How much does it cost to outsource payroll?

The Deloitte Global Payroll Benchmarking Survey has shown that 73% percent of organizations outsource some aspect of payroll. A similar survey conducted by Ernst & Young has found the number of businesses that either co-source or outsource payroll operations to trend around 64%.

Outsourcing payroll can have many advantages for businesses because it frees up internal capacities which can then be used to drive business growth and ensures that tax and payroll compliance is handled by experts. But there is one question that always comes up somewhere along the way and that is: How much does outsourcing payroll cost?

There are many different factors that can drive up payroll outsourcing costs, and the fact that there are different pricing models providers use to set their service fees makes it all the more complicated to quantify the actual cost of outsourcing payroll. 

In this blog post, we’ll dive deep into payroll outsourcing costs to help you understand the different pricing models and cost factors that need to be considered. Plus, we’ll share some valuable tips on how to reduce your payroll outsourcing costs.

Outsourcing payroll means transferring the responsibility for some or all payroll processes to a third party rather than processing payroll in-house. It is up to the business to decide which parts of payroll will be outsourced. Payroll processes that lend themselves to outsourcing include payroll calculations, employee benefits management, and statutory reporting of payroll taxes. It is also possible to outsource payroll entirely to a third party. This is known as fully managed payroll.

Using a payroll service provider to handle all things payroll comes with numerous benefits. The advantages of payroll outsourcing notably include time savings, enhanced payroll compliance, and a decreased risk of payroll errors. Outsourcing payroll can also help reduce global payroll costs.

In general, payroll outsourcing is an interesting option for small businesses that don’t have the necessary capacities or experience to manage payroll internally. In the context of a multi-country payroll, however, outsourcing payroll also becomes increasingly interesting for large-scale organizations that struggle with the complexities of processing payroll across geographies.

There are numerous different factors that influence the average cost of outsourcing payroll. These factors include:

• Headcount: The more employees the business has on its payroll, the more time and effort is needed for processing it—unless, of course, the business leverages payroll automation.

• Payroll cycle: The payroll cycle (i. e. weekly or monthly payroll) determines how often employees get paid. The shorter the time span between two consecutive payroll runs, the more often the services of the payroll vendor are required and the higher the service fee.

• Required services: Not all payroll providers offer the same range of services. But it’s a general rule that the higher the service level required by the client business, the higher the cost of outsourcing payroll. Additional services could be handling statutory tax reporting and issuing employee payments.

• Number of payroll countries: When looking at a multi-country payroll set-up, the number of countries on the client business’s payroll will be another factor that can drive up the total cost to outsource payroll.

• Country restrictions and regulations: In addition, costs tend to be higher for countries where payroll is highly regulated. The more regulations and restrictions the service provider has to navigate, the more they will charge for their services.

• Payment fees: Paying international employees can be very expensive when using traditional salary payment methods such as bank transfer. Any fees that a payroll service incurs when paying their clients’ employees will be added on top of the normal payroll outsourcing cost.

• Frequency of payroll changes: Salary increases, new hires, bonus payments, additional employee benefits -- there are numerous changes that can affect payroll and will have to be implemented in your service provider’s system. Depending on how often these changes occur, the provider may levy an additional fee for processing the changes.

• Statutory reporting requirements: The requirements in global payroll reporting vary from one country to the next. While some countries merely ask employers to report payroll taxes once a month, others require additional quarterly and annual reports. If the payroll outsourcing service is also charged with handling tax reporting, they might impose an additional fee in cases where reporting requirements are high.

Now that we know what cost factors need to be considered when calculating the cost of outsourcing payroll, the next question is how payroll providers take these factors into consideration when calculating their service fees. There are different pricing models for payroll outsourcing services. Most service providers choose one of the following pricing structures:

• Price based on payroll frequency: Under this pricing model, the cost of outsourcing payroll depends on how often the business pays its employees. For instance, a business that runs a weekly payroll will pay more than a business that pays its employees once per month.

• Price based on number of employees per month: Another way payroll service providers calculate their fees is by charging the business per employee and per month. This pay-as-you-go approach is often suitable for businesses that are constantly growing their global team and need a flexible pricing structure that doesn’t overcharge them.

• Fixed service fee: Yet other payroll outsourcing services charge their clients a fixed fee for a basic service package that remains the same regardless of the number of employees (as long as it moves in a certain predefined range) or the pay frequency.

Given that there are so many factors to consider and different pricing models service providers can choose, it’s not surprising that calculating the average cost of outsourcing payroll is difficult. But even with a general idea of the cost the business will incur, employers often wonder how they can reduce their payroll outsourcing cost. Here are some tips on how to save money on outsourcing.

• Using payroll software instead of outsourcing: The market for payroll software is full of solutions that leverage smart technologies to automate as many parts of the payroll process as possible. Modern payroll software can do much more than just calculating gross to net. Advanced solutions go as far as to enable automated data input from the company’s HRIS and to support global payroll compliance by auditing payroll results automatically.

• Investing in a global payment solution: Since paying employees in different countries can be very expensive and payroll providers usually charge an additional fee for managing salary payments, investing in a global payment solution that covers all of the business’s payroll countries can help reduce the total payroll outsourcing cost.

• Choosing a provider with the pricing structure that best matches the business’s needs: Businesses that want to save on their payroll outsourcing cost should make sure to choose a payroll vendor that uses a pricing structure that is advantageous to them. For instance, businesses that pay their employees on a weekly basis or have many off-cycle payroll transactions should avoid using a service provider that bases its fees on pay frequency.

• Optimizing processes to avoid off-cycle payments: Most payroll service providers charge for any additional payroll transactions they have to undertake outside the regular payroll cycle. Reducing payroll errors and streamlining processes as much as possible to avoid off-cycle payments is hence a good way to cut payroll outsourcing costs.

• Changing the pay frequency: Organizations that pay their employees more often than legally required could consider changing their pay period, for example from weekly to bi-weekly or even to monthly. Before making such changes, however, it’s important to evaluate the impact the planned changes would have on employee financial wellbeing.