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How to cut payroll costs

Posted on May 25th, 2016 Read time: 3 minutes

Peter Limone, CPA, CGMA – President and CFO

There are a few simple ways to cut your payroll costs using a process called payrolling. If you’re not familiar with payrolling, a payrolling company serves as the employer of record.  For the most part that means that employee and employer liabilities are the responsibility of the payrolling company, not the client.  The payrolling company is responsible for collecting and remitting payroll taxes and for paying all the employer taxes such as FICA, FUTA, SUTA, Worker’s Compensation and any local payroll taxes. As the employer of record, the payrolling company also provides benefits to its employees such as Health Insurance, Dental Insurance, 401K plans, flexible spending accounts and other benefits.

The first way to cut payroll costs is subtle but effective. If you use a probationary period for new employees, this method will work for you.  Let‘s say you have a 90 day probationary period for every new employee. If you add the new employee to your payroll and the employee does not work out, terminating that employee may result in your unemployment costs increasing across your whole workforce! Those of you who manage your unemployment process will know that terminating an employee usually results in an unemployment claim, which in turn increases the potential for a rate increase for the whole workforce. To avoid the potential cost increase, simply use payrolling for the first 90 days of each employee’s employment with your company.  If the employee does not work out, the payrolling company will be responsible for the unemployment claim, not you.  Note that this method may not work with most staffing companies as they charge a conversion fee, whereas a payrolling company usually does not charge a conversion fee.

Let’s say your company offers a benefit, such as stock options, to all new employees after a specific number of days. Your company also uses a contingent workforce to either staff specific projects or to handle seasonality in your business. Presuming you do not want to offer stock options to your contingent workforce you have a choice to either carve out a specific section or your workforce from those benefits, potentially running afoul of discrimination issues or you can simply use a payrolling company.  The payrolling company is the employer of record, hence the contingent employee is not on your payroll.  On the other hand, the contingent employee will be able to partake in benefits offered by the payrolling firm.

Lastly, there’s a dirty little secret within the staffing industry. If you use a payrolling firm, this will most likely result in significant savings for you. There are two opportunities for significant savings using this method.  First, if you use temporary help from a staffing agency check to see if the temporary employee has been working with you past the conversion fee period.  If you’d like to keep this temporary, but not on your payroll, you can convert the temporary to a payrolling firm.  Payrolling companies charge much less than the staffing agency because there are no recruiting costs resulting in a reduced markup from 50-100% down to 18-35%, depending on the position and state in which the employee is working.

Second, if you are using payrolling services through a staffing agency you probably want to review your rates.  Payrolling is a service that can be done at a much lower cost, because the payrolling company does not have any expenses related to recruiting the employee.  However, the staffing company may use the same rates whether you use them for recruiting or not.

An experienced employer of record can help you avoid expensive mistakes with your contingent workforce. Reach out to the friendly experts at Innovative Employee Solutions for further assistance today! – See more at: Innovative Employee Solutions.

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