Payroll outsourcing: Making sense of the costs and benefits

Payroll can quickly move from manageable to messy as organizations expand. The manual checks that worked in the early stages simply can’t keep up as your headcount increases and compliance gets complicated. A recent survey from PwC shows that this is a common pain point for businesses, with 63% of respondents saying they don’t like their current payroll model.* Without some type of adjustment, relying on a fractured payroll system could increase your legal risk and jeopardize your growth goals. 

One way some companies are overcoming these hurdles is by outsourcing payroll. In this guide, we’ll help you analyze your current policy data and compensation setups, as well as future goals, to create a sustainable link between HR and payroll outsourcing.

* PwC, 2024

What’s payroll outsourcing?

Payroll outsourcing involves teaming up with a third party who takes on some or all of your payroll activities. In this partnership, you delegate payroll-specific tasks — such as tax filings, compliance checks with regional labor laws, and wage and deduction calculations — to the service, lowering your HR and finance teams' workloads.

According to ADP, payroll outsourcing is becoming increasingly common, with 70% of senior payroll leaders saying they’re at least considering using it. In another 2024 survey by PwC, when asked whether they’ve requested quotes for payroll outsourcing fees, 46% of respondents said “yes.”

How does payroll outsourcing work?

Each payroll provider does things their own way, but it’s generally very easy to set up outsourced payroll. The most labor-intensive phase for your team is compiling and sending your relevant employee and compensation data to the third party. Once that’s all set, you’ll just submit automated inputs (such as hours worked and PTO used) each pay cycle. The provider will calculate and process payments, and take care of related responsibilities like compiling reports and performing ongoing reconciliation.

Benefits and challenges of outsourcing payroll

Payroll outsourcing is an attractive (and generally effective) way to reduce your admin burden without increasing headcount. But don’t discount the disconnect outsourcing brings between HR strategies and payroll processes. By isolating payroll, you could create blind spots that make it harder to get an accurate read on how payroll metrics relate to things like employee engagement and performance.

Benefits of payroll outsourcing

Working with a third-party payroll firm could offer new strategic insights and support growth in all directions:

• Access to specialized expertise: Instead of relying on in-house expertise, outsourcing puts you in touch with specialists who have a deep knowledge of local and international payroll policies.

• Reduces compliance risks: Payroll providers are pros at tracking tax and labor laws in different jurisdictions, which lowers the chance you’ll face penalties or legal action due to filing errors.
  

“We even flag compliance risks — for example, if a country requires a minimum of 20 paid days off, the platform won’t let you go below that.”
— Suraj Paneru, Customer Success Coach at Leapsome

• Time savings: Handing off payroll means your HR and finance teams have more time to plan and implement strategic moves.

Challenges of payroll outsourcing

Outsourcing can pull payroll out of your organization’s HR ecosystem; while you can reduce friction and disconnection (we’ll touch on how later), you’ll have to make peace with the fact that you’re sacrificing at least some control over this process:

• Disconnected systems: Without a centralized HR system for your employee data, it’s more likely there will be inconsistencies in compensation or reporting due to the separation between your payroll department and internal processes.
  

• Limited visibility: Outsourcing all your payroll needs can delay access to your most up-to-date compensation data, making it harder for teams to thoughtfully decide on topics like talent acquisition and budgeting.

• Integration challenges: Third-party payroll tools don’t always link easily with your existing HR stack. To avoid manual workarounds or duplicated data entry, you need to integrate your payroll provider with a unified HRIS like Leapsome. 

“Leapsome connects directly with DATEV for payroll. Salaries, taxes, and benefits flow to authorities automatically, and errors are flagged before submission.” 
— Suraj Paneru, Customer Success Coach, at Leapsome

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🔗 Keep payroll and HR data in sync
Leapsome centralizes all your people data so you can avoid costly errors or compliance gaps from third-party payroll inconsistencies.
👉 Explore Integrations 

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Comparing payroll options: In-house vs. three types of outsourcing

Businesses use payroll outsourcing services for many reasons, but doing so is increasingly attractive when administrative tasks keep HR teams from building the framework to scale.

There’s a particularly high chance companies will turn to third parties as they expand geographically. Data published on Select Software Reviews (SSR) from Alight showed that 55% of companies who have team members in one country kept their internal payroll departments, but this fell to 31% with employees in two to five countries and 19% when in six to 10 countries.

Just keep in mind that outsourcing payroll processes is only one option. Other moves, like combining in-house support with a robust HRIS or specialized payroll software, might be more beneficial depending on your current needs and goals. For instance, growing companies might add software that serves as a centralized single source of knowledge to keep all their data organized and accessible 24/7.

