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Inter Company Payroll

We have 5 companies that we run. The companies are all independent from each other. We outsource the payroll for all the companies. The payroll bill is paid by one company and the other companies reimburse this company for there portion of payroll. Is it correct for me to recognize this as revenue in the company that pays the payroll bill. If not, please advise

Answers

Anonymous
(President and CEO MobileAccountantAZ) |

You wouldn't recognize revenue no, but I would split the cost of the bill to the IC accounts when you pay it

IE:

Payroll Processing: 2,000.00

Credit cash for the whole 2,000 of course then

Debit: Company A
Company B (IC)
Company C (IC)

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

I agree that you would not recognize revenue but set up a contra expense account where the pass-through chargeout expenses would offset the incoming payroll fee expense. I presume you are using a reasonable allocation key, like headcount, to allocate the total cost among the companies.

If this was not a pass-through type of expense from a third party but some service that one company is providing to the others, it might then be appropriate to charge a mark-up on the base expense.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Would it be revenue if the payroll company charged a small mark up "for admin services"?

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Hi Len,

Generally, if it's BILLING from a profit center, meaning the service is a core profit-generating function, then credit a Revenue account. If it's ALLOCATION from a cost center then credit a contra expense Allocation account, as seems to be the case here.

However, if it's an intercompany loan, even if pass-through, I would say use different accounts for intercompany interest income and expense.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Just a note.....

The mark-up is usually the source of "balking" by subs. The bottom line is, because of efficiency and size, the overall cost to the parent company AND to the individual subs should be lower than if the individual companies were to do it themselves or subcontract the process. If the parent company is "saving" because of the structure, it should share those savings down the line.

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

What is the basis for the mark up? Do you add any value to the process? I don't agree that the savings should be shared just because a contract was negotiated. Revenue or a mark up should be for services only. If the companies are truly independent of each other, the payroll company could bill each company independently.

Any inter-company profit would be eliminated upon consolidation in any event.

Anonymous
(Accountant) |

Thank you everyone for your answers and suggestions.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

I think you need to distinguish between intercompany charges on a legal entity or tax basis that should conform to arm's length principles vs. management performance measurement (say for bonus purposes). While some companies treat these as if they're the same, they should not be and it is better not to include intercompany markup items in management books.

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