Payroll outsourcing: Save time, reduce risks, and simplify pay for your small business

Published Friday 17 October 2025

Table of contents

• What is payroll outsourcing?
• Why outsource payroll?
• How much does payroll outsourcing cost?
• What do payroll providers do?
• Types of payroll service
• How to choose a good payroll service provider
• Take control of your payroll with confidence
• FAQs on payroll outsourcing

Key takeaways

• Calculate your current payroll costs including time, software, and compliance risks, then compare these to outsourcing fees of $20-$100 per employee monthly to determine if outsourcing provides cost savings for your business.

• Choose between full-service providers who handle everything from start to finish or self-service options where you manage basic admin while they handle complex calculations and tax filings based on your budget and desired control level.

• Evaluate potential providers based on their service levels, data security measures, software automation capabilities, and integration with your existing accounting systems to ensure they match your business needs.

• Recognize that payroll outsourcing can save you 4-8 hours per pay period while reducing tax filing errors and compliance risks, allowing you to focus on growing your business instead of managing complex payroll tasks.

What is payroll outsourcing?

Payroll outsourcing is hiring external specialists to handle your business's payroll tasks instead of managing them in-house. These providers can handle the complete payroll process or specific parts based on your needs and budget.

Payroll providers typically help you with tasks such as:

• Calculating employee pay and deductions
• Transferring money to employee accounts
• Filing payroll taxes with government agencies
• Maintaining payroll records and compliance

Why outsource payroll?

Payroll outsourcing saves you time and helps you stay compliant. You can focus on growing your business while experts handle payroll.

Key benefits include:

• save 4–8 hours per pay period for other business activities
• reduce the risk of tax filing errors and missed deadlines
• lower your payroll costs with automated software
• rely on payroll experts for accurate and compliant payroll

How much does payroll outsourcing cost?

Payroll outsourcing typically costs $20 – $100 per employee each month, depending on your business size, service level, and provider. Many small businesses save money by outsourcing payroll when you consider time, software, and compliance risks.

Common pricing models include:

• pay $20 – $50 per employee each month for basic services
• pay a $30 – $100 base fee plus $2 – $15 per employee
• pay 2 – 10% of your total gross payroll (less common for small businesses)

Several factors affect the cost of payroll outsourcing, including:

• Number of employees and pay frequency
• Service level (basic processing vs. full-service)
• Additional features like benefits administration or time tracking
• State and local tax complexity

Add up your current payroll costs, including your time, software, and any penalty risks. Then compare these to the cost of outsourcing to see if it’s right for your business.

What do payroll providers do?

Payroll providers offer different service levels. Most can help you with tasks such as:

• calculate pay, including benefits and reimbursements
• deduct payroll taxes and other contributions
• file and pay taxes with the Internal Revenue Service (Internal Revenue Service (IRS)) using tools like the Electronic Federal Tax Payment System (Electronic Federal Tax Payment System (EFTPS))
• pay employees
• keep payroll records, including online payment history

Types of payroll service

Payroll service providers offer two main models. Choose the one that fits your business size, budget, and how much control you want over payroll.

The two main types are:

1. Full-service payroll provider

A full-service payroll provider manages your payroll from start to finish – you just supply your business and employee data. They handle the rest.

Full-service payroll is easier but usually costs more. You need a good system for sharing information, such as timesheets and updates to employee details.

2. Self-service payroll providers

Some providers handle the complex parts of payroll, while you manage basic admin. You might record time and attendance and keep employee records. The provider calculates pay, taxes, and deductions, and gives you software to make your tasks easier.

How to choose a good payroll service provider

Choose a payroll provider that matches your business needs and growth plans. Look at their service levels, costs, and security measures.

Key selection criteria:

• choose the right level of service so you only pay for what you need
• make sure your provider uses software to automate basic tasks
• ask how your provider checks and updates employee details
• check what safeguards your provider uses to protect your data
• see if your accounting software can automate payroll or if you need help from an accountant
• ask your accountant or bookkeeper if they offer payroll services

Take control of your payroll with confidence

Payroll outsourcing works best when you choose the right service for your business and budget. Start by adding up your current payroll costs and time, then compare providers based on their services, security, and integration.

The right payroll solution saves you time and reduces compliance risks. Xero payroll features help you automate payroll tasks and keep control of your financial data. Get one month free to see how easy payroll management can be.

FAQs on payroll outsourcing

Here are some common questions and answers small business owners may have about payroll outsourcing.

Is it better to outsource payroll?

For many small businesses, outsourcing payroll saves you time and helps you file taxes accurately. It also protects employee data and keeps you compliant with changing regulations.

What are the disadvantages of outsourcing payroll?

Outsourcing payroll may cost more and you may have less direct control. Choose a provider that is transparent and fits your budget. Set up a clear process for sharing employee data with your provider.

Can I switch back to in-house payroll if I want to?

Yes, you can bring your payroll back in-house at any time. Most providers offer flexible contracts. If your needs change, you can switch to Xero payroll software to manage payroll yourself.