Everything You Need To Know About Outsourcing Payroll Services in Kenya

Get to know what outsourcing Payroll is, how to do it in Kenya, what functions to outsource and the advantages and disadvantages of outsourcing payroll services in Kenya
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Posted by: Admin
Category: Insights, Payroll, Wagemaster
outsourcing payroll services in Kenya

Outsourcing continues to be an integral part of business strategy not only for large corporations but also for small-scale businesses, at least according to a Deloitte 2020 Global Outsourcing Survey. Locally, large corporations whose books of accounts tally in the billions like Safaricom have found the gem in outsourcing certain businesses functions, and the rewards are amazing business-wise.

Certainly, outsourcing payroll services in Kenya is part of the strategy that smart businesses have realized and are exploiting to their advantage.

In this article, we seek to answer the pressing questions around outsourcing payroll services in Kenya and cover certain critical, decision-making points around outsourcing payroll services. These include:

  • What is payroll outsourcing?
  • What Payroll Functions Can Be Outsourced?
  • How does outsourcing payroll services in Kenya work to my advantage?
  • What are the benefits and disadvantages of outsourcing payroll services in Kenya?
  • How does one find the right payroll outsourcing partner?

Let’s get into the details, shall we now?

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What is payroll outsourcing in Kenya?

Although businesses are unique from one industry to another, certain functions, processes, and services are common to all. Payroll processing is one such function as any business with an employee(s) must process payroll in one way or another.

Now, payroll processing can be done ‘in-house’ by an assigned team of HR specialists or by a third-party organization recruited through normal channels.

Outsourcing payroll services in Kenya is the process where an organization or business contracts a third party to offer payroll processing services. As payroll processing has several functions, some organizations may decide to only contract a third-party firm to execute only a few specialized functions in the payroll processing process while more internal payroll processes are handled by a select team of the organization or business.

The third-party organization offering the payroll processing service may be an accountancy firm, a professional employer organization- commonly known as PEO, or by a specialist payroll company like Digital Frameworks Ltd (the creators of Wagemaster)

What Payroll Functions Can Be Outsourced?

As already mentioned, outsourcing payroll services in Kenya can be executed in two ways- fully outsourced or co-outsourced. If every payroll process and function is outsourced to a third-party firm, then this arrangement is referred to as full outsourcing of payroll functions. If a few functions are retained to be handled by an internal team, then this is co-outsourcing payroll.

Because payroll is a complex process involving complex calculations and data, some functions may be considered better handled by the internal team. In most times, the following payroll functions are outsourced:

  • Employee payroll account set up which involves the acquisition of all necessary personal employee information required to process the employee’s payroll.
  • Setting up of payment method which is arrived at through careful consideration by the contracting company. This can be either automatic payments (direct deposit, either through the banks, MPesa, etc) or paychecks.
  • Income and tax withholding as applicable
  • Remittance of taxes to KRA. Although the contracted payroll provider is required to remit taxes on behalf of the employer, the obligation lies with the employer.
  • Managing employee deductions where applicable such as compensation, mortgages, health insurance, etc.
  • Managing necessary end-year declarations and tax forms

The decision as to what functions to outsource and retain is entirely up to the employer company or business to decide, albeit with some guidance from a professional. Also, if the budget is constrained, then not all functions will be outsourced.

How does outsourcing payroll services in Kenya work? The Steps

In Kenya, the process is pretty straightforward but this may change in different jurisdictions or where international payroll service providers are involved.

The general process of outsourcing payroll services in Kenya includes the following steps once the right provider has been identified (more on how to choose the best payroll provider will later in the article):

Decide the terms of engagement

Terms of engagement detail how the whole process will work as well as detail all the direct and indirect costs involved. The contracting firm must decide and agree on the terms of engagement before the process begins.

Confirm all essential registrations are accurate

Where licenses and registrations are required to run payroll, the payroll processing service provider will have to verify and confirm all the licenses and registration details are accurate before commencing the contract.

Acquisition of necessary business and employment information

To run payroll, business and employee details are required. The payroll outsourcing provider will need access to this information to manage your payroll.

Payroll processing intervals

Once the above is set in place and agreed on, then it’s time to decide the payroll processing intervals depending on what the law provides as well as the terms of employment agreement the business has with its employees. All deductions including payroll taxes will be made before employees receive their net pay.

Submission of reports

Once the payroll processing has begun, the client expects regular reports to keep abreast of how the business process is performing. This has to be done based on the agreed frequency.

Regular tax and contribution remittance

As is required by law for all registered companies to remit applicable taxes and contributions to KRA and other bodies like NHIF, NSSF, etc., the payroll outsourcing provider will remit the agreed taxes and contributions on time.

What are the benefits of outsourcing payroll services in Kenya?

It’s no secret that outsourcing payroll services in Kenya come with great goodies. Let’s review the advantages below.

Cost savings

Processing payroll requires adequate infrastructure- be it personnel, computer, payroll software, or accounting software. You also have to factor in the cost of training personnel to use the software which has to be repeated every time a new employee in this department comes in.

There’s also the need for employers to keep training personnel on changes in the law, best practices and also fight to meet deadlines.

Using a payroll processing service provider shifts the cost of all the above and frees up your personnel to focus on other functions of the business.

