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Summary: Managed payroll can provide select functions or completely take responsibility for a company’s payroll management.
Managed Payroll
Managed payroll is when a third-party service provider performs outsourced payroll functions on behalf of a client company. Managed payroll can provide select functions or completely take responsibility for a company’s payroll management.
How is managed payroll different from in-house payroll processing?
With in-house payroll, it’s typically the payroll team within a human resources (HR) department that takes responsibility for all payroll functions. This means that the team has to have employee data and working records to calculate salaries and benefits. They also need to have expertise in local tax laws and social schemes to ensure that everything they do complies with the appropriate statutes. Most large companies have their own payroll experts who ensure that everyone, from the employees to state coffers and social programs, gets paid appropriately.
Managed payroll is an outsourced service. For many small-to-medium enterprises (SMEs), supporting a dedicated payroll team is an unattainable luxury. Without payroll experts, they could rely on HR generalists to handle payroll or hire a specialized provider to do it for them. Managed payroll service providers are experts in their roles, which helps to ensure compliance and accuracy of all payroll functions.
What services are typically included in a managed payroll setup?
Managed payroll providers may handle some or all of these typical payroll tasks for their clients:
- Payroll system: The provider chooses and prepares an appropriate and data-driven payroll system.
- Employee data: The client supplies the provider with employee data on an ongoing basis.
- Calculations: The provider calculates gross pay, adds bonuses and incentives, and subtracts tax withholdings and social contributions to find net pay.
- Taxes: The provider calculates taxes and settles payments on behalf of employees.
- Deductions: The managed payroll provider deducts and pays the employee’s contributions to benefits programs and Social Security schemes. It also calculates and adds the employer’s contributions.
- Payslips: The provider generates and distributes employee payslips.
- Records: The provider keeps track of all calculations and payments and keeps these for reporting and analytics purposes.
What are the pros and cons of a managed payroll solution?
Deciding to use a managed payroll service provider can be challenging as there are advantages and disadvantages to these solutions, including:
- Pros
Compliance
Payroll professionals are experienced in and knowledgeable of local laws and standards.
Fraud prevention
In-house payroll teams may be exploited by fraudulent actors within the same company, while a third-party provider is separated from this influence.
Accuracy
They’re experts in calculating salaries and deductions
Time/cost savings
Efficient service providers can charge less for payroll than internal teams cost and do the job faster.
- Cons
Data security
Transferring data to a third-party provider can increase the risk of data piracy.
Poor service
Not all service providers are equally professional, and companies risk hiring providers who don’t do the job well.
Hidden costs
Some service providers don’t state all of their fees upfront.
How can companies ensure data security and confidentiality when using managed payroll services?
When transferring sensitive data to a third-party vendor or service provider, companies must be aware of increased security risks. They should work with the service provider to institute security guidelines for data transfer and storage in the provider’s care. The service provider should be able to prove compliance with an appropriate security framework, like the Federal Information Processing Standards (FIPS), to prove its ability to protect the client’s data.
What are the key factors to consider when selecting a managed payroll provider?
Managed payroll providers vary in their ability to deliver superior service. Companies should consider these key factors when looking for the best provider:
- Security: The service provider should be able to prove their compliance with strong data security standards.
- Experience: A long-established service provider can normally handle the challenges and complications of managed payroll services better than newcomers.
- Reputation: Providers with great reviews and ratings can be trusted to fulfill their customers’ needs appropriately.
- Platform and communication: The payroll platform a provider uses should be easy for the client to adapt to, and communication channels should always be open to support and problem-solving.
How can managed payroll services adapt to changing regulations and tax laws?
Managed payroll service providers need to stay current to keep up with ever-changing statutes. They can focus on using the latest software for accuracy and technology to ensure compliance with data security standards. They should also employ legal teams that always keep abreast of any applicable changes to tax and labor laws that might affect their clients.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
