Addressing the complexity of payroll planning in North America

Paul Barber

Finance leaders know that payroll planning in North America is complex – and that such complexity creates an impact felt directly by your business.

This blog takes a quick look at one of those inherent complexities in payroll-related planning: payroll taxes.

In the US and in Canada, companies pay taxes that are over and above employee salaries. In Canada, they are CPP and EI contributions; in the US, they include FICA, FUTA, and SUTA. These payroll taxes are particularly complicated to calculate because they are front-end loaded. As a result, employers pay higher taxes for employees (who make a certain amount) in January than they do in December.

For example, if the nominal percentage paid is 4.95% (as in the case of Canada Pension Plan contributions), then this represents a difference in the cost of employing a highly paid employee by 4.95% in January when compared with December. Adding in EI premiums increases this to 7.5%. In the US, FICA, FUTA, and SUTA are calculated similarly and require employment expenses to be front-end loaded.

If an employee leaves employment (in Canada) the employer effectively ‘turns the clock back’ to the start of the year when that employee is replaced. In other words, a business with a high turnover of highly paid staff pays considerably more taxes than a company with low turnover rates.

In contrast, in most European countries these ‘social security’ taxes are spread across the year for all employees; the maximum tax is calculated on a monthly basis instead of cumulatively. In other words, employers pay the same straight percentage of earnings every month. As a result, employee turnover does not affect the taxes paid.

The complexities in North America make it difficult for companies to accurately plan employee costs for higher paid staff. Using a blended rate for all employees is inadequate and forecasting payroll taxes can only be calculated accurately if done for each employee.

The good news is that you can draw upon software solutions that manages the complexity built into North American payroll rules and regulations. For example, Detailed Planning Manager, a component of Prophix’s software, allows you to calculate FICA, FUTA, SUTA, and all other payroll taxes for each payroll cycle (i.e., weekly, bi-weekly, bi-monthly, or monthly) and use timeframes consistent with the General Ledger (e.g., months or 13 four-week periods).

The outcome: the complexity of payroll-related tax planning and calculating is dramatically reduced. That’s because there is less variation between what was planned and what happens. As a result, differences in employee-related costs can be identified and analyzed. Given that one of the greatest expenses companies grapple with is employee salaries, having this information helps finance professionals address day-to-day tactical decisions as well as strategic business decisions.

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