JANUARY 9, 2025
As an employer, providing fair compensation for your staff’s hard work is one of your biggest responsibilities, which means you should make sure you have a budget for proper employee pay.
Statistics show that nearly 1 of 4 U.S. businesses planned to increase staff, and the increasing costs of doing business – including rising wages – are the primary concern of 80% of small businesses.
What Goes in a Payroll Budget
Creating an accurate payroll budget helps business leaders make informed financial decisions and allocate resources effectively. By regularly reviewing your payroll budget and adjusting for changes in expenses, your company can remain financially resilient, even in fluctuating economic conditions. Follow these steps to keep your payroll budget on track, manage employee payroll efficiently, and optimize your overall payroll expenses.
Step 1: Calculate Total Payroll Costs
The first step in building a payroll budget is calculating the total payroll costs. This goes beyond base salaries; it includes bonuses, commissions, overtime, and other variable compensation. Additionally, employers must consider indirect expenses, such as payroll taxes and employee benefits, which can significantly increase total payroll expenses.
It’s crucial to stay updated on Social Security and Medicare tax adjustments, minimum wage laws, and other regulatory changes. These elements are core to your payroll budget and help you forecast realistic employee payroll costs across all pay periods.
Step 2: Include Additional Payroll Expenses
When planning for payroll, it’s essential to include all costs associated with employee compensation. This includes payroll taxes, health insurance premiums, and retirement contributions, which can vary based on company size and employee types. Benefits costs, such as healthcare premiums, continue to rise, so accurately accounting for them in your budget can help you avoid surprises.
Make sure to also account for any optional benefits your organization offers, like employee wellness programs, which can positively impact employee satisfaction but will also add to your payroll expenses.
Step 3: Forecast Future Payroll Expenses
Accurate forecasting is key to an effective payroll budget. Look at historical data to identify trends, factoring in expected raises, hiring plans, and workforce changes. Businesses must also consider potential cost increases tied to economic inflation, which affects wages and benefits.
Payroll software automates complex tasks like tax calculations, compliance checks, and benefits management. With updated payroll data, companies can make timely budget adjustments.
Step 4: Allocate Payroll Budget by Department
Once you’ve identified all payroll expenses, break down the budget by department or function. This granular approach helps you understand where the majority of payroll expenses go, such as operations, sales, or marketing, and makes it easier to allocate resources strategically. Departmental payroll budgeting can highlight areas of overspending or identify departments where additional resources might be necessary to support growth.
Step 5: Regularly Review and Adjust Your Payroll Budget
A payroll budget isn’t a one-time project; it needs regular monitoring and adjustment. Review your budget monthly or quarterly, comparing actual payroll expenses to the budgeted amounts. Unexpected changes, like employee turnover or benefits cost adjustments, may require a payroll budget update to keep your expenses aligned with your cash flow. Staying proactive about adjustments keeps your business agile and prepared for economic shifts.
Some companies have examined adjusting payroll frequency, optimizing payroll schedules, such as biweekly or monthly pay cycles, to improve cash flow management.
The Right Budget Size
A general rule of thumb is to allocate between 15 to 30 percent of gross revenue for payroll expenses. Obviously, this is dependent on the industry you’re in; for example, service-based industries that have high head counts may have more payroll expenses than retail businesses. Some industries have reduced expenses since they require little to no materials to operate.
You should also keep in mind that as your business grows, your expenses may change. You may have more employees or require more travel to meet with clients and business partners. You may have to add additional locations, which could mean more location upkeep expenses, more property taxes, or more lease or rent expenses. Making sure your total budget is balanced will require you to juggle these various expenses and keep accurate records of all of them, which can be a lot to handle.
Keeping the Books Balanced
Not every business owner is an expert accountant, and unless you’re running a financial service, you shouldn’t be expected to know everything about payroll budgeting. But it’s an important part of any business, so if you don’t already know how to create a budget, there are several ways to handle it.
You can learn how to do it yourself, but that will require training. You’ll also be personally responsible for the record-keeping on top of all the other duties you have as a business owner. You can also hire an in-house accountant, but for a small business, that can be a considerable expense. If you want a solution that’s both cost-effective and lets you and your staff focus on your customers/clients, your best solution may be to contract a payroll service provider.
A payroll service provider is a third-party company that manages your business’s payroll and distributes compensation to your employees. A quality payroll service will provide you with regular reports, ensure you’re in compliance with all applicable laws and regulations, keep accurate payroll records, and assist with tax filing. A good payroll service won’t make decisions on your budget without your approval and will stay in communication with your business to make sure you’re informed and satisfied with how your money is being managed.
Create Your Payroll Budget with Payroll Vault
We are a boutique-style payroll and outsourcing service provider, offering customized payroll services and human resources solutions for small businesses like yours. Our payroll management experts help business owners like you with planning your payroll. We offer customized reporting, reliable and easy communication with our accounting team, tax filing, a comprehensive menu of business administration services, and a variety of HR solutions, such as background checks, labor law posters, and more. To find out more about how Payroll Vault - Oklahoma City, Oklahoma can help your business, visit Payroll Vault, or stop by your nearest Payroll Vault location for a consultation!
