stubs and legal documents.
The HR team looks after other important responsibilities such as submitting benefit deductions and issuing W-2's at year-end, which provide essential legal requirements.
To do all this right, HR personnel require up-to-date training on payroll regulations and the technology that facilitates these tasks. Payroll laws change, and mistakes can cost money and trust. For instance, if HR makes a mistake on benefits or tax withholdings, workers could overpay taxes or miss out on perks, leading to payroll errors that can affect morale.
Even one pay error can have a major impact. Research indicates that 35% of employees consider quitting if they are paid incorrectly once. So a solid HR crew is more than a bonus; it is a necessity. Training on payroll software, rules around reporting benefits and expenses, and when to outsource auto-enrollment for workplace pensions is important. This last bit is crucial in a lot of locations, as laws demand tight records and timely updates on who is in or out of pension plans.
No matter who has responsibility for it, Payroll is not a solo or siloed job. HR has to collaborate with tax experts, finance, accounting, and occasionally external vendors to ensure everything aligns with the payroll schedule. This means verifying that employee information, such as new hires, exits, or name changes, is up to date. Staying on top of these changes isn’t just about being organized; it’s about ensuring compliance with federal regulations.
Payroll information should be preserved for years, as the IRS or others may require it for audits or tax inspections. Manual payroll processes can take hours or days, particularly in larger companies, so teams frequently leverage software to assist in accelerating and vetting their work. Yet the human bit, diligent review and cross-team checks, still counts just as much in achieving payroll accuracy.
The payroll processor must own it — every step, from record-keeping to final reports — and set the tone for trust in pay matters. That doesn’t mean just compliance; it means always striving for transparent ways of working so employees know they can rely on being paid correctly, timely, and with all the necessary payroll details.
Finance or Accounting professionals may not want to be the face of payroll to employeesm, whereas HR is already the employee-facing department.
So… Insource to HR?
The first answer you need to find is whether you outsource payroll to your internal HR staff [insourcing] or to outsource payroll to a reliable payroll outsourced provider. If you don’t have an HR department or your HR staff is not competent and knowledgeable, then the answer is clear. You need to find a human resources outsourced solution that includes payroll.
Finding a vendor that offers all HR functions will be an addwed benefit.
If you are a Finance or Accounting professional doing payroll, and you have an internal HR function, then the first assessment is whether they have the expertise to do it effectively. If so, then you have to figure out if they have the bandwidth.
If your company has a human resources department that can handle the time and competency commitments, the by all means, negotiate an insourcing agreement to get payroll off of your shoulders.
The Outsourcing Decision
Deciding to outsource payroll is the logical move for most companies to reduce errors and accelerate processing. Outsourcing can help teams navigate complex payroll rules, varying tax laws, and changing compliance standards that can be difficult to mana. For international readers, payroll laws vary between countries, meaning a niche provider with both wide reach and localized knowledge can keep everything running smoothly.
While some think that only big companies should outsource, even little ones can experience real benefit, particularly if they have less than three employees. There’s no hard-and-fast guideline; each firm needs to evaluate its necessities, dangers, and objectives.
Why Outsource
Payroll is more than just sending money on time; it encompasses the entire payroll processing cycle. Mistakes can damage trust and incur expensive penalties. That’s why outsourcing the payroll process to dedicated firms allows companies to boost precision and comply with local and international tax regulations. This usually results in fewer payroll errors and less stress for all parties involved.
By working with an external payroll service, organizations can experiment with next-generation tech and support systems right away. There is no massive initial software investment or years of training your internal team. This can be a savvy strategy for newer firms or those scaling quickly, especially when they need to streamline their payroll operations.
HR teams prove advantageous when they waste less time on payroll tasks, allowing them to focus more on hiring and employee growth or strategic planning. For instance, an HR manager at a tech startup could concentrate on building a better team instead of stressing over employee paychecks and payroll accuracy.
Quickness and dependability are essential in a reliable payroll process. Seasoned payroll partners tend to pay sooner and with fewer hiccups. However, not every outsourcing partner is suited for every business. Some require a longer lead time, sometimes 10 days or more, which probably won’t work for everyone. It’s crucial to check how fast providers can accommodate your pay schedule.
Outsourcing can, at times, liberate a company to focus on its primary objectives. Some clients prefer not to have their payroll done by a third party, particularly if they value a closer relationship with their payroll staff and want to ensure accurate payroll calculations.
