For businesses of all different sizes, outsourcing payroll is becoming more and more popular due to its sheer convenience — the payroll software handles the bulk of your employee admin work while you focus on some of your core day-to-day business activities; the benefits are fairly obvious.
Still, despite the numerous advantages you can expect with an outsourced payroll service, you'd be doing yourself a disservice by not understanding some of the true costs that are associated with this kind of service.
So, throughout this article, we'll be taking a look at the various financial aspects of payroll outsourcing — from the explicit costs to the more hidden expenses that companies like yours might encounter.
This isn't to say you should avoid payroll services altogether, but the ultimate aim here is to give you the knowledge needed to make an informed decision about whether your business should outsource its payroll operations or keep them in-house instead.
Initial Financial Investment
Kicking things off, the most obvious place to start looking when contemplating payroll service costs is the initial financial investment that's required to actually purchase the software.
Of course, this investment is going to vary depending on the third party payroll provider and how complex your payroll needs are, but it's still essential to be aware of some of the most common upfront costs.
It's worth mentioning at this point that there are actually several HMRC endorsed payroll services that are completely free, but these are only really effective for businesses that have very few employees. As your business begins to grow, it'll become increasingly evident that you're going to need one of the paid options instead.
Upfront Costs
There's typically some kind of initial setup phase with payroll outsourcing services where they need to configure their systems in order to properly accommodate any requirements your company may have.
This kind of thing is less common with a free part managed payroll service, but again, we'll only be focusing on the costs associated with a paid, fully managed payroll service in this article.
So, the aforementioned setup phase naturally incurs a few different costs — whether it's fees for system integration, customisation, or general data migration. As such, it's imperative that you ask for a transparent breakdown of some of these setup costs from your potential service provider so that you can assess their impact on your budget.
Service Fees
We'll come onto this in a bit more detail soon, but aside from the basic setup costs, outsourced payroll services typically charge ongoing service fees for using their platform.
These fees are usually structured in various ways — per employee, per pay run, or as a flat monthly or annual fee, for instance. Ultimately, though, the specific pricing model is going to depend on factors like the size of your workforce, how complex your payroll is, and even the range of services that you've opted for in your subscription.
Integration Expenses
Generally speaking, the cost to outsource payroll can actually go beyond simply subscribing to any given service, as actually integrating this platform into your existing business systems often requires investments in software or technology you might not already have.
As an example, your company might have to update or modernise the accounting software you're using to get the most out of the payroll software. Furthermore, you might also need to adopt new HR management tools that can integrate with the payroll system.
Whatever the integration expenses are, you've ultimately got to factor them into your overall cost assessment when deciding if you should outsource or just manage your payroll in house.
Ongoing Operational Costs
Moving on, while the initial investment is obviously a critical consideration, it's equally important that you analyse what ongoing operational costs there are with using this kind of software.
Naturally, these costs can have an impact on your company's bottom line over time, so let's explore what some of the factors that contribute to these recurring expenses are:
Recurring Service Fees
Carrying on from what we touched on earlier, let's cover the ways that these service fees are most commonly structured:
Per Employee
Under this specific pricing model, you'll end up paying a predetermined fee for each employee that's on your payroll. In general, this is normally one of the most ideal approaches if your business has a relatively stable workforce size since it provides a pretty predictable cost structure all in all.
Per Pay Run
This next option is based on the number of times you process your payroll within any given period — monthly or bi-weekly, for instance. If you've got fairly varying payroll frequencies, this approach can be slightly more advantageous than the previous option since it's less set in stone.
Flat Monthly/Annual Fee
Lastly, payroll providers can sometimes offer you a fixed monthly or even annual fee for unlimited payroll processing. While this might seem quite appealing for companies with frequent payroll runs at first glance, it's worth considering whether it'd be a cost-effective approach based on your payroll volume.
For example, you'd probably be better off with the ‘per employee' approach if you're a small or medium sized business with fewer individual payrolls to dish out each month.
Ultimately, having a clear understanding of your payroll frequency and the service fee structure is paramount in terms of how you're going to budget for this software. So, before you consider using one of these services, it's advisable to figure out what your annual payroll processing costs are first so you can be sure you're not over or underpaying.
Transaction Volume Impact
The actual volume of how many payroll transactions you need to make can have a significant impact on your ongoing operational costs, too, so consider the following:
Additional Employees
If, over time, your company starts to grow and you need to hire more employees, your payroll costs are naturally going to increase (which is why the majority of free payroll software isn't particularly sustainable).
So, if this is the case, you'll have to factor in some of the additional per-employee fees that are charged by your outsourcing provider.
Bonuses and Overtime
In an ideal world, you'd have every employee working the same amount of hours and receiving the same wages each month — nice and simple. Still, this is obviously fairly unrealistic, and any employees who receive higher bonus payouts or work overtime are generally going to lead to more complex payroll processing, which typically culminates in higher fees.
While this wouldn't be particularly problematic with a start-up business with minimal employees, complex payrolls can be an issue for some payroll services.
So, just ensure your provider can accommodate these variables and discuss what the associated costs would be beforehand.
Tax Filings and Compliance
Though this is a slightly more niche example, any changes in tax regulations or compliance requirements might mean needing more services from your outsourcing provider.