More time for core business functions

One of the benefits of freeing up personnel and resources tied to the payroll process is that you get more time and energy to focus on more core business-oriented functions. Payroll is hardly a core business function but requires resources devoted to it internally. If this can be lifted, then more time for core business functions is availed.

Saving time

Payroll demands a considerable amount of time and attention to process correctly every month. This is true regardless of how many employees you’ve got. If you handle payroll in-house, then this requires devoted personnel.

If you analyze the time spent on processing payroll every month for a full business year, outsourcing payroll services make more sense as time is money.

Also, a lot of time is wasted in trying to resolve occasional mistakes that are made during payroll processing or when a sudden audit request is rolled out. Outsourcing payroll services to a payroll processing service provider saves you all the time and gives your team time to focus on core operations like sales and marketing.

Expert access

As payroll is or is part of the core business of the payroll processing service provider, they have invested enough expert personnel with years of diverse experience to handle your payroll. This means that you don’t need to worry about the quality of your payroll processes as it’s being handled by experts.

Most payroll processing providers hire individuals with years of relevant experience and a deep understanding of payroll laws and regulations in Kenya, including complex payroll tax. This is very critical for the accuracy and efficiency of your payroll processing.

Regulatory compliance

If there’s anything that small-to-mid-sized companies or businesses dread most if failing to comply with regulations, laws, and mandatory rules set by KRA and other agencies collecting deductions like NHIF, etc. This gets worse where foreign governments may be involved.

To avoid being a victim of non-compliance, companies invest in training or hiring individuals with a deep understanding of such compliance requirements which is obviously an expensive undertaking.

Using an experienced payroll processing service provider takes off the burden of compliance failures due to negligence or ignorance on the side of payroll processing employees.

The experts at the outsourced firm will ensure all compliance requirements are adhered to fully.

Probable disadvantages of outsourcing payroll services in Kenya

While it’s undeniable that outsourcing payroll services in Kenya is a smart move for any organization, some challenges may come with it. Below are likely outcomes too.

Loss of control

This is no secret. When payroll is handled in-house, the company has total control over the entire process and provides oversight for quality assurance, and employee data is safeguarded as per government regulations and internal processes.

This control is limited when you outsource payroll processing services to a third party.

Issues of customer support

Customer support is critical to the survival of any business. If there are discrepancies with the payroll processing or something goes wrong along the way, the payroll processing service provider is required to offer customer support to resolve the issues at hand.

If their customer support is questionable, then fixing such issues becomes complicated and painful.

Is outsourcing payroll a good business idea?

Definitely yes but a lot depends on what you think of its advantages and disadvantages. If everything checks out for you, then outsourcing payroll is a good investment. Nonetheless, outsourcing payroll services in Kenya is highly recommended for:

  • Start-ups and small businesses that require cost-efficient payroll processing that complies with all applicable laws and regulations by both KRA and other agencies.
  • Case of international expansion in a new market. Most times, international companies are unfamiliar with the regulations in the territories they are expanding to and a payroll processing service provider resident in the country will be a viable option to ensure compliance.
  • Businesses that are growing fast and are constantly hiring more staff and have to scale up their existing payroll processing.
  • In cases where mergers and acquisitions are taking place and the newly birthed entity cannot handle payroll processing or has none in place.

How to choose the right payroll processing provider in Kenya

Choosing the right payroll processing provider is the make-it or break-it factor in outsourcing payroll services in Kenya. Obviously, you need a trusted partner whose business culture and processes are in sync with your company’s ambitions and culture.

The following guidelines are critical when choosing a payroll processing service provider in Kenya.

Company Reputation over everything

There’s too much to lose if you mess up with your payroll processing. Using a reputable company not only brings confidence and is also a morale booster knowing that your payroll is in safe hands. A reputable company will take care of your employee’s data, submit statutory deductions on time, pay employees on time, and much more.

Look for a provider with verifiable track records of dealing with companies of your size and type. You can look for reviews online as well as insist on certified recommendation letters from past clients of your choice from the portfolio they have provided.

What other HR services do they offer?

A good payroll processing company should accompany its payroll processing services with additional HR functions that complement payroll processing. This may include extra services such as tax preparation etc.

It’s imperative to get a company that offers more complementing services to the one you currently need.

Verify their information security policies, procedures, and processes

As payroll is processed electronically, employee data is at stake and has to be protected without the likelihood of a breach. The payroll processing service provider ought to have and demonstrate convincing rules and regulations on data protection.

Verify their regulatory compliance capabilities

Whether it’s through a referral or open-tender, you must ensure that the payroll processing provider can stay on top of changes in regulations, laws, and rules set out by KRA and other government agencies like NSSF, NHIF, HELB, etc. This ensures that your business remains compliant.

Before settling down to discuss with a potential provider, write down your set of questions about the service and how their processes are, and their capabilities.

Warp Up

Outsourcing payroll services in Kenya is a strategic way of gaining access to the expertise you can’t afford to run your payroll processing, enjoy huge savings on cost and time, as well as stay compliant in all your payroll processing. Not only does it open doors to improved efficiency, but it also avails the necessary time for personnel to focus on more core business functions like marketing, sales, customer care, and more.

If your company is wondering how to go about payroll processing, talk to us now or review our Wagemaster payroll and HR software for Kenyan businesses like yours.

You can also read more about Payroll best practices or review our FAQs. We also have a PAYE calculator to help you get your taxes and deductions right. Check it out here.

Author: Admin

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