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Companies use payroll budgets to predict payroll expenses for the coming year. These budgets also include related expenses such as federal payroll taxes, employee benefits, and overtime expenses.
As such, a detailed and accurate payroll budget will help a company manage expenses and make important business decisions.
But the process of setting this budget can be time consuming and complex. There is a lot to consider when creating a payroll budget, so we break it down into easy, straightforward steps for you.
Why it’s worth creating a payroll budget
Let’s look at the benefits of creating a payroll budget:
Salary is a significant expense
Wages usually make up 20-30% of the company’s gross income. It forms a significant part of the total budget. Therefore, it is important that you handle the salary budget quickly.
Both over-consumption and under-consumption on the payroll can cause problems. Over-consumption reduces your profit margins, while under-consumption can mean that you do not promote growth. After all, your salary budget should increase as your business expands.
A budget helps you stay on track
A payroll budget helps you maintain a company’s financial health. In particular, having a budget that properly breaks down every expense associated with the payroll helps you stay within your limits.
When it comes to important decisions, e.g. Whether you want to be able to make a new hiring or give someone a raise, you know exactly whether the company can afford it or not.
Also, if you need to reduce expenses, you have an idea of where you can make cuts and / or how to handle payroll expenses more efficiently.
You remain in compliance with legal requirements
Projection of payroll taxes and employee benefits is an important part of creating a payroll budget so you have a solid understanding of the mandatory payments you need to make in advance.
This means that you can make sure that you have the funds available to comply with these legal requirements. Failure to do so may result in unnecessary sanctions. For example, if you submit quarterly federal payroll tax forms late, you could be fined up to 15% of the unpaid tax.
The investment is necessary to create a salary budget
Creating a payroll budget can be time consuming depending on your approach and the size of your business. There is a lot of information to retrieve, ie employee data and payrolls.
The good news is that you can speed up this process by using payroll software such as Gusto.
Gusto runs and tracks payrolls automatically and offers other useful features, such as filing taxes on your behalf. You can access and download reports with all the information you need to create a payroll budget, e.g. Earnings information for each employee and total benefits.
Payroll software obviously requires a financial investment. Gusto’s Core package costs a base price of $ 39 per. Month plus $ 6 per. Month per Employee.
However, you may find that this is worth the investment as payroll software can drastically increase efficiency. This is important given the fact that many of the processes involved in payroll are laborious if performed manually.
9 steps to creating a payroll budget
To create a payroll budget, you need to gather the right data and make several significant projections.
The truth is that there are many variables you may need to include. But once you know all the items you need to include in your salary budget, you will be sure to get it right.
# 1 – List of all employees
First, put together a list of all that the company pays. This includes all different types of positions, including external and temporary positions as well as those working on site.
Do not forget to include yourself in the list. Also note that you may want to keep contract workers separate as your calculations for these workers will be different as you do not pay taxes for them or benefits for them.
Unless you are a startup, it is unlikely that you will have to make this list from scratch. Hopefully you have detailed employee records available and it’s just a matter of gathering the information.
Many HR tools store employee records. Some will even save you time by offering self-service systems. In other words, the employees themselves enter the most up-to-date information in the database.
# 2 – List Employee Base Salaries
Next, note the pay percentage for each employee and the number of hours they work each month. Use these numbers to calculate their expected monthly and annual incomes. If you already use payroll software, you can streamline the process by extracting historical data.
When calculating base salaries, there are a few additional aspects that need to be considered to ensure that your estimates are correct for the coming year:
Increases or wage increases Compulsory wages, e.g. A higher minimum wage Predictable redundancies, e.g. Retired employees New employment or additional staff that may be required Changes in existing staff time due to operational changes
# 3 – Estimate overtime expenses
Carefully consider the number of overtime hours to be as accurate as possible.
Some positions may be more likely to require overtime than others. You also need to take into account seasonal fluctuations as well as events that increase overtime in the coming year. For example, there may be a new product launch that requires more employee hours.
When it comes to numbers, there are a few more things you need to take into account. Under federal law, if a worker works more than 40 hours a week, they are entitled to 1.5x pay for their overtime.
You must also examine the requirements of the state. Some states have slightly different rules for overtime. For example, in California, if employees work more than 12 hours in a day or more than eight hours on the seventh day in a row, they are entitled to double pay.
Furthermore, there may be the company’s policies regarding overtime or premium pay, ie. increased rates when employees work unwanted hours or days.
