How Are Payroll Outsourcing Charges Calculated?

How Are Payroll Outsourcing Charges Calculated
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Thinking of outsourcing your payroll process? As a client, it is important to understand all the different elements that go into its costing. Although payroll outsourcing brings significant benefits to businesses, the quantum of savings you stand to make depends on several variables.  

Below we provide an outline of how payroll outsourcing fees are set. Since it is a highly customised process, where factors like employee strength, payment frequency and the unique requirements of the business play a pivotal role, the following information will help you gain a better insight into pricing calculations and make better-informed decisions as a result.  

1. Basic Service Cost

This covers a major portion of the total payroll service cost and includes expenses towards the maintenance of financial records and disbursal of salaries. There are three main plans or models: ‘lump sum’ basis, ‘per frequency’ basis, and ‘per employee per month’ basis. 

Many organisations opt for a ‘per frequency’ model which requires them to pay an overall base fee apart from a smaller fee for each employee. The model works best for organisations which have a predictable payment system and a fixed employee roll.

The ‘per employee per month model’ is increasingly popular with businesses which maintain a flexible employee roll as it allows them to run unlimited payrolls for a fixed base fee coupled with a fixed nominal fee per employee. The arrangement is also suitable for organisations that pay additional bonuses and commissions. 

The ‘fixed’ method entails a flat monthly charge depending on employee strength. The fee remains constant irrespective of the frequency of payment. This plan is ideal for businesses that maintain a fixed number of staff, such as a grocery store or a departmental store, which enjoys consistent business round the year.

2. Software System Cost

Payroll agencies typically use designated software to maintain a database of the several thousand employees of their client organisations. Hence, they include a fee towards software usage in their annual contract with the client. This component is usually non-negotiable but the amount is likely to be lower than if businesses were to invest in their own payroll software. 

3. Set-Up Cost

This essentially includes the cost towards setting up the business’ payroll system, including specifics such as the tax liability, direct credit of salary into accounts vs paper cheques, time and attendance, performance report, annual report etc. 

Some businesses also offload additional human resources functions to their payroll vendors for an extra fee. All such expenses are included in the set-up cost. This component could include fee towards applicant tracking, recruitment, referral bonus, onboarding, time, attendance, and HRIS (human resource information system). 

4. HR Integration

Many agencies also incorporate the cost of HRIS (human resource information system), sometimes also known as HRMS (human resource management system), in their overall payroll contract. This allows the business to smoothly integrate all human resource functions, namely payroll, accounting, attendance, appraisal, recruitment etc.—into a single software system or database—thereby cutting down costs while simultaneously bringing all HR-related functions on to a single platform. 

For large businesses with multiple overheads, outsourcing all HR activities to a reputable outsourcing partner, while maintaining a core team of 1-2 senior officials to take decisions and liaise with the vendor, is a good way to rationalise costs. Businesses can save on expenses related to additional infrastructure, salaries and benefits, training etc. 

5. Pension System

If your business provides pension to employees after the completion of a predefined number of years in service, you may also include pension services in the work contract that is signed with your payroll agency. Opting for payroll services will ensure that the employee salary account is closed and a pension account is activated after the last day of service. This enables a smooth transition of pension benefits to the employee with minimal effort and paperwork.

6. Other Charges

These may include charges for additional services such as payroll taxes, call-in assistance etc. Some agencies only offer automated payroll service in the form of software database and management, coupled with additional support on a piecemeal basis, which usually proves expensive. It makes more sense to opt for a bouquet of services to keep your costs down.  

Calculating Your Benefits 

Payroll processing is one of the most heavily outsourced HR functions in the corporate world. Having an understanding of the various elements that determine its costing can help you assess the gains you stand to make and also select the most economical combination. 

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