7 Considerations When Preparing Your Payroll Budget

Most companies spend 20% to 30% of their annual revenue on payroll. The exact amount varies based on the employer’s size, industry, staffing and operational needs. In some industries it’s not uncommon for payroll to constitute up to 50% of revenue. For other industries, such as manufacturing and food and beverage, it usually takes up no more than 20% to 30%.

Your current spending should be based on payroll expenses from the previous year and forecasted payroll needs for the next 12 months.

Here are seven items to consider when establishing your payroll budget:

1. Salaries and wages

When budgeting for wages, verify the market rate for each position, and projected pay increases or adjustments. Also, gauge the need for additional staff over the next 12 months, and estimate associated wages.

2. Employee benefits

Identify mandatory benefits, like state-mandated paid sick leave, and voluntary benefits, like holiday pay, vacation pay, health insurance, 401(k) plans and flexible spending accounts.

Determine which benefits you should offer over the next 12 months and which ones (if any) you should scrap. Don’t forget to consider the administrative costs of providing employee benefits.

3. Incentive payments

These may include:

• Bonuses, such as sign-on, referral, retention and year-end bonuses.
• Commissions.
• Stock options.
• Spot awards.

Examine your incentive pay structures and determine what, if anything, needs to change.

4. Overtime pay

If you require overtime, forecast the potential costs as accurately as possible. Note that if uncontrolled, overtime can eat up a sizable chunk of your payroll budget because it must be paid at 1.5 times the employee’s regular hourly rate.

5. Payroll taxes

As an employer, you must pay your share of payroll taxes. On the federal side, there’s Social Security tax, Medicare tax and federal unemployment tax. Additionally, most employers must pay state unemployment tax. Depending on your jurisdiction, there may be other types of state payroll taxes along with local payroll taxes.

6. Unemployment insurance and workers’ compensation insurance

If staff members lose their jobs through no fault of their own, you’ll be required to pay unemployment benefits. If they get hurt on the job, you’ll likely need to pay them workers’ compensation benefits. Your payroll budget should account for both of these insurances.

7. Payroll administration

How much are you paying to administer payroll, and do you need to increase or scale back on spending? When answering, consider:

• How you process payroll. Is it more cost effective to do payroll in-house or to outsource payroll?
• How frequently you pay your employees. The more often you run payroll, the higher your payroll administration costs.
• Upgrade technology and automate manual payroll processes to reduce human errors.

Be sure to exercise caution when seeking ways to cut back on payroll costs. While you should remove any excesses, reductions should not be made at the expense of employee morale.

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