# 4 – Estimate bonuses and commissions, if applicable
There are different types of bonuses that you may need to take into account, depending on the company policy.
Performance-based bonuses or commissions, e.g. For salespeople, are difficult to estimate as they are not guaranteed. The best thing you can do here is to create an average based on an employee’s performance in previous years, or what employees in a particular role have achieved in previous years.
Other types of bonuses can be holiday or annual bonuses. They may be based on seniority. Or based on the number of years an employee has served. You need to buffer up on various bonuses that your company offers to ensure that you do not miss anything out of budget.
# 5 – Project Employee Benefits
There are likely to be mandatory benefits you need to include in your budget. In the majority of states, employers must cover workers’ insurance policies. There are also additional requirements in certain states or even cities or counties, such as disability insurance or paid parental leave.
Be sure to check government regulations to stay compliant. And keep an eye out for any new legislation.
There are also a number of voluntary benefits you may need to consider depending on the company. These can be:
A 401k plan Life insurance Medical, dental and vision insurance An employee assistance program (EAP) A flexible consumption account (FSA) A health allowance (HRA)
# 6 – Calculate payroll taxes
Each employer must pay federal payroll taxes. Note that other state or local payroll taxes may also apply.
Income tax, medicare and social security payments must be deducted from the employee’s salary each month and paid to the relevant authorities.
Employers must also pay their share of payroll taxes (which do not come from wages to employees), including social security, medicine, federal unemployment and state unemployment benefits.
Tax rates are subject to change, so be sure to stay updated.
When it comes to actually filing these taxes, if you do not want the hassle or you are worried you will make mistakes then many payroll tools, e.g. Gusto, automatically calculate and file payroll taxes on your behalf.
# 7 – Gather your payroll budget
You may have a specific way of showing your totals. For example, you could use a budgeting tool or payroll software or a combination of the two that perform the calculations for you and provide a report. Or maybe you use a spreadsheet, maybe based on a template.
Either way, you need to see a breakdown of the total expense totals so that the right people can leverage the information to make smart business decisions. In addition to the total number, totals for gross wages include overtime, benefits, bonuses and taxes.
Once you have the totals, you may want to add a percentage for unexpected expenses. For example, there may be an unexpected termination or, as we have seen recently, interruption due to global events.
# 8 – Review your payroll budget
Benchmark for payroll expenses is generally 20-30% of the company’s gross revenue. Some industries, e.g. The service and hospitality industry, however, can have a salary budget of 50% that does not reduce profits. Beat the standard salary budget for your industry to see how your budget stacks up.
There are further reasons why it is a good idea to compare salary budget with expected earnings. First, you will be able to train if you can afford new hires. If there is room in the budget for this, it is a big plus as new hires can help the company’s growth.
Or if the expected salary budget is too high, you have the opportunity to make changes that affect the financial year. For example, you can create incentive programs to increase employee productivity or reevaluate overtime.
# 9 – Track payroll expenses
You need to track your actual payroll expenses throughout the year and compare them to your projections. It helps the company stay within its limits when considering bonuses, overtime and so on.
Of course, there are many additional reasons to monitor and maintain payroll records. For example, if an audit is to be performed. And of course, your records will help you create the payroll budget for next year.
The easiest way to keep payslips is to use a payroll tool such as Gusto. It tracks each person’s hours, time off, salaries and automatically saves all records for you in one place.
Final tips for creating a payroll budget
If you want to create and manage your payroll budget like a pro, here are the last things you need to know:
Use a temp agency for seasonal workers? Do not forget to include their salaries plus the administrative costs associated with using the agency in the budget. You may be able to create a proven salary strategy based on your budget. Set e.g. An economic target (an increase or decrease) for the budget for the coming year. Make sure that changes in payroll expenses are sustainable and will not have a detrimental effect elsewhere. For example, removing an annual holiday bonus that employees are used to can have a serious impact on morale. Release freelancers and entrepreneurs from the payroll budget. They do not have the same financial requirements as other salaried employees.
Once you have created and reviewed your payroll budget, the next step is to get together with the relevant people and get them to look too. These can be C-level, HR team, accounting and / or department heads.
This way you can discuss and implement any necessary changes. Then, of course, you should continue to maintain good records and try to stick to your budget as mentioned above.
As we are sure, busy HR professionals have many tasks to perform on top of payroll administration. So if you want to simplify further HR processes, you may be interested in our guide to the best HR software. We provide you with a toning down of the tools that help you streamline recruitment, HR management, PTO, payroll, reporting and more.