What Is Managed Payroll — and Is It Right for Your Business?

There are many roads to outsourcing. For instance, you can outsource 1 aspect of a business function to a service provider and do the remaining tasks in-house. Or, you can outsource the entire function to the provider. The latter option is called “managed service.” When payroll is the function being fully outsourced, the practice is known as  “managed payroll.” Managed payroll is when the employer outsources the vast majority of its payroll responsibilities to an external provider — which basically becomes the employer’s payroll department. Sometimes, managed payroll is referred to as “fully outsourced,” because of the significant extent to which the employer relies on the service provider.

Which services are included in managed payroll?

The specifics vary by employer-provider agreement. Usually, at a minimum, the provider processes the employer’s payroll from start to finish. Many providers handle other duties besides payroll processing.

Managed payroll services may include the following:

• Verify employees’ time card information
• Calculate gross-to-net wages and salaries
• Issue paychecks via direct deposit, pay cards, or paper checks
• Administer wage garnishments
• Remit payroll tax payments
• File payroll tax returns
• Reconcile payroll
• Audit payroll
• Maintain payroll records and reports
• Ensure payroll compliance with federal, state, and local laws
• Resolve payroll issues
• Address payroll inquiries from the employer
• Stay on top of payroll trends affecting the employer
• Keep the employer informed on payroll developments

Some providers offer additional business process outsourcing (BPO) services, along with payroll. For example, they may perform payroll and benefits administration. Fundamentally though, their purpose is to manage their client’s payroll. Note that this does not mean the employer will not have any payroll responsibilities.

For example, the employer may need to:

• Capture employees’ time and submit the approved data electronically to the managed payroll provider.
• Ensure the payroll provider receives the correct amount of funds to pay employees each pay period.
• Perform oversight on the payroll provider, such as by designating a qualified employee to liaise and verify the provider’s work. This is important, because in most cases the employer (not the payroll provider) is legally responsible for ensuring compliance with payroll laws.

How popular is managed payroll among employers?

In a 2021 survey, “53% of respondents said their departments regularly used a payroll processing service.” Although this survey data does not reveal how many of those employers fully outsource, it demonstrates just how popular payroll outsourcing is. Moreover, 54% of respondents “said their HR departments used a benefits outsourcing firm or consultant on a regular basis.” Notably, a 2020 global survey by Deloitte found that:

• 73% of organizations outsource some payroll responsibilities.
• “Organizations leveraging a payroll provider for managed services are using an average of six payroll providers, with the highest concentration in regions outside of North America.”
• Most employers are generally satisfied with their current payroll providers.
• Employers cited compliance, accuracy, and self-service capabilities as the areas needing the most improvement among their payroll providers.
• 58% of respondents have been with their payroll providers for over 5 years.

Despite the momentum of payroll outsourcing, that does not mean it is suitable for every employer. The same goes for managed payroll — meaning full payroll outsourcing.

Is managed payroll right for your business?

Managed payroll may be appropriate in the following situations:

• You do not have a skilled in-house team. Payroll administration requires specialized knowledge of payroll systems, processes, procedures, and laws. If your payroll team lacks the necessary expertise, a myriad of problems can occur, including paycheck and compliance errors. Managed payroll providers typically have certified payroll professionals.
• You would like to save time on payroll tasks. It can take a lot of time to administer payroll plus monitor and audit payroll. The 2020 Deloitte survey found that more employers are monitoring key performance indicators (KPIs) related to payroll accuracy and timeliness — and this can be a time-consuming endeavor.
• You want to reduce payroll staffing costs. It may be cheaper to pay a 3rd party to manage your payroll than to pay wages, salaries, overtime, and benefits to an in-house team.
• Your business has expanded to global regions. Global payroll can be highly complex because it requires sound knowledge of international payroll laws. It might be easier and more cost-effective to use a managed payroll provider if you have employees in different countries. The same can be said for employers with employees in different states.
• You cannot keep up with the ever-changing payroll landscape. Federal, state, and local payroll laws are always changing. New laws, mandates, and amendments can pop up at any time, and employers must be ready to implement them as required. Emergencies like the COVID-19 pandemic show that things can change swiftly and drastically in payroll.
• You’d rather not deal with payroll. You want someone else to do the heavy lifting, so that you can focus on growing your business.

While these are all good reasons to consider managed payroll, many employers choose to not go this route.

Some employers prefer to keep payroll in-house

For any number of reasons, an employer may opt to do payroll in-house instead of contracting with a managed payroll provider. As mentioned earlier, employers in the Deloitte survey listed compliance, accuracy, and self-service capabilities as areas needing the most improvement among their payroll providers. Some employers keep payroll in-house to avoid these shortcomings.

If you use a managed payroll provider, you should monitor their performance.

There’s also the matter of monitoring the provider's performance, which may or may not be up to par. According to the Deloitte survey, most larger employers (81%) are primarily using service level agreements (SLAs) to monitor their payroll provider’s performance. However, most smaller employers (59%) are not doing so — which puts them at risk of being liable for errors the provider makes. Therefore, if you use a managed payroll provider, you should monitor their performance. If you don’t want to have to worry about the provider’s performance, then you’re likely better off keeping your payroll in-house. In this case, it’s essential that you utilize payroll software, which can also reduce the need for managed payroll.

How can payroll software help your company?

Due to advancements in payroll technologies, employers can accomplish their payroll obligations much easier than in the past. For example, modern payroll software:

• Automates payroll processes
• Streamlines payroll workflows
• Calculates wages, salaries, and deductions (gross-to-net)
• Enables multiple forms of payments (e.g., direct deposit, pay cards, and paper checks)
• Decreases manual data entry
• Cuts down on administrative errors
• Integrates with related functions, such as scheduling, timekeeping, HR, and benefits
• Provides real-time and historical payroll reports
• Increases payroll accuracy and compliance
• Offers self-service capabilities

Notice that payroll software helps with the 3 improvement areas employers cited in the Deloitte survey regarding their payroll providers: compliance, accuracy, and self-service capabilities. Although you still need someone qualified to execute payroll, the right technology via a payroll vendor can vastly reduce the amount (and complexity) of work that needs to be done. Having said that, managed payroll is ideal for some employers, such as those lacking the proper onsite resources. If you’re leaning toward this option, make sure you perform due diligence before hiring a managed payroll provider.