The Telegraph newspaper recently asked us to compare contractor destinations in terms of the net disposable take-home pay (NDTKP). We defined NDTHP as “what was left for a contractor to save taking account of contracting rates, the taxes applied to them, and the costs that a typical expat contractor faces working there”. We gathered the contract rates in each destination and, using our contractor tax calculator; we computed the take-home pay before the costs of subsistence. So what is a retention calculator or contractor tax calculator, and how does it differ to what conventional payroll software does?

Let’s start by going through the mechanics of a regular payroll. The data that is input is the taxable salary agreed between the employer and employee. From this sum, payroll software deducts the payroll taxes and employee social costs (or NICS). What is left is the net pay. In parallel and without the employee being aware of it, the software computes the contributions to social costs, insurances, and so forth that the employer must bear on its employees. So far, so straightforward.

But what happens if there is no actual employer and yet the chosen structure is one of employment. A management company working on the slimmest of margins cannot hope to absorb employer costs of up to 30% in some countries out of a margin that can be as low as 2%. The client usually is bound to pay what a contract sets out.

So, something must give, which is where the value of the contract must take account of numerous factors, including:

  • Statutory holiday entitlement
  • Public holiday entitlements
  • Equal pay considerations
  • Thirteenth-month pay
  • Fourteenth-month pay
  • Insurances
  • Employer social security
  • A handling fee or margin

The retention calculator needs to deduct all the items above in arriving at the taxable salary, which is the start point for conventional payroll software.

The above discourse assumes that the structure is an employed one, but not everyone is an employee nor wants to be. Some may prefer to be self-employed. Others may want to work through their limited company. The take-home pay calculator now needs to be able to compute all the possibilities and all that is common is the starting point of the contract value.

Unlike a payroll program, a retention calculator needs to incorporate the rates and assumptions and legal requirements of all the potential lawful ways of working.

So, how do we at AF create such things? Well, we start with Excel spreadsheets that contain each lawful solution based on for which ones does the contractor qualify? We then combine them into a master calculator, so there is no duplication of logic or tables. We do this to make the calculator easier to maintain in the future. Some countries have flat rates of tax. Others countries have progressive tax rates in rising bands. Others still do not publish the formulae but publish tax tables instead. We have to cater to all these, which is often complicated. It takes us into the realms of Excel’s most arcane functions like Goal Seek, Macros, VBA, VLOOKUP and others.

After creating the master calculator in Excel w test it rigorously. We test it with high values and low values, negative values and positive value and every use case we can imagine.

When we are satisfied the Excel is robust, we rewrite the entire logic in PHP which we can publish on our portals, phone app, intranet and website. In this way, we can manage centrally calculators that find use 24/7 in our offices from Shanghai to London no matter how many concurrent users there may be.