How Payroll Outsourcing Works

All payroll services operate differently, but most companies have a few things in common.  Payroll outsourcing works by shifting all the functions of payroll processing - collecting information about hours worked, computing employee tax information, and transferring funds to various accounts- to a third party.  A payroll processing company can write checks, deposit funds to employee accounts, and provide W-2 forms at the end of the year.

A payroll processing company will usually request that your business have an account set up for regular or automated deposits.  This account will allow the payroll company access to funds for paying employees, withholding taxes, and paying the necessary amounts to state and federal tax authorities.  Setting up the account is usually quick and easy.  A payroll company will also need employee information, such as social security numbers, employment forms (W-4s and I-9s, among others) and employee banking information if you’ll be utilizing direct deposit features. 

After the company has collected this information, they’ll need to set up a procedure for collecting employee pay information including working hours, sick and vacation pay, and savings plan information.  Many companies have websites where you can enter this information securely and easily.  Employees can also access their accounts online, and make changes to accounts like IRAs and Medical Savings Accounts.  Most companies have a procedure for “calling in” or inputting hours online.  You may need to collect this information several days before payday - every company is different.  Make sure you know the procedures before choosing a company.

After you’ve chosen a company, provided information, and set up the procedure by which you’ll communicate, you can begin using the service.  Some companies allow a “trial” period before you sign up for the service while some others will run “test” transactions so you can make sure everything is transferred correctly before the actual day of payment arrives. 

Many companies will require you to keep funds on reserve for the payment of taxes and employee pay in the event a regular (bi-weekly or monthly) deposit is not made.  Providers differ on requirements, but most also charge a fee per transaction, per check, or per deposit.  These fees will be taken out of your account along with the funds for employee payment. 

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