Payroll: What are your options? The four types of payroll

Discover the main types of payroll solutions and how they can benefit your business

First published on Monday, Jul 01, 2024

Last updated on Tuesday, Jul 02, 2024

Effective payroll management is crucial for businesses of all sizes, impacting employee satisfaction, financial stability, and regulatory compliance. As a business owner or HR professional, understanding the different payroll options available is essential for selecting the right system that meets your needs. 

In this guide, we'll explore the four main types of payroll solutions: manual payroll processing, outsourced payroll services, payroll software solutions, and Professional Employer Organisations (PEO). By the end, you'll have the knowledge to make an informed decision that enhances your payroll operations.

What is a payroll system?

Payroll systems emerged as businesses recognised the critical need to efficiently track all financial aspects related to their workforce. Essentially, a payroll system is an application designed to streamline and oversee employee payments. In the UK, businesses must pay taxes based on employee wages exceeding specific rates and thresholds, which can vary.

A robust payroll system monitors employees' work hours and calculates pay rates, computes taxes and other deductions, and ensures precise payment amounts. It can also manage attendance records, process time-off requests, handle tax obligations, oversee expenses, and perform numerous other functions.

When implemented effectively, such a system ensures timely and accurate payments and payslips, keeping employees satisfied and simplifying even the most intricate payroll responsibilities through automated processes that require minimal upkeep.

What do I need to do to use a payroll system?

Planning payroll implementation requires careful consideration of several factors, primarily the timeline. Implementing payroll is a time-intensive process that should be initiated with ample lead time. The later you start in the tax year, the more data accumulation will necessitate thorough input.

Preparing for parallel pay runs and significant data entry is crucial. As a payroll manager, one option to alleviate this workload is outsourcing the implementation. This reduces the burden and brings in specialised expertise to oversee the process effectively.

There are various payment solutions available, each catering to different organisational needs. These include manual payroll processing, outsourced payroll services, payroll software solutions, and Professional Employer Organisations (PEOs). 

Each solution offers distinct advantages depending on factors such as company size, operational requirements, and available resources. So, what are the four types of payroll? Let’s find out…

Person using calculator on desk with laptop, manually processing payroll.

Manual payroll processing (in-house)

Manual payroll processing, historically the traditional method, involves calculating employee wages, withholding taxes, and distributing payslips entirely within the business. Despite technological advancements, some small businesses continue to choose this method due to perceived cost savings and control.

Manual processing entails meticulous record-keeping and compliance with tax laws, which can be complex and time-consuming. Calculation errors or late filings can result in penalties and employee dissatisfaction. 

For instance, a small accounting firm may initially opt for manual processing to maintain direct oversight and reduce software costs. However, as the firm grows or tax regulations evolve, the time and effort required for manual calculations and filings may outweigh the benefits. In-house payroll also lacks the scalability needed for expanding businesses.

Pros of manual payroll processing:

  • Direct oversight: In-house payroll allows for direct supervision and control over the entire payroll process, ensuring a hands-on approach to managing employee wages and taxes.

  • Perceived cost savings: Some small businesses initially view manual processing as cost-effective, avoiding immediate software and automation expenses.

  • Compliance control: Manual processing encourages meticulous record-keeping and ensures businesses stay up-to-date with evolving tax laws, reducing the risk of compliance issues.

Cons of manual payroll processing:

  • Error-prone: Manual calculations can lead to higher error rates, potentially resulting in financial discrepancies, penalties, and employee dissatisfaction.

  • Time-consuming: The process demands significant time and effort for accurate calculations and timely filings, which can be inefficient as businesses expand or tax regulations change.

  • Scalability limitations: In-house payroll systems may struggle to accommodate growth, lacking the scalability and efficiency of automated solutions as operations expand.

Outsourced payroll service

Outsourcing payroll to specialised providers is increasingly popular among businesses seeking to streamline operations and ensure compliance. Outsourced payroll services handle all payroll functions, including payslip calculations, tax withholdings, and compliance filings. This option reduces the administrative burden on internal staff, allowing them to focus on core business activities.

One significant advantage of outsourcing is access to payroll expertise and compliance knowledge that external providers offer.  According to Deloitte's global outsourcing survey, 49% of businesses outsource to gain acess to new capabilites provided by experts that come with outsoursing services.

Plus, outsourcing can be cost-effective, eliminating the need for internal payroll staff and reducing the risk of penalties for errors or late filings. In fact, the same survey revealed that 57% of bussiness outsouce in order to cut costs.

However, selecting an outsourced payroll provider requires careful consideration. To accommodate growth, businesses should assess provider reliability, data security measures, and scalability. Clear service-level agreements (SLAs) and regular audits can mitigate risks associated with outsourcing sensitive payroll information.

Pros of an outsourced payroll service:

  • Expertise and compliance: Access to specialised knowledge and compliance expertise that ensures adherence to payroll tax laws and regulations.

  • Cost-effectiveness: Potential cost savings by avoiding the need for internal payroll staff and reducing the risk of penalties from errors or late filings.

  • Focus on core activities: Allows internal staff to concentrate on core business functions rather than administrative payroll tasks.

  • Scalability: Ability to scale services according to business growth without significant internal restructuring.

