How To Calculate Payroll Transaction Fees per Employee of Outsourcing?

How To Calculate Payroll Transaction Fee Per EmployeeIs payroll function in your company carried out by an outsourcing payroll service provider? Do you know which payroll service provider provide better offer? Do you know how to compare the fees offered? Let’s talk about this. Many big companies have found it well worth the effort of outsourcing their payroll processing functions to specialized service providers, thereby eliminating the hassle associated with payroll tax calculations and submissions. However, few companies go to the trouble of determining the annual cost of this processing on a per-person basis. They may be startled to find that the initial cost at which they agreed to the service has ballooned over time, because of extra fees tacked onto the base processing rate for such services as direct deposit, sealing checks in envelopes, calculating special deductions, and tracking garnishments. For these companies, the payroll transaction fee per employee measurement is a valuable tool.

To calculate this measurement, divide the total payroll outsourcing fee by the total number of employees itemized on the payroll. Be sure to exclude from the total fee any charges that cannot be directly related to individual employees, such as special reports or payroll shipping charges. The formula is as follows:

 

Total payroll outsourcing fee per payroll
———————————————————
Total number of employees itemized in payroll

 

For example: a new payroll manager has been hired at the Royal Bali Cemerlang, which has a large staff of garment manufacturing. Accordingly, the payroll function is the key accounting activity. The new manager is interested in obtaining the best cost-benefit performance from the payroll function, which is currently outsourced. He/she compares the cost of the current outsourcing provider and the fees charged by a competitor in the following table where all information is based on the processing of a single biweekly payroll.

Types of Fees                        Current Provider Fees       Competitor Fees
Minimum processing fee                $50.00                                    $15.00
Processing fee/each                       $1.00                                      $1.25
Envelope stuffing fee/each             $ .15                                      $  .25
Delivery fee                                    $10.00                                    Free
Direct deposit fee/each                 $   0.50                                   $ 0.65
Vacation Paid Report                      $12.00                                   $5.00
Sick time report                             $10.00                                    $5.00
Garnishment fee/person                $  2.50                                    $3.50

 

The company has 26 payrolls per year and 120 employees, all of whom take direct deposit payments. The company has requested vacation paid and sick time reports once a month. There are 10 employees whose wages are garnished. Based on these volume considerations, the total cost of the current provider is:

Variable cost per year = Processing fee of $1.00 × 120 employees × 26 payrolls
                                        = Envelope stuffing fee of $.15 × 120 employees × 26 payrolls
                                        = Direct deposit fee of $.50 × 120 employees × 26 payrolls
                                        = Garnishment fee of $2.50 × 10 employees × 26 payrolls
                                        = $5,148.00

Fixed cost per year     = Minimum processing fee of $50 × 26 payrolls
                                       = Delivery fee of $10 × 26 payrolls
                                       = Payroll Tax report charge of $12 × 12 months
                                       = Vacation paid report charge of $10 × 12 months
                                       = $1,824
———————————————————————–
Total cost per year     = $6,972

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Using the same methodology, the total cost of the competitor’s offer is as follows:

Variable cost per year = Processing fee of $1.25 × 120 employees × 26 payrolls
                                        = Envelope stuffing fee of $.25 × 120 employees × 26 payrolls
                                        = Direct deposit fee of $.65 × 120 employees × 26 payrolls
                                        = Garnishment fee of $3.50 × 10 employees × 26 payrolls
                                        = $7,618

Fixed cost per year     = Minimum processing fee of $15 × 26 payrolls
                                       = Delivery fee of $0 × 26 payrolls
                                       = Vacation Paid report charge of $5 × 12 months
                                       = Sick time report charge of $5 × 12 months
                                       = $510
——————————————————————–
Total cost per year     = $ 8,128
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This analysis shows that the competitor’s bid is $1,156 higher than that of the existing service provider, primarily because the competitor charges higher per-employee fees (despite having lower fixed service costs). In this case, the variable payroll cost per employee is $5,148/120 =$42.90 if the current supplier is used Vs. $7,618/120=$63.48 if the competitor is used.

As per noted, those charges that have nothing to do with the per-person fees associated with the payroll must be segregated. In the example, these fees would be the minimum processing fee, delivery charge, and the two reports. By separating these costs, it is easier to determine the pricing strategies of payroll suppliers, some of whom advertise low fixed fees to attract new customers, but who have so many extra per-employee fees that the total cost is higher.

Author: Lie Dharma Putra

Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

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