Paying employees is no longer limited to sending the checks to the staff, when you outsource payroll. Outsourced providers can handle several payroll duties, like administrative work and compliance procedures, but they will depend on you for accurate data, payroll approvals, strategic business decisions, and handling any employee issues. You are still the one who decides if that payroll will actually be paid, how much, when, and to whom after all, that is your business decision.
This is a very important matter to get right to ensure that expectations are fully aligned before the start of the payroll outsourcing services. Miscommunication often means problems such as delays, mistakes, and disagreements in the future. Before you even decide on a provider, make sure you know exactly what the provider's role will be and the role your team will have as well as areas where both shall work together.
Having a clear demarcation of responsibilities when it comes to payroll outsourcing is a solid and workable plan that both sides can agree on for managing payroll and knowing who was in charge when things go wrong.
What Payroll Outsourcing Services Typically Handle
For payroll outsourcing, the precise scope of work will depend on the provider and the specific service package, but most of the outsourcing deals should encompass the primary administrative tasks involved in the calculation and processing of pay.
Common responsibilities include:
- Working out wages and salaries.
- Extended working hours and approved variable pay
- Doing the calculations of payroll deductions H&W tax & payroll tax computation as applied.
- Making electronic payments from the account to receive direct deposits or payroll payments
- Completing payroll registers and reports
- Submitting specific federal, state, and local payroll tax reports
- Deducting payroll taxes if the services are included in the deal year-end payroll forms.
- Management of payroll documentation.
Not every provider includes every service automatically. Some providers may handle tax filings and payments as part of a standard package, while others may charge separately.
That is why the service agreement should define the actual responsibilities rather than relying on general statements about “full-service payroll.”
Calculations, Filings, and Payments Explained
In most circumstances, payroll calculations often require the calculation of normal gross pay, deduced figures, taxation and finally your net pay following the figures supplied by your business. For example, the provider may calculate:
- Regular wages
- Overtime
- Bonuses
- Commissions
- Employee tax withholdings
- Benefit deductions
- Retirement contributions
- Garnishments
- Employer payroll taxes
Payroll tax filings can also be handled by the provider if included in the agreement.
This may involve preparing and submitting required payroll tax returns and related reports.
Tax payments are another area that needs explicit clarification. A provider may calculate the amount due and submit the payment on your behalf, but the agreement should state who is responsible for initiating, funding, monitoring, and confirming those payments.
What Payroll Outsourcing Services Don't Take Off Your Plate
The outsourcing of payroll does not negate the personal accountability by the business owner for employment and wage determination.
Your company will usually be responsible for managing such issues as:
- Employing and dismissing employees
- Determining wages
- Approving pay raises and bonuses
- Approving overtime worked
- Deciding whether employees are regular or contractual
- Furnishing correct employee details
- Authorizing payroll once the staff has been paid
- Informing about staff change
- Handling and developing employee performance
- Keeping records of HR policies
- Approving benefits and charges from pay
- Reporting accurate information about work times and attendance
Suppose you indicate that the employee's annual salary is $70,000 instead of $75,000 to the payroll provider, it is likely the provider will correctly calculate the salary as per the data provided without verifying, as that is their role. Yet, it would still be up to you to make the original decision and give the correct details.
The same applies to employee status changes, new hires, terminations, promotions, and compensation adjustments. If your team does not communicate those changes on time, the provider cannot automatically know what changed.
Payroll Is Not the Same as HR
There is a misconception among many that human resources support will be part and parcel of payroll outsourcing.
Though that is just not always the case.
Carefully examining the content, the focus of the latter is only in payroll operations and administration while other activities remain within the boundaries of HR department which normally consists of:
- Staffing
- Labour relations
- Staff development & evaluation
- Code of conduct implementation
- Welfare package management
- Work leave provisions
- Staff record & information management
- Staff discipline & grievance procedures
Although a number of service vendors do bundle human resource (HR) works as an extra service component, you should never be quick in assuming these services are included just because you outsourced your payroll.
Where Responsibility Splits Between You and the Provider
When it comes to payroll some companies share the responsibility. Such shared responsibility can make payrolls' accountability really complicated mostly when the tasks are not explicitly outlined.
Let's take an example of payroll tax filing. The tasks of the provider might include:
- Calculation of the tax liability
- Filing of the tax return
- Submission of the papers
Still, the company might be liable for:
- Submission of correct employee and business data
- Tax registration maintenance
- Payment of the payroll account
- Payroll authorization *
- Notifying the provider of changes
Example: A New Employee
Your business:
- Hires the employee.
- Collects required information.
- Determines compensation.
- Send the information to the provider.
The provider:
- Enters the employee into the payroll system.
- Applies the appropriate payroll settings.
- Calculates the employee's pay.
- Processes the payroll.
If your business sends incorrect information, responsibility may remain with the business. If the provider enters accurate information incorrectly or fails to perform an agreed service, responsibility may shift to the provider.
Getting This in Writing Before You Start
A verbal understanding is not enough when payroll responsibilities involve employee pay, tax filings, deadlines, and sensitive financial information.
Your payroll outsourcing contract should clearly identify who is responsible for each major task.
Build a responsibility checklist
Before signing, ask the provider to confirm:
- Who enters new employees?
- Who processes terminations?
- Who approves payroll?
- Who calculates payroll taxes?
- Who files payroll tax returns?
- Who remits payroll taxes?
- Who monitors filing deadlines?
- Who handles payroll corrections?
- Who manages year-end tax forms?
- Who maintains payroll records?
- Who handles employee payroll questions?
- Who manages timekeeping integrations?
- Who is responsible for benefits deductions?
- Who handles garnishments?
- Who funds the payroll account?
- Who is responsible when an error occurs?
Also clarify deadlines and dependencies. For example, if your company must submit approved hours by Tuesday for a Friday payroll, that deadline should be documented.
Outsourced providers will be able to carry out the calculations processing reporting, payments and filings that have been agreed, whereas your business will generally still have to provide the correct information, make the decisions and authorizations and maintain control of your methods, employment decisions and communication the easiest way to go about this is to have broad definitions for all responsibilities before the first payroll.
Ensuring specific scope of work and payroll outsourcing services can ensure clarity, accountability and the management of the relationship from the beginning.
