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Sister company to absorb salary costs?

We have a sister company that does not have any salaries on their books, however a handful of our companies employees work approx 1/3 of their time on the sister companies jobs. I would like to charge our sister company for a portion of these salaries. What is the proper accounting treatment - is it at the billable rate? What would the entries be? Any help would be greatly appreciated!

Answers

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

I used a contract labor approach. I took the estimated payroll and increased by an estimated PR tax amount. This amount was then 'invoiced' to the sister company as temporary help. Each person does need to keep track of their time working on each company to make sure the invoices accurately reflect the value being 'reimbursed' by the company using the labor.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Sara has this right. I would include 7.65% for PR taxes and an appropriate amount of benefits costs. Be careful if you are crossing country borders as you will have transfer pricing issues.

Doug Devlin
Title: Doug Devlin (CEO at Zuman) expert
Company: Zuman
(Doug Devlin (CEO at Zuman) expert, Zuman) |

In addition to gross wages, payroll tax load and employer contributions to benefits, I would also consider both federal and state unemployment insurance taxes (probably not reflected in the 7.65%) and more importantly workers compensation premiums associated with the shared labor. You may also want to allocate direct processing or banking fees incurred in running the payroll.

Most HRIS systems have a labor distribution report which totals employer costs for the payroll, but most don't calculate the workers compensation costs, banking or processing fees. (Also remember that you may be over-allocating costs to your sister company if you have flexible benefit plans that reduce the employer portion of FICA or if you don't cap your 7.65% calculation for wages over the wage limit). Cross boarder workforces may also have currency translation issues.

Brian Thomas
Title: Controller
Company: Seifert MTM Systems, Inc.
(Controller, Seifert MTM Systems, Inc.) |

For our Sister company, I also charge against employee benefits and facilities, not just Payroll & PR tax. I use GL contra accounts to keep everything separate.

Joe M. Guerra, CPA
Title: Chief Financial Controller
Company: MTC, Inc.
(Chief Financial Controller, MTC, Inc.) |

Depending on the state, sales tax may be due on the amounts charged between companies, This may also depend on the characterization of the charges (i.e. contract labor, temp, etc.). Research before implementing.

Damian Childress
Title: Management Consultant
Company: Independent Consultant
(Management Consultant, Independent Consultant) |

The actual journal entries made on the books of the two sister companies (related parties) would be as follows:

Company Allocating the expenses:

Due to/From XX,XXX.00
Expenses XX,XXX.00

Company Receiving the allocated expenses:

Expenses XX,XXX.00
Due to/From XX,XXX.00

The Due to/from accounts represent a receivable (debit balance) or a payable (credit balance). It's known as branch accounting and the Due to/from accounts are frequently called "Inter-company accounts" or reciprocal accounts. When the financial statements of the two companies are consolidated, the Due to/from accounts cancel each other out to zero.

Depending upon the accounting structure of the organization, many variations exist for the accounting procedures of the "inner-company" accounts.

The above users have answered the questions of how to build up the $ dollars for the allocation of salaries as well as being mindful of international transactions (i.e. foreign currency and regulations regarding transfer pricing)

Hope this helps,

Damian

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