How to Correctly Calculate Payroll Costs


The concept of correctly calculating payroll costs is something that frequently comes up when our sales team is working with a new customer. As surprising as it sounds, small businesses often underestimate their payroll costs because they do not take the time to step back and fully understand how much they are spending. Suffice it to say that payroll costs are not exclusive to wages and benefits alone.

We should note that correctly calculating payroll costs is essential to good budgeting. Take the restaurant industry for example. Restaurant margins are not all that great to begin with thanks to intense competition. Controlling payroll costs is often the difference between a restaurant's failure or success.

As a general rule, full-service restaurants should not be spending more than 35% of gross sales on payroll. Limited service restaurants should be closer to 25%. If a restaurant owner does not calculate payroll costs properly, he or she could be spending more than he/she can safely afford to spend.

Five Components of Payroll Costs

There are five components that go into the total cost of payroll. Calculating payroll costs properly is a matter of understanding each of these components so as to get the numbers right. The five components are:

1. Wages, Salaries, and Tips

The biggest payroll expense is obviously the wages, salaries, and tips paid to employees. We make a distinction between wages and salaries because the former may involve overtime pay. Salaried employees do not necessarily get paid for overtime. As for tips, certain categories of workers earn them in addition to hourly wages. Think of restaurant servers, hairstylists, hotel concierge staff, etc.

2. Payroll Taxes

A lot of companies forget about payroll taxes when calculating costs because they think only in terms of the money deducted from employee paychecks. However, employee contributions are only half of the equation. Employers pay the other half. The amount employers pay in federal and state payroll taxes is a direct cost of doing business and part of payroll cost calculations.

3. Unemployment and Workers’ Comp Insurance

Like payroll taxes, employers are required to pay their share of both unemployment and workers’ comp insurance. The latter can be significant in industries for which the risk of on-the-job injuries is high. It pays to shop around for competitive rates so as to pay as little as possible while still complying with federal and state regulations.

4. Benefits Packages

If your company offers employees additional benefits like health and life insurance, the cost of those benefits is included in payroll costs. Thanks to the Affordable Care Act, most companies in the U.S. now pay for at least a minimum amount of health insurance for their employees. The price of that insurance tends to be the second-biggest contributor to payroll costs.

5. Payroll Processing

Last but not least are the costs associated with payroll processing. This is another component business owners tend to leave out simply because it is an 'out of sight, out of mind' sort of thing. Still, the time and financial resources put into payroll processing adds to the total cost of payroll.

A company that handles payroll in-house must pay staff members to handle work. They are paying for hours spent tracking time and attendance, calculating pay, inputting data, and printing checks. There are also additional tasks like reporting and paying taxes.

Small businesses can save money by transitioning to an online payroll solution. Such solutions are among the services we offer here at BenefitMall. For more information about online payroll or calculating your total payroll costs, feel free to contact us at any time.