Pros and Cons Series: Outsourcing Payroll

Defining payroll and a cost-benefit analysis of outsourcing payroll.

What is payroll?

Before we weigh the pros and cons of outsourcing payroll, let first understand what it is. Essentially, payroll is the sum of the salaries paid by a company to their employees. Hence, to understand payroll, we first have to look at the components of a salary. Generally, there are 4 main elements: Base pay, overtime, allowance and deductions.

Base pay

According to investopedia, the base pay refers to the initial salary paid to an employee, not including any benefits, bonuses or raises. It is usually either in the form of salaried pay or hourly pay. A salaried pay is a fixed wage and an hourly pay is a fixed rate per hour of work. In Singapore, the base pay determines the CPF contribution and is usually indicated on the employment contract.

Overtime

Overtime pay applies more to employees that partake in manual labour. For those that are eligible under the MOM employment act, they will receive overtime pay of: hourly basic rate x 1.5 x hours worked overtime.

Allowances

Employers also offer allowances on top of the base pay to cover for other expenses. Examples include: meals, transport and overtime allowances. Do note that in Singapore, these allowances are usually part of the employees taxable income. However, some forms of reimbursement is non-taxable and may be preferred. To know what is taxed and what isn’t taxed you can refer to IRAS website.

Deductions

There are many reasons an employer can deduct salary from an employee. Based on MOM’s employment act, these reasons include: absence from work; damage or loss of goods; CPF contributions; other purpose agreed upon in writing. For more details refer to MOM allowable salary deduction or reach out to us.

What payroll entails?

The payroll process is much more than just paying wages on time. From onboarding new employees to recording payroll expenses, the process is not as easy as it seems. When a new employee joins a company, the first step is to onboard him/her and update employment records. Then you would have to track the number of hours he/she worked and determine the amount to be paid. Next comes the distribution of salary whether directly to their bank accounts or by cheque. This must be done within a stipulated time frame. Finally, payroll expenses need to be recorded for accounting purposes. In Singapore, the employment act requires employers to maintain detailed records for the past 2 years. There are several legislations governing employment and payroll that can make it quite confusing. To simplify this task, there are many payroll softwares that automates this process. Currently, we use Roubler as it is a one stop shop for workforce management. From clocking in and out to accessing the roster, payroll has never been easier.

Cost-Benefit Analysis

When deciding if you should outsource your payroll there is a lot to consider. To simplify the decision making process these are, generally, the main pros and cons to outsourcing payroll.

Pros of outsourcing payroll

Ensure complianceOutsourcing payroll gives you access to experts that will ensure compliance with IRAS and MOM regulations.
Saves time. Handling payroll in-house requires time to set up and someone to manage it. This pulls attention away from growth and business development.
Potentially saves cost. Depending on the structure of your company, it may be cheaper to outsource payroll. If your company’s salary structure is complex and fluid, outsourcing may be the cheaper option.

Cons of outsourcing payroll

Potentially increase cost. If your company has a very fixed salary structure with no overtime pay and no allowances, a simple excel spreadsheet may do the job. This will be cheaper than outsourcing payroll. However, being a 100% digital practice, we would never recommend you to keep payroll files in excel. There is plenty of software that can streamline this process. These software can link to IRAS and provide files to upload payments to banks and the CPF board.

Less control. Outsourcing payroll means that an extra step is required when correcting errors or accessing employee information.
Sharing personal information. Outsourcing payroll means that your employees’ information will be shared with an external party. This may make some uncomfortable.

Decision

Consider your current position. Do you require absolute control over your payroll functions? Do you already have experience setting up payroll services or do you already have a dedicated finance team? Are you prioritising growth or are you laying down the foundations? Weigh the pros and cons based on your current circumstances. The right decision is the one that will work for you.

If you want to learn more about payroll functions, check out our article

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