Outsourcing Payroll: How it Works, Benefits & Best Practices

August 3, 2022

Employee working researching payroll outsourcing.

When most people think of outsourcing, they imagine multinational corporations with billions in revenue and employees scattered around the globe. In reality, outsourcing is most helpful to small businesses, allowing them to contract out some of the services necessary to run a business that are too time-consuming or expensive to be accomplished in-house. 

Almost every business that sells a product outsources the manufacturing of that product. There’s simply no way they could make a profit if they needed to build a factory, purchase all the necessary machinery, and hire legions of employees to build their product. Manufacturing isn’t the only service that can be outsourced, though; many businesses outsource their accounting, sales, marketing, and even payroll. This guide will explore how outsourcing a tedious and costly process like payroll can save your company money while enhancing tax compliance and security.

How Outsourced Payroll Works

Administered payroll is one of the most important functions of any business — your employees are not likely to keep working for you if they don’t receive their paychecks. In larger companies, payroll can be a large department with multiple specialized employees. For smaller ones, the task of payroll can fall on a single administrator, who has many (other) unrelated duties. These are the businesses for which outsourcing is most advantageous. 

To outsource your business’s payroll, you’ll need to pick a provider to whom you’ll submit all of the company payroll information: salaries, hours worked, sick days, vacation policies, etc. Once they access that information, they can run your company’s payroll from the cloud. Every pay period, the firm will transfer money from the company account to each of your employee’s bank accounts.

Benefits of Payroll Outsourcing

Subbing out your business’s payroll administration has numerous advantages, but they all boil down to less money spent and more efficient use of your employees. 

Experienced Professionals

Payroll is where small details can make an enormous difference; a single error can cost the company thousands. Hiring an experienced payroll administrator that is only focused on company payroll will result in fewer errors than relying on an employee who might have several other tasks competing for their attention.

Better Security

Small business owners are rightfully anxious about turning over their employee’s personal information, including bank account and social security numbers, to a third party. Do data breaches happen to outsourcing firms? Yes, but they’re far less likely to happen to an outsourcing firm with extensive security experience than to a small business’s one-person payroll department. 

Superior Tax Compliance

Tax law changes with the whims of the legislature (state and federal), so what was legal one month may not be acceptable the next. The COVID-19 pandemic led to a rash of changes to tax withholding that were incredibly complicated for small business owners to comply with.   Employing an outsourcing firm that’s on top of the latest tax law will help to avoid penalties from the government. 

Lower Cost

Payroll administration can be seen as a semi-fixed expense in that the cost of sending out paychecks to 30 employees isn’t significantly more than sending them to 10. In both cases, businesses need administrators, software, and office space. Payroll outsourcing allows small business owners to take advantage of economies of scale by pooling their payroll administration with dozens of other small business owners.

How To Choose a Provider for Outsourced Payroll

There are dozens of reputable payroll outsourcing firms, but many business owners aren’t sure where to start looking.

What Does Your Company Need?

Start by listing out what your current payroll employees do and see which of these tasks can be hired out. Payroll outsourcing firms vary in the types of services and features they offer. As the outsourcing firm is responsible for withholding taxes for your employees, many of them will also prepare your tax filing at the end of the year. Some will only do payroll for employees with a W2, while others can take care of paying 1099 contractors

Software Integration

You’ve probably already spent significant capital on your business software, including time trackers and accounting software. Unless you plan on subbing all of these tasks, you’ll need an outsourcing firm that can seamlessly integrate with your current tech setup.


Most payroll outsourcing firms can transfer money to your employees in two to three days, though a few can do overnight processing. Often it boils down to the banks involved and their capacity to complete the transactions.


This is what stops most business owners from even considering payroll outsourcing. They assume it’ll be too expensive. What they’re not considering is how much they’re already spending administering payroll. Once you get down to doing the math, outsourcing payroll is usually less expensive than doing it yourself.

The Cost of Outsourced Payroll for Small Businesses

On average, outsourcing payroll saves small business owners around 18% compared to doing it in-house. These cost savings can be better used for marketing, sales, and other departments that will help your business grow.

Outsourcing your payroll will almost certainly save you money, but if you’re thinking about expanding your business, you’ll need a larger cash infusion. LendThrive offers fixed-rate business loans of up to $150,000, and you can apply for a loan in just a few minutes with approval in as little as 24 hours.

Contact LendThrive today for a free consultation, or start your application right now!

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