What Is a Payroll Processing Service?
Payroll refers to business activities regarding employee compensation and compensation management. Paying employees can be a complex process. At minimum, businesses often calculate and withhold government taxes like Social Security and income taxes from pay. Many companies also have benefit programs like health insurance or retirement plans. These plans require deductions of premiums from employee paychecks according to employee customization, adding another layer of activity for payroll processing. Some companies create a separate department for payroll or make it part of the human resources department, while others use a service.
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Definition
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A payroll processing service is a third-party service that manages payroll for a business. Essentially, the business outsources its payroll activities, and like many outsourcing strategies, the third party is often an organization in a foreign country such as the Philippines or India. Small businesses may not have the expertise or time to manage payroll correctly, so they must depend on an outside vendor. Larger businesses may want to save money by hiring another organization for the service at a fraction of the cost it would take to manage it in-house.
Web or Software
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Another class of payroll processing services belongs to the organizations that do not manage payroll activities themselves, but rather provide businesses with tools to make payroll easier. These tools fall into either web or software categories. Web applications are the newer and less-costly payroll option. A business pays a vendor for access to an application run entirely from the vendor's servers online, where the business can access it as long as it has an Internet connection. Buying software is a more traditional and more expensive process.
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Advantages
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Clearly, if a company no longer has to spend time on payroll then it can focus more on core operations and become a leaner, more efficient organization. Also, if the business finds a high-quality service provider, the payroll organization will have more experience in payroll activity than the business and will be able to manage payroll more accurately, reducing costly mistakes. Applications provided by vendors streamline payroll activities and also help businesses save time and double-check information while allowing the company to keep control of the payroll process.
Considerations
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Payroll services can be expensive, especially if the company decides to outsource them completely. Thorough analysis helps a business see if the savings outsourcing brings is worth the cost of making the transition and losing control of the payroll process. Also, most companies cannot help businesses with local or state taxes.
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