Insights into global expansion & employee retention

Published: June 10, 2022

What Is Payroll Cost?

Running a business can be expensive. As the saying goes, you have to spend money to make it. Across all industries, the largest cost of doing business by far is labour—also known as payroll—which can account for up to 60% of your total expenses. This is especially true for service industries where staff represent a major facet of the delivered product.
payroll cost

So, what is payroll cost exactly? In short, it’s the total amount that goes towards your employees’ pay and benefits—In other words, it’s salaries and wages combined with statutory benefits. 

Today, we’ll explain the ins and outs of these costs. Then, we’ll show you how to create a payroll budget. 

What is Included In Payroll Costs?

When you initially hear the term payroll, the first word that comes to mind is probably “salary.” Whether for full-time employees or freelance contractors, wages are indeed a significant percentage of payroll. However,  are still other expenses that must also be considered. 

Payroll is the total cost of hiring, which includes direct payroll costs, indirect payroll costs and out-of-pocket employment expenses. 

To get more specific, let’s take a look at the definition laid out by the Small Business Association

Paycheck Protection Program (PPP) Although the program ended in May of 2021, it provided clear categories for the factors that officially go toward payroll costs. These include:

  • Compensation – This refers to the monetary value an employee will receive in exchange for their labour, the labour cost. It may include salary, wages, commissions and overtime pay. At the end of the month, the employee’s pay stub will likely show their gross pay—the total dollar amount paid before subtracting deduction. This includes time worked, overtime, benefit contributions, reimbursements, additional income and net pay.   
  • Benefits – Federal and state law often requires companies to provide benefits. The vast majority of companies must also include benefits to attract and then retain employees. These may include:
  • Worker’s compensation
  • Vacation
  • Sick days
  • Health insurance
  • Dental insurance
  • 401ks and retirement plans 
  • Commuter benefits
  • Long-term disability insurance

In terms of payroll costs, these are categorized as benefits withholdings, meaning you deduct the employee portion of the benefits from the gross pay. In some cases, the business may also offer a program where benefits are matched out-of-pocket (thus contributing to payroll expenses). 

  • Withholding taxes – Like benefits, an employer must also withhold a salaried employee’s income taxes on wages. This will include: 
  • Federal income taxes
  • State income taxes 
  • Medicare and Social Security taxes 
  • Payroll tax – Similarly, an employer may also be expected to contribute (on behalf of the employees) to federal and state unemployment taxes.
  • Allowances for separation or dismissal – Some businesses create a severance program where, after the employee’s job is finished, the business still pays them a portion of their salary for a set amount of time. 
  • Tips – Do tips make up a sizable percentage of employee pay? If so, an employer is expected to calculate this figure based on records of past tips or using a good-faith estimate.      

How to Create a Payroll Budget

Curious about how to do payroll or budget accordingly? 

Follow these steps: 

  1. Create a list of positions – To better drill down into your total operational payroll costs, consider every single position and department within the company. This may include full-time salaried employees, seasonal employees, hourly employees, contractors and so on. 
  1. Collect W-4 data – Every salaried employee is legally required to complete a W-4. This document explains how much an employer should withhold from the employee’s paycheck to account for taxes and benefits. 
  1. Set gross pay cycles – Whether you are using manual or automated payroll, to calculate gross pay, you must set a clear payroll cycle. It could be done on a weekly, biweekly or monthly schedule. Once set, that will determine what percentage of salary you pay on each payroll date. 
  1. Calculate net pay – You can calculate net pay by subtracting deductions and withholdings from gross pay.
  1. Add up each payroll expense category – Once you have all of your data, input that information to better understand how expenses are allocated to each position and category in terms of gross wages, taxes and benefits. 
  1. Perform a budget review – Now that the numbers are in order, you can review the data to see whether the figures are accurate, the resource allocation is reasonable and the total spending aligns with projected earnings. Then, going forward, you can compare historical payroll budgets and company performance over time, making adjustments as needed. 

Manage Payroll with Playroll

Managing payroll costs in the U.S. alone can be a massive undertaking. And the calculus becomes all the more complicated for multinational companies that must also factor in local laws and regulations, employee compensation, domestic and international tax laws, employee benefits, bank charges and exchange rates.

How then can growing businesses gain control and visibility over their payroll costs? You’ll need a payroll management system and other payroll solutions.

That’s what Playroll’s Payroll Pros was built to solve—it’s the tool employers can leverage to set accurate budgets, avoid payroll errors, and then pay global teams the right way, on time, every time. 

Aside from our payroll service, we also have employer of record services. Want to see how it works? Connect with the Playroll team to schedule your demo today! 

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