The Ultimate Guide to Outsourced Payroll
Author: Georgie Gilbert
Expertly reviewed by Xanthe Simpson, payroll expert since 2002
“Because the purpose of business is to create a customer, the business enterprise has two - and only two - basic functions: marketing and innovation.”
Can I afford to hire a new staff member?
As your business has grown, you’ve probably often pondered the question, “can I afford to hire someone to do this for me?”
It’s easy to assume that hiring more people is the solution to growing your business. The more the merrier, right? Employees can add incredible value but they need to be managed and trained, and there is of course the financial aspect to adding headcount.
Hiring employees to perform tasks that aren’t directly correlated to the growth of your core competencies as a business, is where it is a good idea to be asking this question instead:
Shall we hire or shall we outsource?
Where hiring an employee doesn’t help you bring in new business or improve your product or service, then outsourcing is a good idea.
What is outsourced payroll?
Outsourced payroll is a service provided to businesses who wish to have the compliant calculation and payment of wages managed by an external provider to:
Ensure wages are managed by actual Payroll Specialists
- There is a reason a lot of accountants don’t offer payroll services. It’s actually not even covered when studying to become an accountant, nor during the professional year of training to become a certified chartered accountant (CA) or CPA.
- 1000s of businesses have someone managing payroll whose primary role is in fact something different and sometimes completely unrelated to payroll.
- Payroll Specialists know the ins and outs of the clauses in your award or agreement and how they behave in reality.
Ensure compliance to Fair Work
- Australian payroll is one of the most complex industrial award systems in the world, possibly in the top 5 of all OECD countries.
- This complexity means it is worth outsourcing it to teams who know what they’re doing.
- What’s more, there are 122 modern awards out there and whilst you may only be paying to 1 of these 122 awards, you’re paying to 100s of pay conditions that don’t always have practical applications.
Consider this story: John, a publican and wonderful boss, who employed 57 staff in his pub in regional NSW, decided instead of paying an allowance of $3.64 for every 8 hours worked, he would pay his staff $2 more per hour for every hour worked. He was that kind of bloke. Instead of being praised, he was fined by Fair Work.
- These small gestures, even if they’re done with the greatest intent, can backfire and put business owners in a spot of bother.
Generate agility in hiring practices
- Hiring a payroll manager isn’t always the answer – perhaps you’re not yet large enough to warrant someone working full time in payroll.
- Consider too the scenario where you have only 1 person working in payroll, i.e. just one person in your business who knows how to get staff paid properly – what will you do when they go on leave?
- There is always an opportunity cost – could you hire someone instead who can look after customers, or help you grow your customer base?
Remove items from your To-Do list.
- And this doesn’t just stop at payroll.
- Think accounting, bookkeeping, social media, recruitment, content management and email management.
What does payroll outsourcing involve?
The best place to start is to understand your unique payroll scenario – how do you pay your staff? Do staff log timesheets? Do you pay salaries to some employees where their salary is meant to cover their award entitlements?
What workflows are in place to produce the data we need for payroll?
It’s not just about payroll sitting in it’s own silo. Workforce management operations and HR workflows can influence efficiencies and frustrations.
The next step involves assessing your set up in the solution you’re currently using and making an expert assessment if it is optimised.
Transferring the process to your payroll specialist involves:
1. Discovery
- Understanding your unique scenario – everything from deductions through to cost centre reporting
- Review existing payroll processes for accuracy and compliance.
2. System Configuration
- Configure payroll software to align with business rules, award requirements, and leave accruals + integration with any third party softwares for timesheets, rostering, or ERP systems.
- Set up reporting requirements for management, ATO, and auditors.
3. Payroll Processing
- Capture employee work hours, overtime, and allowances.
- Calculate gross-to-net pay, PAYG withholding, and superannuation contributions.
- Generate payslips and ensure employees are paid on time, every time.
4. Compliance & Reporting
- Lodge Single Touch Payroll (STP) reports with the ATO.
- Monitor Fair Work changes, minimum wage updates, and modern award variations.
- Provide end-of-year payment summaries, reconciliations, and audits.
5. Ongoing Support
- Manage payroll queries from employees.
- Monthly reporting on all payroll reviews and checks performed on the pay run each month – providing the client with a clear and concise understanding of the months variances and activities outside of the norm.
- Ensure accurate changes are made to Enterprise Agreement or Award rules when required, including rules testing prior to going live.
- Scale payroll as your workforce grows or contracts.
- 6-monthly reviews of workflow processes to ensure onboarding and ongoing documentation processes are efficient.
How much does payroll outsourcing cost?
Technology has lowered the barriers to entry for highly capable payroll experts and experienced payroll managers that offer their services at a fraction of the rate of of a full time employee.
These are called Outsourced Payroll Providers.
The cost of outsourcing your payroll in Australia can depend mostly on the size of your workforce and complexity of your requirements.
Most providers will charge either a per-employee, per-pay-run fee (often ranging from $5–$25 depending on your pay frequency, or a monthly fixed service fee for ongoing management.
Additional costs will often apply for:
- Initial payroll setup or payroll implementation,
- The build of rule sets according to your Enterprise Agreement
- Adjustments to rule sets determined by variations you make to Award rules
- Compliance reviews, or
- End-of-year reporting
While costs will vary from one provider to another, many businesses find outsourcing more affordable than hiring an in-house payroll specialist, especially when you factor in the cost of software, training, and compliance risks.
So yes that’s right, don’t forget:
- Software costs
- Compliance risks – no one wants to go through a major reconciliation project down the track
- Staff training
And of course, the cost of recruitment and sourcing payroll talent in a tight market.
Will I retain control over my payroll records?
Should you wish to have full administrative access to your payroll records, you should.
Should you wish to simply view a report instead, you should have that.
A report from your outsourced payroll provider could include things such as:
- Variances in this pay run to another
- Outliers above a 10% threshold
- Employees on leave
- A report on the cost of the pay run this month
- Oncosts for this pay run
- Rostering to timesheet variance reporting – did employees work than what was actually planned
Ultimately you can have as much control over your payroll as you wish to have.
What should I expect from my managed payroll provider?
Transparency.
Reporting each month on the checks performed should be standard.
Just as an internal Payroll Manager would report to his or her boss on payroll variances, costs and outliers, so should your Payroll Service Provider.
When engaging an external Payroll Specialist, ensure that:
- They have experience in and around your industry
- They have the capability to grow with you
- You trust them!
And of course, if you’re paying to an Award, or Enterprise Agreement, can the software they use handle it, and provide you with automations?
You should be able to either see these automations or test them for yourself.
And finally, if you’re paying to an Award or Enterprise Agreement, does this managed payroll provider have the experience and expertise to handle it?
Again, do you trust them?
Business is about relationships after all. And you’re handing over access to important information.
The right provider though will remove the burden of the workload as well as the stress in ensuring accuracy in payroll to your employees every time.
Back to this question...
Should you outsource or insource?
Doing payroll is not a core competency if you’re making baby formula, manufacturing materials handling equipment, or building sheds for industry.
Managing payroll is not a good use of your time when you could otherwise be focusing on your core competencies and true talents.