How Does Outsourcing Payroll Work?

Payroll outsourcing is when you instruct a third-party or external firm to carry out all the payroll operations on behalf of your company. Choosing an outsourced payroll provider eliminates the need to train payroll employees and means you won't have to acquire and maintain software. Therefore, it saves both time and money. Below is a detailed breakdown of how outsourcing payroll works.


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Do You Need To Outsource Payroll?

The initial step of payroll outsourcing is deciding whether your business needs to outsource payroll or not. For small and medium businesses, outsourcing presents benefits such as saving time and money on having to hire an in-house member of staff. Once you analyse the extent of the services you need, you will most likely discover that outsourcing your payroll is the best option for you.

Identify Your Needs

The next step is having a clear idea of what you need to accomplish.


Have a clear understanding of what kind of business you are by determining certain things like whether you have employees or operate with contracts. Is the payment rate hourly, daily or monthly? Are there any deductible expenses?

This knowledge will ultimately help you in making the right choice of outsourced payroll provider.

Carry Out Some Research

Once you have defined what you need, the next step is to choose the payroll service that best suits you because different service providers offer different services.


Proper research will enable you to find the right payroll company for you before you begin outsourcing. It is important to choose an outsourced payroll provider that not only caters to your needs, but which is also fully licensed and legally compliant.

Make sure there are no hidden fees linked to the outsourced payroll services that you are considering. The best payroll companies will not charge any extra costs without your knowledge.


Finding the best payroll company for outsourcing will be influenced by the size and needs of your company. Where possible, ensure they have experience providing payroll services for other companies in your industry or in-line with your specific staffing contracts and staff benefit entitlements.

Provide Employee Records

Once you have settled on the best payroll company, you need to set up a system between you and the provider for collecting information about your employees. Some companies collect the data through e-mail while others use an electronic system.

The payroll service providers send you a payroll report which will be used to process your company’s payroll information. The payroll report contains details such as wages, the pay cycle and rates, number of employees, policies on benefits and holiday pay, among others depending on the provider you are working with.


This report must be approved to start the payroll process because it provides a structure which will be used by the outsourced payroll provider to carry out tasks for your firm.


Your job is essentially done after providing all the information needed to the outsourced company. The payroll service will deal with management and administration of payroll, easing the burden for your firm.

Other Outsourced Payroll Solutions

Dealing With Employee Inquiries

Your outsourced payroll provider communicates directly with HMRC, which means they can tackle a number of queries your employees may have, such as taxes, National Insurance contributions and the processing of new tax codes.


Issuing Payslips

After issuing salary payments to your staff, usually via BACS transfer, your payroll provider will also take responsibility for providing payslips, either in hard copy format or electronically. Many payroll systems can also be set up to allow employees to input their expenses, as well as issue employee P45s. Having all this handled by an experienced organisation ensures your payroll is accurately processed on time while complying with all legal requirements.


Having an expert team handle your payroll doesn't just minimise the possibility of filing your taxes late and reduce errors in payments; finding the best payroll solutions for small businesses also frees up companies to focus on more important functions like customer service, revenue generation, and sales and marketing.

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A Free Guide To Outsourcing Your Payroll