In practical terms, this could entail a specialised way of reporting/generating tax invoices or other compliance related tasks — both of which can easily result in extra fees.
So, in order to manage all of your costs effectively, simply try to work closely with your provider in order to figure out how your transaction volume can impact the total payroll service cost.
In addition, you might also want to explore certain strategies that can help you process your payroll more efficiently, such as automating particular systems or processes you might have.
Additional Services
You wouldn't normally expect this with a free payroll service provider, but many of the paid ones will offer you supplementary services that go beyond some of the basics involved in payroll processing.
Naturally, these are going to come at a price, but some of the services you might expect include:
Tax Filing
Depending on which payroll professionals you ultimately end up working with, you might get the opportunity to have any of your payroll-related tax filings handled on your behalf — including things like the submission of PAYE (Pay As You Earn) and other kinds of payroll taxes.
This type of service can definitely save you a lot of time (and reduce compliance risks) — especially if you're a larger business with a particularly high number of employees — but it often comes with an additional fee attached, too.
Employee Self-Service Portals
Sometimes, your payroll provider might even provide online access for your employees to view things like their pay stubs, tax documents, or any other kind of information regarding their benefits.
Again, while giving your employees more chances to engage in the whole payroll process and provide them with self-service capabilities, you can expect to incur various setup and ongoing maintenance costs with this particular feature.
Compliance Management
This feature generally pertains to aligning your payroll processes with some of the ever-evolving changes surrounding labour laws and other kinds of regulations.
Generally speaking, these features actually go quite a long way in terms of mitigating a lot of the risks that are associated with legal penalties, but they could still add to your outsourcing expenses unless your payroll service provider explicitly mentions that this is a free service.
You won't always need these kinds of additional services when using some form of payroll software — in fact, you can generally get by without them just fine if you already have a process for handling things like your employees' taxes or benefits, especially if you're looking to cut extra costs.
Still, if these kinds of features are something that you might find useful for your business, just ensure that you absolutely need them and that they're actually cost-effective for your organisation to have.
Just try to weigh up all the benefits of having these extra services against all of their associated fees so you can properly determine the best value for your business.
Hidden Costs
Although we've covered some of the most obvious expenses that you'll be informed of straight away, it's worth noting that many of these payroll service providers have some slightly less overt costs that won't be made immediately obvious.
It goes without saying that these will also have an impact on your bottom line, so let's get familiar with some of the more sneaky payroll charges out there:
Penalties for Errors
Firstly, understand that any inaccurate or even just delayed payroll submissions from your payroll software can result in pretty heavy penalties imposed by HMRC.
Obviously, you can generally be quite confident that your payroll provider won't cause any errors like this, but in the rare event that they do, there's a chance that they won't cover these penalties on your behalf.
In this kind of scenario, it would actually be your business that's held responsible for these financial liabilities — not them.
System Upgrades
As we touched on earlier, the more technology evolves, and better payroll software becomes available, there's a chance that your outsourcing provider could require you to upgrade some of your systems or software in order to ensure their software is still fully functional for you.
In a way, this is a nice problem to have as you'll ultimately be receiving better service, but it still comes with a possibly unexpected price that'll need to be budgeted for in the long term.
Exit Costs
Finally, if, for whatever reason, you decide you might want to terminate your outsourcing agreement, keep in mind that there's a good chance some exit fees or transition costs might be involved — whether that's data migration costs, contract termination fees, or even the cost of having to reintegrate your payroll processes back in-house if necessary.
Naturally, these hidden costs can catch you off guard if you've not thoroughly examined and thought them through when you are deciding which outsourcing payroll provider you want to partner with.
Though you might have to think outside the box to figure out what some of these hidden costs might be, you generally just need to take a long look at your outsourcing agreement — reviewing things like possible clauses related to penalties, system upgrades, and even contract termination — so you're able to better understand the potential financial implications.
Cost Mitigation Strategies
We've talked a lot about the expenses you can expect when using one of these platforms, but to wrap things up, it's worth taking a look through some of the strategies you can employ when trying to mitigate and control the costs of an outsourced payroll service:
Negotiation Strategies
- Whenever you're negotiating with potential payroll outsourcing providers, never hesitate to ask for a detailed breakdown of what their fees and services look like — you'd rather know in advance instead of finding out later when it'll cost you.
- Explore all their various options for customisation so you can ensure you're only paying for the services that your business actually needs. In general, you'll find most providers offer modular packages that let you select specific services instead.
- If it makes financial sense for your specific business, consider entering into long-term contracts with your payroll service provider. These kinds of contracts typically come with discounted pricing, which can naturally be a big help in the long term.
- Having said that, ensure the contract includes some kind of clause that allows you to be flexible in case there are any changes in things like transaction volume in your business.
Due Diligence
- Always conduct thorough due diligence before you put pen to paper and finalise your outsourcing contract — whether that's by researching providers thoroughly, examining their reputations, or checking out client references.
- Read client testimonials and reviews so you can see if there are any hidden costs — this ultimately allows you to gain insights into how transparent and reliable they'll be.
- Ultimately, though, just ensure that whoever you choose for your payroll service provider is able to align with your company's values and long-term goals. Having a strong partnership with an outsourcing provider can often make all the difference when it comes to cost efficiencies and operational improvements.
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