“Bring Finance, managers, and leaders in early, show them what’s possible. When they help shape the views and get trained, they actually use the HRIS. That’s when the time savings show up.” 
— Carolin Leidel, Consultant, at torq.partners

Here are the most common ways organizations outsource their payroll. 

Is payroll outsourcing right for you? Three key considerations

Payroll outsourcing is a long-term structural choice rather than a short-term way to streamline operations. Working with a third party can impact your HR planning, so there are three broad implications you should deliberate over before making your decision.

1. Assess your current payroll complexity

First, take an honest look at how difficult and error-prone your current payroll system is. If you’re expanding into new markets, consider the burden of those compliance challenges, too. 

Consider how many sources your payroll team has to pull from, how often they have to make manual adjustments, and how long it takes for them to review payroll data. If it takes multiple days to run payroll or you rely exclusively on tracking hours manually in multiple spreadsheets, you may want to centralize your data or outsource some help.

2. Evaluate internal expertise and bandwidth

Check in with your HR and payroll teams to see what they can handle and what they need help accomplishing. Depending on the complexity of your payroll needs, your in-house staff may have the time but not the expertise to handle the legal demands of payroll, for example. 

If only a couple of employees have all the knowledge necessary to run payroll, you might find more frequent bottlenecks when those team members are out of the office — which means you’ll need to either give more training or outsource your efforts. And if the rest of the team doesn’t have the bandwidth to take on a bigger role in payroll, it’s a good sign you need to outsource or add payroll software.

To determine if a full outsource or supportive software fits your workflow better, consider how much support your team will actually need (like automations for a few tasks or a complete hand-off). And run ROI analyses using estimates from your potential outsourcing agencies and subscription costs for payroll software.

Even if your team has the capacity to monitor and comply with payroll changes as the organization grows, ask yourself: Will adding more complexity divert too much focus from their other HR tasks? If the answer is yes, look into outsourcing.

3. Identify compliance and risk exposure

Compliance issues become even more of a threat as your business expands into new markets with distinct labor laws. Payroll and compliance errors cost a pretty penny, but they can also seriously damage your reputation and dampen employee satisfaction. When it only takes two payroll errors for employees to start looking for a new job, according to the National Association of Women Business Owners, keeping your information accurate and consistent is critical.

If your payroll team struggles to submit regulatory paperwork on time, or employees regularly approach the team with questions about their latest paystub, outsourcing payroll to compliance experts could help you avoid bigger legal problems or employee churn down the road.

Leapsome’s centralized HR database comes with a payroll prep portal to help you stay ahead of compliance challenges. You can easily align your internal payroll policies with local legislation on Leapsome to reduce your risk of any payment processing issues.

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💸Prepare payroll from a single source of truth
Leapsome’s customizable rules and policies help you make accurate, compliant, and consistent payroll choices informed by all your other critical data.
👉 Explore Payroll

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Boost payroll and HR management with Leapsome

Outsourcing payroll to a reputable partner is a fast way for lean teams to lighten their workload and supercharge scalability. But if you opt to integrate with a third party, be sure you aren’t sacrificing key insights your HR team needs. Handing over the reins and forgetting about payroll means you’ll likely lose visibility into your own processes.

Leapsome helps HR teams avoid this common issue by directly including payroll data integrations in the centralized platform. Our all-in-one HR system makes it simple to link with major payroll processing providers while keeping access to employee data and analytics at your fingertips.

“With Leapsome, we were able to automate performance reviews, goal setting that was even prior, but now even further and onboarding and offboarding and that together helped us save about 20% of manual effort of our team.” — Weronika Czerny-Nowakowska, Chief Operating Officer at Neurons Lab

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📈 Align payroll with your HR strategy
Leapsome connects an HRIS platform with a payroll system so your HR teams have the data they need to build effective strategic initiatives. 
👉 Request a demo 

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FAQ

How can I choose an outsourced payroll service for my business?

First, take stock of your internal system: Who holds knowledge necessary to run payroll, where are documents necessary to do the job stored, and how easy is it for the team to stay compliant with local laws? Make note of any unorganized systems, like multiple spreadsheets employees have to manually copy-and-paste data between, and room where automated software could fill in the gap. Then, ask your employees what their workload looks like and their current bandwidth for more in-depth payroll training. If they don’t have the time, or are already sinking a lot of time into payroll but are struggling to get it done, it’s time to ask why outsourcing payroll hasn’t happened yet.

Ideally, you should work with an outsourced payroll partner that has experience in your industry plus reliable compliance support and integrations to your existing HR system. Compare pricing, customer service, and each provider’s unique features to find the best option for your needs.