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The Ultimate Guide to Payroll Outsourcing

Payroll outsourcing is one option for paying workers in a domestic or foreign location through use of a third-party payroll provider.  We have put together this quick guide to payroll outsourcing, to outline the pros and cons and the main reasons to outsource your payroll for employees on assignment.

What is Payroll Outsourcing?

Payroll outsourcing is simply the use of a service provider to handle the administrative and compliance functions of paying employees.  It is important to note that payroll services are only that, and do not offer a local employer of record for the foreign company.  This means that local incorporation is still required, and the other aspects of employing workers must be handled DIY or by other experts.

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When to Outsource Payroll?

The question of when to outsource payroll depends on several factors, such as number of employees on assignment, whether a company has a local entity and the complexity of the host country laws regarding employment and withholding.  In many cases, the time and cost of setting up and administering a local payroll cannot be justified, so the payroll functions are outsourced to another host country firm.

While many small businesses routinely use payroll outsourcing, larger companies can also benefit from this service when sending workers on international assignment to a new market. In that instance, a company can elect to use either a local payroll provider or a GEO service, which offers comprehensive employment support to its clients, including a compliant payroll for all employees in that country.

Depending on their needs, a company may customize the payroll services that they outsource, while retaining control of other aspects. The payroll functions typically outsourced to a third-party provider include:

  • Running payroll and making employee pay and withholding calculations
  • Depositing funds directly or issuing checks to employees
  • Calculating state and federal payroll taxes, and making tax withholding payments
  • Filing required government reports
  • Administering employee benefits
  • Withholding social security and pension contributions

Why Outsource Payroll?

Running an in-house payroll can be a challenge for smaller companies, or a business without HR and accounting professionals on staff. Outsourcing is one method to avoid hiring additional employees or contracting with specialists.

Companies choose to outsource payroll for several primary reasons:

  • Cost savings by avoiding the need to use in-house resources to comply with complex payroll requirements
  • Ease of ongoing administration of payroll through changes in personnel, reduction or increase in compensation structure and filing of reports to government authorities
  • Avoiding mistakes and tax compliance penalties
  • If using a GEO service in a foreign country, no need to establish legal entity to run a compliant payroll

What Payroll Functions Can Be Outsourced?

Depending on their needs, a company may customize the payroll services that they outsource, while retaining control of other aspects. The payroll functions typically outsourced to a third party provider include:

  • Running payroll and making employee pay and withholding calculations
  • Depositing funds directly or issuing checks to employees
  • Calculating state and federal payroll taxes, and making tax withholding payments
  • Filing required government reports
  • Administering employee benefits
  • Withholding social security and pension contributions

Benefits of Outsourcing Payroll

The advantages of outsourcing payroll for both small and large companies are numerous, and a large percentage of businesses use this type of service abroad. The benefits of cost and time savings, filing of reports and avoiding compliance issues make payroll outsourcing a popular service. Those advantages are multiplied in foreign markets where payroll rules and tax laws are unknown to a new business, and a local payroll provider can be a valuable partner.

Disadvantages of Outsourcing Payroll

Outsourcing payroll is a limited, administrative foreign employment solution, and does not guarantee compliance with taxation, immigration or labor laws in the host country.  The payroll provider does not offer the foreign company a local employment entity, so incorporation is still required along with registration and other compliance measures.

Other practical disadvantages include losing control of compensation and employee data, security issues and lack of service quality or timely reporting.  These can be offset by thorough research of the payroll providers in the country and selecting the best firm available.

What to Ask When Outsourcing Payroll

There are a few key questions to ask any payroll provider prior to outsourcing, to minimize any issues with service quality:

What are the basic and/or add-on services offered?

How do they secure confidential employee and payroll data?

How many clients do they have and for how long?

Do you calculate tax withholding for each employee?

What rates do you charge for running payroll per employee, and is there different pricing for higher volume?

Do you assist with generating tax forms for local tax filing purposes?

A Step Beyond Payroll Outsourcing: Employer of Record Solutions

There is a more complete solution for running a foreign payroll through a GEO employer of record.  The ‘employer of record’ (EOR), sometimes known as the local employer of record, is a third party contracted to take responsibility for all formal employment tasks, not only payroll. The EOR is charged with carrying out the legal and regulatory requirements of immigration, employment and payroll, but does not participate in day to day work activity of the employee.

Specifically, the employer of record is the legal entity that:

  • Arranges all visas and work permits for the employee, avoiding delays or refusals
  • Provides a registered entity for running a local, compliant payroll inside the country
  • Meets all host country labor laws pertaining to local contracts and worker protections
  • Advises the client of required notice periods, termination rules and severance pay
  • Is the host country interface between the employee and government authorities

The advantages of a comprehensive EOR solution as offered by Shield GEO are obvious, since the client company does not have to establish a local corporate entity or worry about the numerous compliance requirements in the host country.  An EOR does all that a payroll provider can, but also much more, so that a multinational has a true end to end employment solution in one or more foreign markets.

Outsourcing payroll might have its place for companies that have a commitment to a country, abundant resources and have already established a local entity.  But for other businesses just entering a market, or with limited HR resources, the EOR solution is ideal to ensure full employment and payroll compliance.

Get in touch to find out more about how an Employer of Record solution can help your company

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