Tips and Tricks for Creating a Successful Payroll Budget

August 22, 2023・7 mins read
Tips and Tricks for Creating a Successful Payroll Budget

Creating a payroll budget gives businesses an idea of what to expect in the coming year. Payroll costs are significant for most companies, whether a small business with just a handful of employees or a Fortune 500 corporation.

Payroll isn't just about salary, either. According to the Small Business Association, the average employee costs a business between 1.25 and 1.4 times their salary. Payroll consists of additional expenses and mandatory payments like certain benefits and taxes. So, the payroll budget can, on average, be anywhere from 40% to 80% of revenue. Some companies use less, though.

As a result, payroll budgets could account for a considerable portion of cash flow. Having a payroll budget in place can help you with better control over spending and cash flow throughout the year. It can also help you to avoid underspending on payroll, which could affect your ability to maintain top industry talent.

This article will discuss the benefits of developing a payroll budget and provide a plan for managing yours.

Things to consider when you create a payroll budget

One way to keep the budget organized is to break it into categories. The amount of the company's revenue set aside for payroll will vary based on many factors, including how many employees you have, the benefits you offer and plan to cover for your employees, either in whole or in part, and even the industry. Categories can help clarify the budget, so let's review the standard ones.

Base pay

Base pay would include gross wages for exempt and non-exempt employees typically paid by salary or hourly, respectively. This is a suitable place to investigate your pay range to see if it aligns with the market. Some things to consider at this stage include:

  • If you expect to be hiring any new employees during the budget period and if any will be leaving
  • Scaling hours and staff for seasonal changes or temporary employees, where allowed
  • Mandatory increases such as changes to the minimum wage or salary threshold

Once this information is ready, you can determine pay increases and adjustments for the period.

Additional pay requirements

This would include overtime or premium pay for nonexempt employees. Premium pay typically is an incentive to work holidays, weekends or graveyard shifts. In some cases, it might include split shifts, as well.

Anticipated overtime pay is subject to federal and applicable state wage and hour laws. Creating the budget should include determining what the rules are for overtime and the pay rate specifics. It also involves finding out whether there will be any changes in the rules for the coming year.

Incentive payment

Incentive payments would be bonuses and commissions. If your company pays end-of-year bonuses for revenue growth, for example, that may fall under this category.

Mandatory benefits

You can break employee benefits down into mandatory and voluntary. Mandatory benefits, which can be federal and/or state-mandated, may include:

  • Workers’ compensation
  • Paid sick and safe leave
  • Disability insurance
  • Paid time off

Voluntary benefits

Voluntary employee benefits are offered by the employer and elected by the employee and can be employer or employee paid. These can include:

  • Health insurance
  • Dental or vision insurance
  • Life insurance
  • Short- and long-term disability
  • Voluntary benefits insurance such as pet, critical illness, hospital indemnity, disability and long-term care.
  • 401(k) or other retirement options
  • Flexible spending or health savings accounts
  • Health reimbursement programs
  • Stock options
  • Tuition assistance
  • Travel Insurance
  • Employee assistance programs
  • Legal counseling
  • Student loan repayment
  • Commuter benefits

Benefit packages draw in top talent, so new possibilities trend each year. Consider what additional voluntary benefits you might add or change.

These employee benefits can increase the amount of revenue that goes to payroll, but they are also critical to reducing employee turnover. If the competition offers better benefits, your key employees may decide to make a change.

Payroll Taxes

Payroll taxes can be one of the most complex elements of a budget. It helps to break the payroll taxes down by federal and state classifications.

Federal taxes generally include:

  • Social Security tax
  • Medicare tax
  • Federal unemployment tax
  • Federal withholding tax

State taxes vary depending on the state, but common taxes are:

  • State withholding tax
  • State unemployment tax
  • Local withholding taxes
  • Paid family medical leave
  • State disability insurance

Payroll tax requirements can change frequently, so you'll want to confirm them with each new payroll budget.

Payroll administration

Include as part of your payroll budget any costs that go into managing it. Along with payroll administrative costs, factor in a reserve fund for anything unexpected that might come up. Just like a home budget, you may need to consider an emergency fund so you don't have to worry about money from elsewhere in case of an unexpected expense arises.

Tips for creating a payroll budget

The first step for a small business is determining how the payroll is going to be processed. For example, do you pay a third-party service to do the payroll processing? Do you use payroll software with updates or annual subscriptions?

If you do process payroll in-house, consider the software used and the time it takes to process it. If it is labor intensive, investigate whether there is a more cost-effective way to manage the payroll, like outsourcing to a third-party service.

Is your payroll software state-of-the-art, or is it worth considering newer options? If so, how much will that cost and how long will it take to master?

Now, consider whether you need professional help to create the budget. If you use an accountant, it might be wise to let them make the budget for you or at least review the one you create.

If you decide to keep the payroll budget in-house, break it down into steps:

  • Create a list of employees and their positions. Make sure to include upper management and yourself. If you have more than a few employees, break them down by department. List exempt and nonexempt employees separately to avoid confusion.
  • List the various payroll expenses for each employee. This would include incentive pay, the different benefits each gets and other factors that affect their income and costs. Compare your list to the previous year's payroll data to make sure you cover everything. Figure out who will get increases for the year, as well.
  • Forecast salary expenses first. This is the easiest part of the budget. Account for any new positions or open positions.
  • Budget for nonexempt employees separately. This is where it can get complex. Make sure your budget accounts for busy seasons and slow times. Meet with the managers who do the scheduling and review the hours with them. Account for any new positions or open positions.
  • Estimate additional payroll. This would include bonuses, overtime and premium pay.
  • Budget for the payroll taxes once you determine the annual wage budget for each employee. Check the current tax tables to ensure you calculate the taxes correctly.
  • Create a projection for employee benefits costs. Be sure to include any administration fees you pay. For example, what are the 401(k) service fees? Double-check their prices to see if there are any changes.
  • Once you have all budgets for all the categories, compare them to the previous year's numbers. How accurate was the budget for that year? What can you learn from comparing those numbers to your final payroll expenses?
  • Have multiple people review the final budget, including department managers and your accountant. They can provide feedback that might give you a more accurate payroll budget.

The payroll budget is not easy to determine. That is because payroll is complicated. TriNet offers a comprehensive HR solution that can be cost effective to your payroll budget including access to benefits, payroll processing, real-time technology, and more.

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.

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