Payroll Tax Outsourcing: 3 Opportunities and Threats for HR

Andrew Moran - Writer for TBR
By Andrew Moran
Nevena Radulović - Trusted Brand Reviews Editor
Edited by Nevena Radulović

Published January 19, 2023.

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Payroll outsourcing is quickly becoming a popular tactic for many businesses looking to cut costs or streamline their payroll operations. It's the act of transferring payroll administration responsibilities to a third-party source on behalf of the company. Many companies have been turning to this alternative for their payroll and other tax-related duties - and it is not something that is done lightly.

Although opting for outsourcing rather than in-house payroll handling comes with its benefits, there are some threats associated with this process as well. While outsourcing can significantly streamline payroll tax handling, employers are still held liable for federal employment taxes, even if they outsource these tasks.

With this in mind, here are some payroll tax outsourcing opportunities and threats for HR.

» HR outsourcing solutions: see whether your business needs ASO or PEO

3 Opportunities and Threats of Payroll Tax Outsourcing for HR

Here are three opportunities and threats of payroll tax outsourcing:

3 Opportunities of Payroll Tax Outsourcing

  • Improved control and visibility
  • Better administration
  • Reduced costs

3 Threats of Payroll Tax Outsourcing

  • Additional costs
  • No in-house knowledge
  • Compliance and calculation errors

3 Opportunities of Payroll Tax Outsourcing

Let's go into detail about the three opportunities payroll tax outsourcing offers:

Improved Control and Visibility

Outsourcing to another party that can manage payroll data online accurately can be highly beneficial. With today's technology, decentralized HR can benefit from digitized payroll data thanks to bolstered data visibility. And, of course, this can substantially increase HR efficiency and reduce errors.

Better Administration

It might seem counterintuitive, but outsourcing can support HR administration in general tasks, including personal file management, taxation, Social Security, and other day-to-day assignments. Ultimately, outsourcing can assist the HR department in making well-informed decisions.

Reduced Costs

Finally, outsourcing can save money on hiring additional personnel, especially during the busiest times of the year. Overall, payroll outsourcing can trim onboarding costs and scale back on training costs.

» Learn whether HR functions still outsource their services

3 Threats of Payroll Tax Outsourcing

Now, let's examine the three threats of payroll tax outsourcing:

Additional Costs

Companies often learn that outsourcing payroll could be more expensive than in-house processing due to multiple reasons. The most common one is that some suppliers might encourage clients to use their services by providing combo deals, meaning payroll firms specializing in this field may add fees for extra and usually unwanted services. As a result, it would be necessary to clearly define what services you need to avoid these fees.

No In-House Knowledge

Internal knowledge can be diminished at a significant pace for two reasons. The first is that outsourcing can result in your HR team forgetting how to do payroll. The second is that if you terminate your working relationship with an outsourcing partner, you'll need to train an HR team to do payroll.

Compliance and Calculation Errors

Failing to ensure payroll compliance and calculation errors are the two most common mistakes by payroll outsourcing service providers, which is ironic considering many businesses hire them to avoid these in the first place. However, these mistakes can cause delays in paychecks and, if they become frequent enough, this can lead to fees and penalties.

» Payroll tax vs. income tax: learn which you should pay as an employer

Outsource Payroll Tax Smartly

Payroll administration tasks are known to be overwhelming and difficult. Although engaging with a third-party source might not be the perfect solution for every employer, it's an easy fix for a complex problem.

However, if this isn't something you'd consider, adopting payroll management software could be a better alternative since it almost guarantees compliance and data accuracy.

» Not sure which payroll software to choose? Read TBR's payroll software reviews and find the one that best suits your specific needs.

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