Outsourcing payroll accounting allows a business to significantly reduce the cost of accounting and reporting, without sacrificing the quality of the payroll specialist’s work. To understand the efficiency and benefits of outsourcing payroll accounting functions, let’s consider the financial and other benefits for the business entity.
Costs of employing a payroll specialist
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Most managers mistakenly believe that the cost of calculating employee salaries is solely the salary of a specialist who handles it. However, this approach is fundamentally flawed.
The cost of employing an accountant to calculate payroll includes not only direct costs but also indirect costs. For example, money that has been spent on finding an employee in the labor market as well as money that has been spent on maintaining an employee’s qualification.
A payroll specialist requires such expenditures:
- The employee’s remuneration according to current legislation.
- HR costs, which include the cost of finding an employee, adapting him or her to work in a specific company, training and maintaining his or her qualification, motivation in the form of bonuses, and other incentives.
- Insurance against possible losses and damages which the company may incur due to incompetence, intentional or unintentional mistakes of the employee. For example, the payment of fines and penalties because of tax underpayments.
Let’s look at each of the items. All numbers are approximate, the real numbers can be greater.
Expenditure for the maintenance of an employee
The salary of a specialist who knows how to calculate salaries and mandatory payments to the budget is 2500 dollars, that is, for the year you will have to spend 30 000 dollars.
This amount has to be increased by another 20%, which is spent on insurance premiums, payments to the pension fund, social security, and health insurance. The calculation is based on the minimum interest rates for an employee who works in an office.
Consequently, you need to add 500 dollars mandatory payments to the amount of 2500 dollars. Over the year, the amount to be paid is 36 000 dollars.
You have to take into consideration that the employee, who is responsible for paying the salary, won’t be able to work 100% of the time. He or she may fall ill, be on vacation in accordance with the Labour Code, or have other valid reasons for not coming to work.
If your in-house accountant takes a 28-day vacation and is sick for up to 2 weeks during the year, you have to replace the payroll specialist for 1.5 months with another specialist. The costs of the substitute should also be included in the expenses, as the main accountant is also paid.
The next important point is the training costs of the employee. Even if an experienced employee is hired to calculate the salary, he or she cannot maintain his or her qualifications all the time due to changes in legislation.
Therefore, it is necessary to send him or her to seminars and refresher courses. The costs of training may vary. But practice shows that it is necessary to spend at least 3000 dollars per year.
The amount of the bonus and its payment itself depends on the internal regulatory documents of a particular company. Accountants who calculate salaries are usually paid bonuses based on the results of the accounting period. That is:
Bonuses may be paid monthly for the quality performance of current job duties. As a result, a bonus of 3000 dollars should be included in the annual costs.
Intangible incentives are also often used. One of the most common is health insurance paid by the employer. The average payment for health insurance is about 4000 dollars per calendar year.
Optional expenses are also possible, the cost of which must also be taken into account:
- Reimbursement of sports activities.
- Reimbursement of food and/or travel costs to work.
- Compensation for mobile phone expenses.
- Corporate events and holiday expenses.
There is another cost item that is not usually included in the costing. These are one-off and recurring costs:
- The birth of a child, anniversaries, and other festive occasions, which are usually encouraged by cash payments.
- The purchase and maintenance of specialized software for the employee’s work.
- The purchase of furniture and a computer, and their replacement as they wear out.
A large number of companies also buy TVs with Netflix or XBOX subscriptions for the recreation area. These expenses must also be taken into account when calculating the accountant’s pay. And if you can’t minimize the cost of XBOX, you can minimize the cost of a Netflix subscription. You can find out how to profitably do this through any service, for example cooltechzone.
All expenses described above can cost your company 7000 dollars per year but if you try to minimize them, the amount will be less. Another important factor is the provision of workspace. The cost of renting a square meter in a medium-sized office building would be, for example, 300 dollars.
According to sanitary norms, one office worker needs around 6 square meters of space to work. Even if you reduce this norm by a third, i.e. allocate 4 square meters, you need to add to budget 1200 dollars each year.
So, $36000+$3000+$3000+$4000+$7000+$1200=$54200. This is the minimum amount a company should spend on the in-house accountant. And we haven’t even calculated timesheet conversion.
In most cases, it is really better to use outsource payroll services.
The scope of services provided by the outsourcing company under the agreement
The types of work that an outsourcing company (provider) performs under a payroll contract depend on the package chosen and the responsibilities specified in the agreement. Most often the services are divided into two types:
- Basic. They are provided monthly according to a set schedule. They usually include the actual payroll calculation and other activities that go along with the service. For example printout and delivery of payslips, submission of reports, entering entries in the client’s financial system.