  • Risk mitigation: Clear service-level agreements (SLAs) and regular audits can mitigate risks associated with handling sensitive payroll information.

Cons of an outsourced payroll service:

  • Dependency on external providers: Reliance on a third-party for critical payroll functions, which may pose a risk if the provider fails to deliver.

  • Data security concerns: Potential security risks associated with outsourcing sensitive payroll data, requiring robust data protection measures.

  • Quality control: Maintaining consistent quality and accuracy in payroll processing compared to an in-house team.

  • Loss of control: Reduced control over the timing and handling of payroll operations, which could affect responsiveness to internal needs.

  • Cost considerations: Initial cost assessments should include potential hidden fees or unexpected expenses related to outsourced payroll services.

A man in glasses sits at a desk with a laptop and a phone, researching types of payroll software.

Payroll software solutions

In the digital era, payroll software solutions offer automation, efficiency, and scalability for businesses of varying sizes. Software as a Service (SaaS) platforms like BrightHR Payroll integrate payroll functions with other HR processes, enhancing overall workforce management.

Payroll software automates payslip calculations, tax deductions, and employee benefits contributions, reducing manual errors and ensuring compliance with changing tax laws. 

The flexibility of payroll software allows businesses to customise features such as direct deposit, employee self-service portals, and integration with accounting systems. For instance, a tech startup may choose cloud-based payroll software to facilitate remote workforce management and scalability as the company expands globally.

Cost-effectiveness is another key advantage of payroll software, as it eliminates the need for extensive IT infrastructure and dedicated payroll staff. Subscription-based pricing models ensure predictable costs, making it accessible for small businesses to adopt advanced payroll management technology.

Popular payroll software solutions offer features tailored to specific industries and compliance requirements, enhancing operational efficiency and employee satisfaction. Integration with HR functions streamlines data management, enabling real-time reporting and analytics for informed decision-making.

Pros of payroll software:

  • Automation and efficiency: Payroll software automates payslip calculations, tax deductions, and benefits contributions, reducing errors and improving efficiency.

  • Scalability enables businesses to scale operations seamlessly, supporting growth and expansion.

  • Customisation: Businesses can customise features like direct deposit and employee self-service portals to suit their needs.

  • Cost-effectiveness: It eliminates the need for extensive IT infrastructure and dedicated payroll staff, with predictable subscription-based pricing.

  • Integration and analytics: Integration with HR functions allows real-time reporting and analytics, aiding decision-making.

Cons of payroll software:

  • Initial setup complexity: Implementing and customising payroll software can be complex and time-consuming initially.

  • Dependency on internet connectivity: Cloud-based systems require stable internet connectivity for uninterrupted access.

  • Security concerns: Storing sensitive payroll data online raises security concerns that need robust measures.

  • Training and support needs: Users may require training to utilise all features effectively, and ongoing support is crucial for troubleshooting.

  • Vendor reliability: Dependence on the vendor's service uptime and support responsiveness can impact operational continuity.

Professional Employer Organisations (PEO)

For businesses seeking comprehensive HR and payroll solutions, Professional Employer Organisations (PEOs) offer bundled services payroll processing, employee benefits administration, and HR compliance management. PEOs act as co-employers, assuming responsibility for payroll taxes and regulatory compliance on behalf of client businesses.

Partnering with a PEO provides access to economies of scale, allowing small and mid-sized businesses to offer competitive benefits and reduce administrative costs. According to the National Association of Professional Employer Organisations (NAPEO), businesses using PEOs grow 7-9% faster than those without, emphasising the strategic advantages of outsourcing HR functions.

Additionally, PEOs offer expertise in navigating complex employment laws and regulations, which is particularly beneficial for businesses expanding into new states or countries. However, businesses should carefully evaluate PEOs based on service quality, industry specialisation, and cost transparency.

Despite these advantages, some businesses may find the PEO model restrictive in terms of employee control and customisation of benefits packages. High upfront costs and long-term contractual commitments require thorough financial planning and risk assessment before entering into a partnership with a PEO.

Pros of PEOs:

  • Comprehensive HR and payroll solutions, including payroll processing, benefits administration, and compliance management.

  • Access to economies of scale, enabling competitive benefits and reduced administrative costs.

  • Potential for accelerated growth compared to businesses without PEOs.

  • Expertise in navigating complex employment laws and regulations, beneficial for expansions.

  • Shared responsibility for payroll taxes and regulatory compliance.

Cons of PEOs:

  • Reduced control over employee management and benefits customisation.

  • High upfront costs and long-term contractual commitments.

  • Variability in service quality and transparency across PEOs.

  • Potential for conflicts in decision-making due to co-employment structure.

  • There is a need for careful evaluation of costs versus benefits before partnership.

Discover BrightHR Payroll Software

Choosing the right payroll solution hinges on understanding your business's unique needs, compliance requirements, and growth trajectory. Whether you opt for manual processing, outsourced services, payroll software, or a PEO, each option offers distinct efficiency, cost-effectiveness, and scalability advantages.

BrightHR Payroll provides tailored solutions designed to simplify payroll management and enhance HR operations for businesses of all sizes. By integrating advanced payroll software with comprehensive HR support, BrightHR ensures accuracy, compliance, and employee satisfaction.

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