Guide

Payroll outsourcing: what you need to know

Payroll can become messy and stressful when you have several employees. Here’s what you need to know about outsourcing.

A small business' outsourced payroll being done on a mobile phone

What is payroll outsourcing?

Like most jobs you don’t want to do, or can’t do, there are specialists who will take payroll off your hands. Payroll providers can do everything from calculating pay and deductions to transferring money into your employee’s account and filing associated taxes. Or they might just do part of the job, depending on what you need and what you can afford.

Why outsource payroll?

Running payroll can be complicated and time-consuming. Plus there are a lot of legal requirements, which means there are serious risks to getting things wrong. For these reasons, many business owners prefer to leave it to the experts. It gives them more time, and extra peace of mind.

In addition, payroll providers are often able to do your payroll at a relatively low cost as they use software to automate many of the tasks involved.

What do payroll providers do?

Payroll providers may offer different levels of service which you can choose depending on what you need. But they’re generally all capable of:

  • working out pay (including benefits and reimbursements)
  • deducting employee income taxes and, if applicable, payroll
  • making any other deductions, such as retirement contributions
  • filing (and even paying) taxes with the ATO
  • making payments to employees
  • keeping payroll records

Types of payroll service

Payroll service providers come in many shapes and sizes. They can be accountants or bookkeepers, or specialist payroll companies. Some providers may be better at dealing with small payrolls, while others target big businesses. They also differ in the level of service they provide, and the way they deliver it. There are two broad categories.

1. Full-service payroll provider

A full-service payroll provider manages your payroll from start to finish – all you have to do is supply them with your business and employee data. They look after everything else.

Full-service payroll is generally easier but, as you’d expect, it costs more. You also need good systems in place for sharing information. They need timely access to timesheets (for hourly workers), and notice of changes to a worker’s employment terms or tax status.

2. DIY payroll providers

Many providers do the toughest parts of payroll, while leaving basic admin to you. For example, you might record time and attendance, and keep employee records. But they’ll calculate all the pay, taxes and other deductions. And they’ll set you up with software that makes your tasks straightforward.

How to choose a good payroll service provider

Payroll is a critical part of your business. You’ll want to get it right and opt for a provider that meets your needs. Here’s what to consider when choosing a payroll provider:

  • Get the right level of service: Make sure your provider delivers the right level of service – you don’t want to be paying for what you don’t need. Understand what you’re paying for, what you’ll need to handle in-house, and what you’ll pay for extra services.
  • Automate the easy stuff: Be sure your provider is using software to automate the easy stuff so you’re not paying professional fees for basic admin jobs.
  • Check employee details regularly: Ask what processes they have for checking and updating employee information. A change in an employee’s details may affect deductions and legal requirements, so providers must be vigilant about updating them.
  • Secure your data: How does your provider handle the privacy and security of your business and employee data? Ask them what safeguards are in place to ensure your data is secure.
  • Work with what you have: Check out what your accounting software can do. You may already have the means to automate payroll – maybe you just need help from an accountant who’s familiar with the software you have.
  • Work with who you know: Don’t forget that some accountants and bookkeepers are payroll providers too. Ask your accountant or bookkeeper if they provide payroll services.

Outsource payroll the right way

With payroll outsourcing, it often comes down to what’s most efficient and cost-effective for your business. It pays to do your homework and assess your business needs before making a decision. If you get the right provider, you’ll spend less time thinking about payroll and more time doing what you do best – running and growing your business.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

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