Accounting of outstaffing companies in Ukraine

Modern business operates on the principle of "the maximum results with the minimum costs." This applies to both financial expenses and labor resources.

Businesses are now trying to optimize their processes as much as possible and outsource or contract out most of the operational work. When it comes to hired personnel, the concept of outstaffing comes into play.

Outstaffing means contracting workers through another company. This model of cooperation has long been actively used by foreign businesses. Let's consider how this scheme works in Ukraine and, most importantly, how to organize accounting of outstaffing activity in Ukraine.

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How does outstaffing work and how does it differ from outsourcing?

The outstaffing company hires employees, who are then passed on to client companies (outstaffing services) to perform certain tasks defined by the latter. In this case:

• The employee remains in the staff of the outstaffing company;
• The outstaffing company calculates and pays the salary and other social guarantees;
• The employee performs the tasks set by the customer company (at the customer company's premises or remotely);
• The client company pays for the outstaffing services.

Please note! Outstaffing is not outsourcing, part-time work or recruitment services.

What is the difference between these concepts?

1) Outsourcing implies that a certain project/function or process is transferred to an executing company (outsourced). In this case, the executing company performs the tasks assigned to it with the help of its regular employees.

The result of outsourcing is that the company performs the tasks set by the customer (for example, accounting support or project management).

2) Recruitment services involves the search for personnel for the client company. As a result of the search, personnel is hired by the customer.

The result of recruitment services is the search by the executor for personnel who will work for the customer. The recruitment service expires after the customer approves the candidates. Subsequently, the customer itself carries out the employment of workers and organizes work with them.

3) Multi-jobbing implies that an employee is employed by more than one company at the same time. In this case, the employee searches for a job on his or her own, so outstaffing is not related to this concept.

Benefits of outstaffing for the customer:

• There is no need to do personnel accounting and payroll (the outstaffing company does this).
• Outstaffing is cheaper than outsourcing.
• Outstaffing services are easier to refuse than to fire an employee.

Benefits for the outstaffing company:

• You hire the best professionals, bringing you income through the quality performance of your customers' tasks.
• You don't need to manage your staff – the customer does.
• You are not responsible for the product developed or tasks performed.

However, there are some disadvantages of outstaffing.

For Ukraine, the outstaffing model is relatively new, so the regulatory authorities are picky about it. A properly drafted outstaffing contract and supporting documents for the service are the key to a safe business model for cooperation.

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What is the income of an outstaffing company?

An outstaffing company receives payment for personnel services. The cost of such services is based on:

• Outstaffer's expenses on wages (including taxes) of the employee provided to the customer;
• Costs of recruitment services;
• Expenses on personnel training;
• Other related services connected with outstaffing.

That is, the above list contains the components of the cost of outstaffing services.

What taxes does the outstaffing company pay?

You will be obliged to pay the following taxes when carrying out outstaffing activities:

1. Income tax.

If you are registered under the general taxation system, you pay 18% income tax on the financial result of your activity (financial result = income-expenses).

If you are registered as a taxpayer on a simplified system of taxation - 5% single tax from the amount of funds received on your current account.

For example, your company is not a VAT payer, and in 2021 you sold services for UAH 300K. Your expenditures, including the cost price, amounted to UAH 180K. The services rendered to the client are fully paid in the month of rendering the services.

On the common system of taxation you will pay UAH 21.6K:

300-180 = 120 * 18% = UAH 21.6K

On the simplified system of taxation you will pay UAH 15K:

300 * 5% = UAH 15K

2. VAT.

If you decide to register as a VAT payer, you need to charge 20% VAT on each service transaction.

If you buy services or goods from suppliers that are VAT payers, you are entitled to receive VAT of 20% of the purchase price. By the amount of this VAT, you will be able to reduce the tax payment to the budget, at the end of the reporting month.

For example, your company is a VAT payer, and in October 2022 you sold services for UAH 300K (including VAT of UAH 50K). Your expenditures for VAT payers amounted to UAH 65K (including VAT of UAH 10.83K).

According to the results of October, your company will pay VAT amounting to UAH 39.17K.

50-10.83 = UAH 39.17K

3. Payroll tax.

Employees employed by the company receive a salary subject to taxation rules.

The employee receives wages to a bank card, minus 18% personal income tax and 1.5% military tax.

At the same time, the employer must pay 22% of the unified social tax on the total payroll (all wages accrued to the employees).

For example, Employee A worked at the company for a full working month in October 2022.

The employee's income for October consists of salary (in the amount of UAH 25,000) and bonus (in the amount of UAH 10,000).

The employee will receive a salary for October 2022 in the amount of UAH 28.2K on his bank card.

The employee's income = UAH 25K + UAH 10K = UAH 35K.

Personal income tax = UAH 35K *18% = UAH 6.3K.

Military tax = UAH 35K *1.5 % = UAH 0.5K.

Salary payable = UAH 35K - UAH 6.3K - UAH 0.5K = UAH 28.2K.

