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Payroll outsourcing: A complex feast

By Jessie C. Carpio

At the heart of it, payroll processing involves two kinds of data: information about employees that doesn’t change on a regular basis – such as employee number, basic salary rate and tax status – which is known as the masterfile; and information that changes every pay period – such as overtime pay, loans and advances – which make up the data file. 

What if the payroll preparer receives the data file late? Employees still have to be paid on schedule, so the preparer has no choice but to rush the payroll processing, which sometimes leads to errors in computation.

There is also the dreaded annualization process for taxes and preparation of schedules of remittances to government agencies. Again, pressure is on payroll preparers to make accurate computations so the employees will not incur tax deficiencies or excesses at yearend.

So while payroll processing may seem rote, the sheer volume of data and the absolute need for accuracy makes it a complex and sensitive activity. This is why many businesses have opted to outsource their payroll functions.

Large banks, for example, have been bundling free payroll processing with their other services as part of their come-on for companies to open accounts with them. These banks can take on a business’ entire payroll function – from processing the payroll monthly, to filing the necessary returns with the government agencies and to annualization of employees’ income taxes. There is a catch, though: Clients are expected to maintain a certain amount of deposits with the bank to continue enjoying the payroll processing service. Effectively, the lower interest cost finances the cost of payroll processing. 

“Software as a service,” or SaaS, is another option available to businesses that are interested in outsourcing. In this case, you engage a software provider to do your payroll. You simply submit your payroll data to the software professionals for encoding. On the plus side, this arrangement minimizes a company’s upfront cost of investing in software. But responsibility over the correctness of the payroll computation still rests with the company.

The more traditional outsourcing provider offers a more extensive menu of services. Usually, the outsourcing provider owns the payroll software that it uses to process the payroll of all its clients; manages the masterfile and ensures that updates are effected; encodes the payroll data changes relative to the payroll computation; and reviews and checks the resulting payroll computations. The provider handles the monthly and annual filings with the government agencies.

Payroll outsourcing has evolved over time. Companies seeking to outsource their payroll processing have also become more sophisticated and demanding. More than the cost, these companies are looking for providers that can guarantee the complete and accurate computation of their payroll, that value confidentiality and security of their payroll information, and that are responsive to their requests and concerns.

The author is a Partner with the Business Support Services Division of audit, tax and business advisory firm Punongbayan & Araullo.

(As published in BusinessMirror, 26 November 2009.)