Payroll Outsourcing Service

Top Reasons Why Your Business Needs to Outsource its Payroll Management System

Mark Robbins
Global Sales and Marketing Director
December 7, 2023
Payroll management is a critical business function. In simple terms, it is a system wherein salaries are disbursed to employees in a company according to relevant laws and regulations. Whether managed in-house or outsourced to a payroll management service provider, as long as a company employs people, it must have a system that takes care of compensating them for their services. In this blog, we look at why it makes smart business sense to outsource the payroll function.


In this regard, the size of the business or the nature of the business doesn't matter. The company in question can be a multinational enterprise, an ambitious startup dreaming of becoming the next big unicorn, or a mid-size family-run firm looking to expand its geographical footprint; the HR department will have to map out a payroll strategy across the jurisdictions in which it operates.  

However, payroll management is not as simple as handing out a salary slip. A complex series of time-consuming processes are involved in arriving at managing the payroll of each employee, including taking into account: 

  •  compliance with appropriate labour laws,  
  • employment taxation regulations at various levels (local, state, central),  
  • any applicable levies, grants and deductions, including voluntary and pre-tax deductibles, such as health, dental insurance and retirement or pension plans 
  • perks, bonuses, paid time off 

Payroll management becomes more convoluted as one considers computing individual salaries based on job positions, dealing with multiple banking networks to disperse the pay, setting up accounts for new hires, settling accounts for employees who’ve recently quit and, most importantly, dealing with the payroll of overseas staff in compliance with the laws and regulations that govern individual countries and geographies. 

Given these realities, let us understand why outsourcing payroll management systems to payroll service providers is a wise choice for businesses: 

Cost-effective, accurate & time-saving payroll management services  

Managing payroll is a cumbersome process prone to costly errors. Why wouldn’t you want someone else to take it off your plate? 

Depending on the type of business involved, payroll constitutes a significant part of the business - anywhere between 15-30 % of the gross expenses, and can go as high as 50% in service-oriented businesses. Payroll management therefore has a critical impact on business revenue and understanding how to maintain employee morale and increase employee productivity through financial incentives such as bonuses and benefits. 

On the other hand, mismanaging payroll has punitive implications - in the U.S., for example, the Internal Revenue Services, the country’s federal authority for implementing taxation, fines one in three businesses  for noncompliance with payroll procedures, such as improper record and data maintenance (inaccurate employee information is a major red flag), not honouring payroll taxes and deadlines, mistakes in withholding taxes, benefits and incorrect deductions, misidentifying full-time employees as part-timers by error or with intent to evade taxes.  

A recent survey  also pointed out that small businesses underestimate the time taken in managing payroll - calculating each employee’s gross and net pay while withholding the correct amount for state and central government taxes can be an overwhelming exercise prone to multiple errors when done manually.

Navigating payroll management challenges in the post-Covid world 

With remote and hybrid work becoming a reality in the post-pandemic world, payroll management has become increasingly challenging - with increased employee flexibility, there are now newer parameters to gauge hourly rates and assess applicable tax laws and other compliance mechanisms.  

In the 2021 edition of the EY Global Payroll Survey, for example, 58% of the respondents said that the pandemic had prioritised the payroll department’s need for evaluating “remote working policies and their impact on multi-jurisdictional payroll withholding and other elements of payroll compliance”.  

With the added burden of attracting and retaining talent in an environment beset with labour shortages in critical skill-based roles and simultaneous layoffs in the face of growing economic pressures, payroll management has become a high-priority function to help the HR function navigate an uncertain environment, limit risks of noncompliance while devising policies that attract and nurture remote/hybrid talent.  

This requires significant technological overhaul and investment when implemented in-house. However, outsourcing the payroll function to a third-party payroll service provider can work out to be the more economical function for smaller businesses, especially. 

Keeping payroll management up-to-date  

As we’ve seen earlier, non-compliance with legal and regulatory payroll requirements, even inadvertently due to manual error, is penalised by the relevant authority. Further, it directly impacts employee morale and trust in the company.

With labour and taxation laws subject to frequent changes around the world to accommodate emerging socio-economic conditions, it can get immensely difficult for payroll management teams to keep track of these developments. In the U.S. for example, inflationary pressures in recent times prompted the increase in tax brackets and social security wage base.  

In India, the Code on Wages 2019 was introduced by the Ministry of Labour and Employment in the Lok Sabha to regulate wages and bonus payments for employees in any industry, trade or business. The Code replaced four pre-existing laws, viz. - the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976. The strictest penalties for violation include imprisonment of up to three months and a fine of up to INR 1 Lakh.  

The  2021 edition of the EY Global Payroll Survey also reported that 32% of organisations surveyed cited that inaccurate source data from employees fed into the payroll system was one of the main reasons their company was flagged for payroll non-compliance. Outsourcing payroll management can definitely bridge this critical gap for organisations. 

Why choosing the right payroll management service provider is crucial 

Partnering with a payroll management service provider can alleviate several pain points. However, it is important to work with partners that: 

  • Ensure data privacy and security, as sensitive employee information, including banking details, is involved.

  • Invest in next-gen technologies, such as AI and Robotics Process Automation to keep track of employee output and source accurate data in the new reality of remote and hybrid work environments.

  • Are staffed by a multidisciplinary team of experts who can help you avoid being slapped with non-compliance fines.

Overall, outsourcing the payroll management system enables you to save time, avoid penalties, reduce payroll maintenance costs, protect employee data and attract new talent by enhancing your reputation as a timely paymaster with adaptable company policies. 

At TopSource Worldwide, our experienced team of professionals, familiar with the latest laws and regulations related to payroll requirements across multiple industries, can help you maintain all forms of statutory compliance. With presence and expertise in over 180 countries, working across 24 timezones, we are your global partner for business expansion, delivering the right solutions that enable your growth. Contact us today

    Share

Employee Cost Calculator

Get a precise estimate of how much a potential global hire may cost each month.
employee-cost-calculator-wide employee-cost-calculator-wide-1
Mark Robbins
Global Sales and Marketing Director
Global Sales and Marketing Director at TopSource Worldwide

Subscribe to our newsletter

Subscribe and receive our latest resources straight to your inbox.