What to Look For
Choosing the right payroll partner is crucial for ensuring a reliable payroll process. Start by looking into their reputation and asking existing customers about their experience. Forget flashy advertising—good, frank reviews provide insights into what to expect from their payroll services.
Next, evaluate the range of services they offer. Some only handle basic pay slips, while others manage payroll taxes, bonuses, and even global compliance. Security is non-negotiable; since payroll data is private, ensure the provider employs robust encryption and privacy safeguards to protect employee wages and your business.
Communication is another key factor. If a partner doesn’t understand your expectations or local payroll rules, payroll mistakes can occur. There is no one-size-fits-all solution; align your partner with your size, sector, and payroll cycle to achieve a seamless payroll processing experience.
|
Criteria |
Description |
|---|---|
|
Reputation |
Check for references, client feedback, and reliability history. |
|
Service Range |
Ensure they offer all needed services, from compliance to reporting. |
|
Security Measures |
Confirm encryption, data privacy policies, and secure handling of all payroll information. |
|
Communication |
Look for transparent processes and responsive customer support. |
My Virtual HR Director has serviced many clients with payroll and other issues with verifiable success and excellence.
When to Decide
Begin with a thorough examination of your existing payroll pains. If pay cycles are late or errors continue to occur, an external specialist can assist in addressing these issues.
Growth is complicated. If you want to hire additional staff or operate in new territories, the payroll process becomes more difficult. A good payroll provider can help manage fluctuating team sizes and local regulations.
Investigate whether your own team has the time or skills to do payroll well. If they don’t, the dangers of blunders increase. Consider the complete costs beyond the sticker. Time savings, error reduction, and improved compliance all matter.
No two companies are alike, so make your selection based on your actual needs, not on hype about price or volume.
The Future of Payroll
Payroll is evolving quickly with innovative tools that assist teams in working smarter and reducing expensive mistakes. What used to take hours can now be done fast with this new tech. AI lies at the core of this transition. AI can organize information, identify mistakes, and respond to employee salary inquiries.
By 2027, sixty percent of payroll queries could be responded to by AI assistants. This allows HR teams to dedicate more hours to activities requiring a personal touch, like employee development or dealing with difficult problems. Applying AI to payroll would eliminate sixty-nine percent of errors, resulting in less late or incorrect paychecks for employees.
Cloud-based systems are hot, too. Nearly half of all organizations now run payroll tools that live in the cloud. This allows employees to access their payroll or update information from any device, which is ideal for remote teams. It means data is safer as it isn’t tied to one single computer or office.
With more companies looking to work smarter, payroll outsourcing has become the latest fad. Others bring in outside experts who employ top-notch tools to take care of payroll, taxes, and reports. This shift may assist firms in maintaining their rules and preventing fines.
At the same time, it lets HR teams focus on hiring or staff expansion instead of sifting through pay runs every week. Although this method is time-saving for most, it’s not simply about time. No, it’s about ensuring pay is always accurate and employees have confidence in the system.
A huge percentage of companies still use antiquated methods such as spreadsheets. This demonstrates a genuine demand for more modern tools that can keep up with today’s work speed. Regulations regarding compensation and working hours are constantly evolving.
This makes it imperative to leverage systems that can keep pace. Payroll tools need to be simple to update when laws arrive. This not only keeps firms safe from fines but keeps workers safe. Automatic updates for taxes or labor rules can save a ton of headache.
Global teams need tools that take care of various currencies and tax codes, so pay is accurate regardless of where employees are based. Employees desire wages that are transparent and accessible. They want their pay on demand and via their phone.
The latest on the future of payroll is that new payroll tools let staff check pay, download forms, and ask questions any time they need. Biometric time clocks, such as palm or iris scans, can automatically track hours worked with reduced potential for error. These innovations increase employee satisfaction and reduce issues with missed hours or incorrect payments.
Wrap Up
To do payroll right, it requires pointed attention and defined processes. Everything from recording work time to distributing payment counts. Minor pay mistakes stress both workers and managers. Tech tools are a lifesaver. They reduce errors and accelerate tasks. Outsourcing can free up time, but it requires trust and boundaries. HR teams provide assistance and resolve payroll problems quickly. Payroll keeps evolving as new technology arrives, such as AI and cloud systems. Letting My Virtual HR Director handle your payroll is an optimal choice if you want it to be done right.
