Outsourcing presents cost saving opportunities for employers.
Outsourcing is a buzz word that seems to be used more and more in the business world. Most people assume outsourcing means paying workers in foreign countries to perform needed tasks, but it can also mean hiring independent contractors in the U.S. as well. Outsourcing often saves employers money compared with using traditional payroll staff, but it also can create problems as well. These costs savings must be weighed against any inconveniences when considering the pros and cons of outsourcing and payroll employees.
Wage Costs
Outsourcing gained a higher profile in the late 1900s as more U.S.-based companies began contracting foreign workers to carry out duties previously performed by payroll staff. Lower labor costs abroad -- typically in developing countries -- fueled the outsourcing movement as lower wage costs resulted in greater profits for outsourcing companies. In the U.S., for example, the average annual wage in 2009 was $40,711.61 while at the same time the average Indian earned less than $800 per year, according to the Social Security Administration and ExpressIndia.com. In most cases outsourcing basic tasks such as data entry, data analysis, customer service and simple accounting tasks results in much lower wage costs than using U.S.-based payroll employees.
Payroll Taxes
Employers outsourcing work avoid certain taxes in the U.S. and save themselves time and resources. If an employer outsources work to a U.S.-based independent contractor it is not required to pay any payroll tax for that person so long as the contractor provides a valid Taxpayer Identification Number. Nor are employers required to withhold Social Security or Medicare taxes for independent contractors, which saves both time and paperwork. An employer that outsources work to a foreign country also avoids paying or withholding taxes for foreign workers.
Employee Benefits
For an employer to attract skilled employees in a competitive job market it must offer attractive compensation and benefit packages to prospective employees. Hiring and retaining talented U.S.-based payroll staff often requires employers to offer retirement plans, health insurance, paid leave and other benefits that add to overhead costs. Outsourced labor rarely demands such perks, and employers can contract independent contractors inside the U.S. or abroad without taking on these additional benefit expenses.
Communications
Outsourcing work to U.S.-based independent contractors or overseas workers is not without its problems. Communicating with independent contractors is often more difficult than with in-house payroll employees. Payroll employees are generally based in one or more central locations where employers can communicate with them face-to-face or easily contact them by phone during predetermined hours. Language barriers, poor communication technology and differences in time zones make it especially difficult to communicate with workers performing outsourced work in foreign countries.
