Payroll is an essential element of every business entity. Each country has its own regulations on the statutory deductions of employees’ salaries under the payroll of a firm.
In some countries, the directors or owners of a firm need not be paid a salary, thus excluding them from statutory contributions to the government. In Singapore, though, it is compulsory even for the board of directors and part-time workers.
Whether a corporation is Singaporean or foreign, it pays to heed all the laws and by-laws associated with payroll to avoid hefty punishments in this city-state. That is one of the many reasons more and more businesses – both large and small – are outsourcing their payroll services.
Who offers payroll services?
Traditionally, payroll is handled by the Human Resources and/or Accounts departments of a firm. This has gradually changed over the past decade.
Corporate Service Providers have taken over the role of those departments to offer payroll services to many businesses. Apart from payroll, this type of company also provides a variety of other Business Process Outsourcing (BPO) services such as human resources, accounting, tax compliance and corporate secretarial services.
What do payroll services include?
- Maintain payroll file for each employee
- Computation of salary, overtime, commission, bonus, CPF and other statutory deductions
- Salary disbursement to employees via bank transfer, cash or cheque
- Preparation and distribution of itemised payslips
- First time CPF online account and GIRO set-up
- Monthly CPF e-Submission
- Perform special bonus runs
- Leave administration
- Administer other employee benefits
- Prepare Form IR8A and relevance appendices for all employees and submit to IRAS electronically via Auto-Inclusive Scheme (AIS)
- Prepare Form IR21 (tax clearance for leaving foreign employees) and submit to IRAS electronically
- Track employee salary increments and other variables linked to salary changes
- Ensure HR and payroll policies and practices comply with the client company’s payroll policies and Ministry of Manpower (MOM) requirements
- Protect the confidentiality of employee personal data
- Maintenance and management of allowances, deductions, arrears, savings and loans for employees
The most critical service in the repertoire is to ensure compliance with the many MOM requirements, as the penalties for non-compliance have become heavier over recent years.
Benefits of using outsourced payroll services
How does a business entity gain from engaging a Corporate Service Provider to handle its payroll? There are actually many advantages which explains why an increasing number of businesses – both local and foreign – are outsourcing their payroll services to BPOs.
1. Save cost on staffing and software
Singapore is a fantastic country to set up a business in Southeast Asia or in APAC due to its well-developed infrastructure for transportation, financial systems, tax benefits and so on. However, it also has one of the most expensive manpower cost in Asia.
Running an in-house payroll can therefore be a challenge for smaller companies, or a business without HR and accounting professionals on staff. Outsourcing is one way to avoid hiring additional employees or contracting with specialists.
Furthermore, with this non-core business activity outsourced, a company would not need to buy its own payroll software which can be quite costly. This is especially so if the company only has a handful of staff, which makes the cost of the software per head a less feasible cost to bear.
2. Save time for core business activities
A corporate service provider helps to streamline payroll processes and simplify administration. Outsourcing payroll services negates the need for a firm to hire its own staff.
The hiring process is not only a cost but it is time-consuming. The months spent shortlisting and interviewing is a time-cost opportunity lost when the time could be spent on core business activities.
In addition, if a firm hired its own payroll staff, it would have to waste man-hours re-training new employees on payroll administration and on following the firm’s own work processes.
3. Avoid costly compliance penalties
Singapore is known to be incredibly efficient in enforcing its laws. The Ministry of Manpower is vigilant of how Singaporean workers are treated. Recent years have also seen fines become heftier for non-compliance offences. Therefore, having a corporate services provider handle payroll would take a load of worries off any business owner’s shoulders
Here is the list of penalties for not complying with the Central Provident Fund (CPF) Act:
- Late payment interest charged at 18% per annum (1.5% per month), starting from the first day of the following month after the contributions are due. The minimum interest payable is $5 per month.
- A fine of up to $5,000 and no less than $1,000 per offence and/or up to 6 months jail.
- A fine of up to $10,000 and no less than $2,000 per offence and/or 12 months jail for repeat offenders.
- Fine of up to $10,000, imprisonment of up to 7 years or both if you deduct your employee’s share of CPF contributions but fail to pay the contributions to CPF Board.
