Learn how to create an effective payroll budget to avoid wondering how and where your money was spent. Creating a payroll budget helps you understand what percentage of your budget should go to payroll and enables you to stay on track throughout the year. Generally, payroll should account for about 15% to 30% of your company’s gross income, but with service industries, costs can be as high as 50%.
For expenses that don’t pertain to a specific position, label them with a general name like “company” to indicate the expenses benefit the entire firm. When you put all the data in a spreadsheet, you can view your totals for each month and a full year. You’ll see payroll expense totals for each position and category—gross wages, taxes, and benefits.
Employers are required to match Social Security and Medicare withheld from their employees’ pay. Also, check your unemployment insurance requirements. You have to have enough cash on hand to pay employees in full and on time.
Look at the totals for each month as well as the annual sum to ensure reasonableness. Get a second set of eyes to make sure the numbers were entered correctly and that all spreadsheet formulas are right. Run it past department heads for sanity checks if they have more current information.
Compare it to projected earnings. Especially if you’re hiring new employees, how will you change the budget to compensate? Calculate total payroll costs as a percentage of revenue to ensure the expense won’t negatively affect company financials.
Create a Payroll Schedule
Now on to devising a payroll schedule. One thing is for sure—you don’t want to confuse employees or cause any hardship if paychecks don’t come when employees expect them:
- Timing—Pay once a week? Once a month? Most small businesses use a biweekly schedule—employees get paid every other week. Employees don’t have to wait too long without a paycheck. It may be easier to set aside time on a particular day every other week to manage payroll. A biweekly schedule is particularly helpful if you have lots of hourly workers whose paychecks have to be recalculated every pay cycle. Don’t confuse this with a semimonthly schedule, which is 24 pay periods rather than 26 as with biweekly. The advantage of semimonthly pay, however, is that it comes out even on an annual basis. However, many employees dislike having irregular pay dates.
- Factoring in holidays—Payroll processing can take an extra day, so don’t let your employees get their paychecks late because you forgot a holiday.
- Weigh what’s easy and cost-effective for you and the company besides thinking about what’s most beneficial for employees. Although some employees like paper checks, direct deposit is most common now. You have to make sure you have the proper connections with your employees’ bank accounts.
Planning helps find the right balance of efficiency for you and timely paychecks for your employees. As your business grows, so will your payroll expenses. Build flexibility into your budget to allow for changes in payroll.