- Extra. These services are provided by a provider as needed. The package of services in this case depends on the specifics of work and accounting organization of a particular client.
Please note that the amount of payment to the provider depends on the amount of work on the first item (the number of employees, who need to calculate the salary) and types of services on the second item.
But the advantage of outsourcing payroll calculation is that it is easy to scale up the services after ordering the minimum amount of services, as the company develops and the number of employees increases.
Basic and additional services of the outsourcer
The basic cost of payroll outsourcing includes the following types of services:
- Preparation of an enterprise-wide payroll statement, divided into sections by company department or type of payment. The classification of analytical accounting items is negotiated separately.
- The total amount of payroll and the number of compulsory payments to be made by the company to the budget and funds.
- The payslips for each employee. These can be provided in the form of e-mail or messenger messages, databases for posting on the corporate portal, and so on.
Payroll outsourcing also involves the provision of additional services as the need arises. These include:
- Calculation of irregular payments, i.e. calculation of holiday pay or sick pay, calculation of severance pay. As the need for these services is predictable, the client company, when drawing up a contract with the provider, immediately stipulates the scope of such calculations, based on which the cost of the additional service is set. In the case of a large volume of work, outsourcing companies usually provide preferential rates, which allows saving on payment.
- Individual reports that are used by the management of the client company for personal purposes. The number and types of reports can vary, which affects the final cost. The price is also affected by the detail of the reporting documentation. More often than not, executives need payroll reports broken down by company department or by individual expense item.
- Tax advice during audits by the tax inspectorate. Advice may take many forms. For example, verbal provision of necessary information by phone or a written answer that can be sent to the tax authorities in response to a request. In special cases, a representative of an outsourcing company may be present during an on-site audit or may visit the tax inspectorate to give clarifications on an issue of interest.
Outsourced payroll calculations also include services that cannot be predicted at all in advance. For example:
- Preparing an income statement for an employee to obtain a visa or a loan from a bank.
- Preparing reports on payroll changes over an extended period.
- Recalculations and corrective reports after changes in employment law.
How the cost of contracted services is determined
Payroll outsourcing is carried out by the provider based on a contract. The cost of the basic package of services is based on the following factors:
- The number of employees in the client company for whom payroll has to be calculated. Separate calculations of salaries and taxes should be done for each of them and calculation forms should be prepared and sent to the budget.
- The number of separate subdivisions of the company for which wage settlements are needed. For each of them, you need to prepare and submit regulated reports to tax authorities and state funds.
- The complexity of payroll calculation. The cost depends on the calculation algorithms adopted, the coefficients applied, the method of bonus payment, the availability of the shift system.
- Method of providing reporting documentation to the client. If a company only needs to provide reports in electronic form, the cost of the service will be lower. If paper reports are used, costs increase due to the increased amount of time required to generate, print, and send them.
Note that as the number of employees for whom outsourced payroll calculations are required increases, the cost of these services per employee decreases.
Advantages of outsourcing payroll calculation for chief accountant
For the head of the accounting department, outsourcing payroll calculation brings with it the following key benefits:
- Reduced financial risks as well as the costs incurred in carrying out such a task.
- Savings in the payroll fund by reducing the number of staff whose services are no longer needed – you can redistribute the workload in the accounting department and hire more specialized staff.
- Improved quality of payroll calculation – outsourcing companies actively use in their work advanced calculation methods, modern programs, and highly professional staff who systematically improve their qualifications. This makes it possible to calculate wages quickly without making mistakes or violating current legislation.
- Absence of human factors and other risks related to staff turnover, maternity leave, sick leave, etc.
How to check the provider of payroll services?
Having decided to outsource the payroll functions, the next important step is to choose the right provider. In order not to make a mistake, you should pay attention to the following parameters:
- The provider’s reputation and length of time working on the outsourcing services market.
- Work experience in the particular industry – for fruitful cooperation provider need to know all the specifics and peculiarities of work in your business area.
- Availability of the right options and services of your interest (e.g. payroll with a complex system of bonuses).
- Feedback from current and former customers.
- The availability of documents that confirm the qualification of the payroll services provider.
Is payroll outsourcing beneficial to the business entity?
The benefits of payroll outsourcing depend on the scope and size of the business entity. For small firms that are engaged in wholesale sales or software development, the transfer of payroll functions to a provider will be most beneficial.
For one qualified accountant in such a company, there is too little work. You will have to pay him or her a lot. In this case, it makes sense to outsource payroll calculations and entrust the bookkeeping to a part-time employee.
Benefits also receive a company with a staff of 50 to 150 people. If you use payroll outsourcing, you can free up your accountant’s time to perform other tasks.
In general, the costs in both options will be equal, but optimizing internal business processes can reduce the number of employees in the accounting department and increase the profitability of work.
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