When the rules and regulations change, it is the responsibility of business owners or board of directors to make sure their organisation complies. If their hired payroll staff don’t do the necessary or make a mistake, it is the directors and owners who will bear the brunt of the blow.
In 2012, the CPF Board recovered $293 million in late payments owed to more than 200,000 workers. In a CNA report, 600 employers in Singapore were caught for infringing basic workers rights, including withholding overtime pay and medical leave days.
Some of the reasons for violations include ignorance of CPF rules or employers who erroneously made such deductions for their foreign employees who obtained PR status. Excessive deduction of CPF contributions from employees is also considered an offence.
4. Solve communication problems
Foreign companies which set up satellite branches in Singapore can benefit from outsourced payroll services, especially if the headquarters are located in a different time zone. Satellite firms are usually bareboned holding mostly production staff to reduce overhead costs.
This type of set-up can enjoy hassle-free operations by having its payroll automatically carried out by corporate service providers in Singapore. All the reports to government authorities are handled by the assigned BPO firm without having to be asked by the foreign company headquarters. This also resolves any language barriers that may exist.
Risks of outsourcing payroll
The following can be addressed by doing a thorough research of the payroll providers in the country and selecting the best firm available.
1. Security of employee data
The fear of confidentiality breach is present because the data is held in a third-party location. The security of sensitive information is also dependent on storage methods and measures taken by the payroll service provider.
2. Quality of service
Statutory deductions to be aware of in Singapore
There are a few types of contributions which must be made by employers for different categories of employees.
1. Central Provident Fund (CPF)
Both employers and employees in Singapore must contribute to this fund. This applies to:
- Singapore citizens
- Singapore Permanent Residents (SPR)
The CPF contribution rates applicable for employees are dependent on their:
- Citizenship – Singapore Citizen or SPR in the first and second year, or from the third year of obtaining SPR status;
- Age group; and
- Total wages (Ordinary Wages (OW) and Additional Wages (AW)) for the calendar month.
2. Self-Help Group (SHG) Fund
The SHG is set up to uplift the less privileged and low income households in the Chinese, Eurasian, Muslim and Indian communities respectively. Employers are expected to deduct the contributions from their employees’ wages unless the employee submits an opt-out form.
3. Skill Development Levy (SDL)
It is compulsory for employers to pay this levy based on each employee’s total monthly remuneration up to the first $4,500 at a levy rate of 0.25% (minimum of $2, whichever is higher). This applies to all employees: full-time, casual, part-time, temporary and foreign employees on the contract of service arrangements wholly or partly in Singapore.
4. Foreign Workers Levy
This levy is paid by employers for foreign workers who hold work permits or S passes.
5. National Service (NS)
This category is for Singaporean male citizens who are fulfilling their duty or training as a reserve soldier. A firm which hired them before they went on service is still required to contribute to the CPF of these workers as long as they have not resigned from the firm.
When to outsource payroll
The timing and situation to do this depends on a few factors.
1. Number of workers
If the number of employees in a firm is relatively small, it may be more time and cost effective to outsource payroll services. Hiring its own payroll staff not only adds costs to manpower but also to tools required for payroll, such as the relevant software. The cost of software per head becomes quite high if a firm is small.
2. Availability of local entity
This applies to international firms which set up a branch in Singapore. If the company has a local entity, it may not be necessary to outsource payroll services. However, in many cases, the time and cost of setting up and administering a local payroll often cannot be justified.
Foreign firms which send employees on international assignments may hire a local corporate service provider to handle these employees’ payroll needs to ensure they comply with local laws.
What to ask a payroll services provider
With so many service providers out there, how does one choose the best? Here are several key questions you can ask before outsourcing:
- What are the basic and/or add-on services offered?
- How do you secure confidential employee and payroll data?
- What rates do you charge for running payroll per employee?
- Is there different pricing for a bigger head-count?
- How many clients do you have and for how long?
- How fast is your turnaround time in providing reports?
- Do you calculate tax withholding for each employee?
- Do you assist with generating tax forms for local tax filing purposes?
The benefits of cost and time savings, filing of reports and avoiding compliance issues make payroll outsourcing a popular service. Those advantages are multiplied for foreign firms which are unfamiliar with local payroll rules and tax laws.