What is managed payroll?
Running payroll is a crucial part of managing a business. Getting payroll wrong can not only break the trust between the company and its employees, but it can also land the organization in hot water when it comes to statutory compliance requirements.
Many businesses therefore prefer entrusting their payroll processes to a third-party provider. But managed payroll offers businesses more advantages than just peace of mind. Read on as we discuss the ins and outs of managed payroll services.
What is managed payroll?
Managed payroll is when an external payroll vendor provides assistance and services surrounding payroll processing and payroll management. In this sense, managed payroll services fall under the umbrella of payroll outsourcing.
The level of assistance provided by the vendor can vary, depending on whether a business requires support only for parts of its payroll or for all of its payroll. Another term that is sometimes used interchangeably is payroll bureau service.
Fully managed payroll vs. partially managed payroll
Managed payroll services can be divided into two major groups. Depending on the range of services offered, one can distinguish between fully managed payroll services and partially managed payroll services
In the case of a fully managed payroll, the payroll vendor takes over the responsibility for the entire payroll process end-to-end. In the case of a partially managed payroll, the vendor is only in charge of certain aspects of payroll (e. g. payroll processing) while key payroll functions remain with the in-house team.
What does a managed payroll solution include?
The scope of a managed payroll solution depends on what has been agreed between the organization and the service provider (i. e. fully managed payroll or partially managed payroll). Managed payroll services typically include:
Pay calculation,
Paycheck distribution,
Salary payments and payment methods administration,
Administration of payroll taxes and deductions (including withholding, remitting, and reporting taxes and social security contributions),
Payroll reporting and analytics,
Payroll compliance advice and support,
Payroll incident management (including payroll disaster recovery), and
Payroll SLA monitoring.
The pros and cons of managed payroll services
Managed payroll offers different benefits for organizations, but there are also some drawbacks—or at least some aspects that might be perceived as inconvenient. Here is an overview of the pros and cons of using external payroll services.
Benefits of managed payroll
Businesses can benefit from using external payroll services in many different ways. They include:
Expertise, experience, and focus: Having payroll managed by an external payroll service ensures that the payroll process is in the hands of experienced experts who can fully focus on payroll management.
Efficiency, accuracy, and timeliness: Timeliness and accuracy are the essence of any payroll. Managed payroll services ensure both timely and accurate payments. Plus, they significantly increase payroll efficiency through process standardization.
Technology and automation: Payroll service providers often have better technology and leverage payroll automation at a larger scale than a non-payroll company would do.
Scalability: Managed payroll solutions are easier to scale than internal payroll operations. As the business grows, it’s quicker to just change the service agreement with the payroll vendor than to try to find and hire qualified payroll staff to grow the in-house team.
Risk mitigation and compliance: If payroll is managed by external experts whose core business is payroll processing and management, this significantly decreases the risks associated with payroll and enhances payroll compliance.
Cost and time savings: Using external payroll services is often associated with increased ROI and productivity because it is more cost-effective than running and managing payroll in-house and frees up time and resources that the internal team can use for value-adding strategic initiatives.
Externalized accountability: An important advantage of managed payroll services is that the payroll vendor takes full contractual accountability for the services they offer. For many businesses, entrusting their payroll to a third-party provider means having peace of mind.
Payroll security: Managed payroll services operate with advanced technology to enhance payroll security and keep sensitive employee data safe.
Drawbacks of managed payroll
Managed payroll holds many advantages for organizations. However, this doesn’t mean that outsourcing payroll is the best approach for every business. Depending on the situation, outsourcing payroll to a third party could be perceived as disadvantageous. That’s because:
Externalizing payroll might feel like a loss of control over processes and sensitive employee data.
There is no guarantee that the chosen payroll provider will be reliable and available on quick notice when there is an urgent payroll issue.
Despite the fact that using payroll managed services reduces compliance risks, there is no guarantee for compliance.
The responsibility for accurate payroll data input still remains with the in-house team.
Managed payroll services can lead to additional problems when managing a multi-country payroll, such as multi-vendor management issues and fragmented payroll data.
When to use payroll managed services?
Managed payroll is a service which is typically used by organizations that lack any or all of the following:
Time to run and manage payroll in-house,
Resources to manage payroll tasks internally,
Expertise to ensure payroll compliance and accuracy.
Other reasons to use external payroll services include enhanced operational efficiency, workflow optimization, and process automation.
How does managed payroll work?
There is no blueprint for managed payroll services because every vendor has its own processes, systems, and workflows. However, the underlying process is the same and typically includes the following steps:
Choosing a suitable payroll vendor (e. g. by sending out a detailed payroll RFP),
Setting up payroll in the vendor’s internal system,
Transferring the data needed for payroll from the business’s internal system to the provider,
Scheduling a parallel payroll run to check that everything is working as it should,
Processing payroll for the client business,
Validating payroll results and withholding taxes, social security contributions, and more,
Distributing paychecks and issuing salary payments to employees,
Filing and reporting payroll taxes,
Keeping employee payroll records, and
Providing ongoing payroll support and advice to the client business.
What is the cost of managed payroll services?
The cost of managed payroll services depends on several factors. These factors include number of employees, required level of service, payroll cycle, frequency of payroll changes, payroll complexity, and more.
Also, there are different pricing models for payroll managed services, which can make it hard for businesses to estimate payroll outsourcing costs upfront. Before choosing a payroll service provider, companies should carefully assess the vendor’s pricing structure and check whether it matches their business needs.
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
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