The employer will pay 22% of the unified social tax, which equals UAH 7.7K.

UAH 35k *22% = UAH 7.7K

How to report to the regulatory authorities?

Reporting periods and the list of reports depend on the taxation system that the company chooses during registration.

If a sole proprietorship, LLC, or private entrepreneur operates under the simplified taxation system:

• Combined reporting for personal income tax, military tax, and unified social tax (if you have hired staff);
• Declaration on single tax;
• Financial statements (balance sheet, income statement);
• Statistical reports (according to the list defined by the statistics service one year after the date of the company registration)
• Reporting to the employment service.

If LLC or sole proprietorship operates under the general taxation system:

• VAT declaration (if you are registered as VAT payer);
• Combined reporting for personal income tax, military tax, and unified social tax (if you have hired staff);
• Declaration on income tax;
• Financial statements (balance sheet, income statement);
• Statistical reports (according to the list defined by the statistics service one year after the date of the company registration)
• Reporting to the employment service.

How to start an outstaffing company and choose the types of qualifying economic activity in Ukraine?

If you decide to set up an outstaffing company, first of all, you need to decide on the legal form (LLC or sole proprietorship) and taxation system (5% single tax or 18% income tax).

Optimal forms and taxation systems are determined based on your business models and goals.

Since outstaffing is an employment mediation service, the company must register with the State Employment Service as an employment service provider.

For outstaffing companies, there is a basic qualifier – 78.20 Activities of Temporary Employment Agencies.

Our specialists can provide you with the initial consultation and help you register your company.

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Peculiarities of employment of outstaffing workers

The formalization of labor relations with workers is always quite a complicated process that has many nuances. As we noted earlier, labor relations in outstaffing arise between the outstaffer and the worker.

How does an outstaffer formalize labor relations with workers?

1. An employment contract is signed between the outstaffing company and the employee, which states that the employee is on the staff of the outstaffing company, but performs the tasks of other companies.
2. Before the employee is sent to the customer, an additional agreement or letter of agreement shall be made between the employee and the outstaffing company stating that the employee does not refuse to carry out the customer's instructions.
3. The outstaffing company must have a staffing schedule and job descriptions for each worker.
4. The work schedule of each employee must match the customer's work schedule and be recorded on the outstaffing company's timesheet.
5. The employee's wages must not be less than the wages of the customer's company employees.
6. The Outstaffing company shall make payment of the employee's wages at least twice a month (with an interval of no more than 16 calendar days).
7. Accrual of unified social security contributions, military tax, and personal income tax withholding entrusted to the outstaffing company.
8. The outstaffing company is responsible for reporting on employees.

The following limitations of outstaffing activities include:

• The outstaffing company has no right to prevent the conclusion of an employment contract between the client company and the executor of the work (employee of the outstaffing company);
• It is prohibited to send workers to a company, which has reduced its staff during the year;
• It is prohibited to send employees to the company to perform harmful and hazardous work (including difficult working conditions);
• It is prohibited to send employees to a company that does not meet the standard number of employees involved in production processes.

Outstaffing is quite popular today among such areas of activity:

• IT;
• financial and accounting services;
• marketing services;
• security services;
• cleaning services.

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Outstaffing risks in Ukraine

Despite the transparency of the outstaffing model and its advantages, there are certain risks, namely:

• Improperly executed outstaffing agreement may not be recognized by the controlling authorities, which will lead to the recognition of the employment relationship between the employee and the customer (penalty of UAH 201 thousand);
• Improperly executed acts of acceptance-transfer of outstaffing services, which will lead to non-recognition of expenses by the client (18% of profit tax from the amount of transaction);
• Incorrect execution of the labor relations between outstaffing company and employees may lead to the recognition of the outstaffing agreement as fictitious;
• There is no economic reasonability for the customer to order outstaffing services (for example, a company with its own staff of marketers takes for outstaffing a specialist, the cost of which is three times higher than the wages of hired workers).

List of documents that an outstaffing company must have in order to minimize the concern of supervisory authorities:

1) Outstaffing (personnel services) agreement.

Please note! The agreement should not be standard (the first one downloaded from the Internet), but should be developed directly for your company. Taking into account all the nuances of activity will provide tax security and help avoid court disputes with the customer.

2) Employment agreements and job descriptions with employees.

Please! These must be employment agreements, not contracts with sole proprietors, because outstaffing involves hiring employees to the staff and then transferring them to the customer.

3) Work schedules of each customer (this data can be prescribed in the agreement) and developed for each employee's timesheets.

4) Acts of acceptance-transfer of outstaffing services rendered.

Please note! The acts shall be as detailed as possible: who did the work, what tasks were performed, and to what extent.

Outstaffing is not the easiest business in terms of organizing accounting and personnel records. We can offer you a simple option - accounting outsourcing with a team of professionals. 

You don't run the risk of making a mistake due to an inexperienced accountant or missing something because you don’t have an in-house lawyer.

The cost of our accounting support services here.

Services and information for IT companies here.