written by | February 28, 2022

Reasons for Hiring Third Party Payroll Services by Companies

Let us first try to understand what payroll is. A Payroll can be defined as the list of all those employees of a company who are employed on a full-time basis, receive a salary and other benefits as per the company's policies. It is the total amount that a company has to pay as salaries. This is one of the most crucial responsibilities of every organisation. It involves the calculation of an employee's payment, deduction of some taxes, funds, insurances, and payments to them. Generally, a payroll is confused with the term, salary. But there is a significant difference between the two, although they both sound similar. Salary is what the employee earns that is a certain amount of pay that a worker receives whereas the payroll is the whole process by which the salary is paid to the workers.

Did you know?

A Third Party payroll enables a Company to focus on its futuristic business objectives as it relieves them of everyday operations.

What is the meaning of Third Party payroll?

Most companies outsource their payroll duties to a third party. The employer transfers requisite funds to the third party which then takes care of all the payroll responsibilities. Wages are now no longer paid from the employer's account but are paid by the third party and thus are known as Third Party payroll. Third-Party payroll also performs a host of other services as well. According to surveys conducted, today around 25% of major league businesses rely upon a Third Party payroll for various services. It's a mutual employer-employee benefit structure.

Who hires Third Party payroll?

Given below are some of the key reasons that Companies hire a Third-Party payroll:

  • Companies that are unable to manage the payroll system of managing salaries, employee benefits, and the evaluation of the taxation are the ones who hire a Third Party payroll.
  • Companies that do not have a well-structured in-house HR management system and are struggling to manage the recruitment systems also advocate the outsourcing of the services.
  • Third-Party payroll is a great opportunity for those who wish to gain experience and work for a reputed company.
  • Candidates seeking jobs on a contractual basis.
  • Third-Party payroll services are a preferred choice for most companies dealing in the IT sector, Banking, Finance, Hospitality, Software companies, Hardware companies, Retail, Pharmacy, Construction, and BPO sectors.

Also read: What is Full and Final Settlement Process in Payroll

Key Responsibilities of the Third Party payroll agency

A Third Party payroll agency provides a host of services and manages non-core business functions for the company. Some of the key responsibilities of Third Party payroll are:

  • Integrate time-sheets into tax liabilities as well as payable salaries
  • Providing management reports.
  • Manage tax deducted at source, tax filings, and deductions.
  • Process payment discrepancies.
  • Manage wage garnishments and other ad hoc requirements of the organisation.

Benefits of Engaging a Third Party payroll

Outsourcing payroll can help companies lower their operating costs by providing the necessary software to streamline the processes. Let’s look at more benefits:

  • Shared Responsibilities: Third Party payroll is not only responsible for managing the salaries but also performs many other duties as well. They share a lot of responsibilities that otherwise burden the companies and exhaust their time. A Third Party payroll also helps in the screening and recruitment of the company's staff along with the handling of the termination formalities and also appointing the temporary staff. 
  • Greater access to technology: Some Companies do tend to continue with outdated software. An outsourced agency assures usage of the latest technology. Comprehensive systems can keep a track of all alterations to government requirements for the agency to act accordingly.
  • Cost Saver: Outsourcing various responsibilities to a Third Party results in a large amount of savings to organisations. Studies have revealed that the cost savings of the companies is no less than 15% and even increases up to 20%. These cost savings are put to more productive uses. This also relieves the authorities of managing internal discords amongst departments, teams, and even employees.
  • Time Saver: The whole process of the Third Party payroll is very tedious and time-consuming. The assigned team has to keep monitoring all the changes from time to time. With the involvement of a Third Party agency, the time is saved and hence is used in main-core performance-enhancing tasks of the company.
  • Better focus on business goals: With all the time saved and hassles avoided, the company is able to shift its focus towards more productive activities. It is able to strategise on long-term goals, work on feasible alliances, and concentrate on other lucrative business objectives.
  • Professional grade services: By hiring a Third Party payroll, a company enjoys the services of a highly professional team that is well-versed in the latest software and technology. The Third Party payroll has a team of experts who handle all the responsibilities with utmost expertise. Their expert staff is always updated about the new norms and occurring changes, which are introduced by the government. The service providers also have better security protocols and it is all their responsibility to safeguard the data and ensure that the data will not be tampered with. 
  • Benefits for the employees: Generally the pay scale is higher when the recruiter is a Third Party agency. The chances of permanent employment are also better when a Third Party is involved in the process. 

Potential disadvantages of a Third Party payroll

  • Incremental costs to the company: With the hiring of a third party an additional cost to the company is added which it pays to the hired party in the form of its fee. 
  • Possible areas of disagreement between the company's HR and the HR of the outsourced agency: The company's HR team starts losing its absolute hold over its employees and has to share it with the Third Party agency. This may lead to some clashes in case there is not a perfect understanding between the two.
  • Lack of access to candidates: A newly recruited employee may be the best candidate but is practically a stranger on his or her first day. This lack of contact can be extremely demotivating for the person.
  • Communication issues: One of the biggest disadvantages is the potential for miscommunication. A large majority of businesses do not get feedback from an outsourced agency. Businesses have always cited other problems with recruitment agencies like receiving no responses at all, poor communication, or either too much or too little communication.

Also read: How to do Payroll Management in Tally ERP 9

A few important factors to be taken into consideration by candidates when they get recruited a company through a Third Party payroll:

  • At the time of being recruited, candidates should bear in mind that they are being hired by a Third Party payroll agency and not directly by the Company. 
  • They should be aware of the risks associated with a job on a contractual basis.
  • A candidate who is a fresher gets good hands-on experience by working with high-value clients and gets better prospects of future recruitments.


An outsourced Third Party payroll is well-structured and a resourceful agency that relieves an organisation of everyday responsibilities. This offers the organisation more time to focus on the achievement of their goals, strategize, and work towards the expansion of the business. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.


Q: Why are companies increasingly opting for hiring on the third payroll?


If a company outsources an agency, it becomes free of all everyday staff issues, salary payments, recruitments among many other functions. Working with a payroll partner provides the HR and payroll teams access to helpful technology and programs to assist with their specific tasks. From savings in costs as well as time to increased access to helpful technology and a professional team, outsourcing payroll can assist companies to complete their payroll quickly and accurately.

Q: Are there any disadvantages to Third Party payroll services?


Like any other system, the Third Party payroll system has its share of advantages and disadvantages. Some of them include extra cost addition in the form of their fee to the company, job insecurity of the candidates hired by them, insufficient experience counting when hired by the outsourced agency.

Q: What is the meaning of a Third Party employment and why is it crucial?


A Third Party employment is the outsourcing of HR services for the said company.  There are many reasons for this. One of the most common is, the incompetence of the in-house HR management. It also becomes important especially when the company is extending its presence overseas.

Q: What should one do if they get an offer from a Third Party payroll regarding hiring from a big company?


One should compare all the pros and cons of getting hired by a Third Party payroll and decide accordingly. It also includes the consideration of future goals by the candidate and decisions should be made after weighing all those factors.

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