Understanding Payroll Costs For Small Businesses

Is payroll really the most significant expense for small businesses? Not quite—but mismanaging payroll can lead to workflow issues and poorly executed strategies. Get a clear understanding of payroll to keep your business running smoothly and efficiently

As a small business owner, understanding payroll costs is crucial. Learning how to manage them efficiently and optimize your spending can make a big difference. In today’s Aniday guide, we’ll show you exactly how to do just that!

Categorizing Payroll Costs Of Small Businesses

Many categories must be considered when calculating payroll costs for small businesses. Let's discuss each in depth!

Employee Salaries And Wages

Employee salaries and wages are part of payroll expenses. Whether you pay monthly, hourly, or any other way, making regular payments is essential. Apart from that, there are also employee-associated other costs such as recruitment, training commissions, bonuses, and more you need to spend.

Payroll Taxes

If you are a small business in the US, FICA (Federal Insurance Contribution Act) taxes indicate a specific portion of payroll taxes. According to Jobera, 70% of small businesses consider payroll taxes a considerable burden. Payroll taxes include other types of taxes, including:

• Federal taxes
• State taxes
• Local taxes

Therefore, employers must retain these taxes from employees' wages and remit them to the specific authorities. Failing to comply with tax regulations may also result in legal actions and penalties.

Employee Benefits

You must also pay employee benefits with basic salaries and wages. They include:

• Health insurance
• Retirement contributions
• Paid time off

While attractive employee benefits can add to payroll costs, they are essential for attracting and retaining top talent in the long run.

Payroll Processing Fees

Payroll processing fees are the costs associated with outsourcing your payroll to a service provider. These expenses typically include:

• Fees for payroll software or services.
• Outsourcing payroll to a third-party provider.
• Hiring an in-house payroll administrator.

Software Or Service Fees

If your small business uses payroll software, it also has monthly or yearly costs. The costs may vary depending on the type of software or service provider you use. 

For example, QuickBooks Payroll provides tax penalty protection, automatic payroll, and more features with added benefits.

Compliance And Legal Fees

It is essential to ensure your payroll activities follow the rules and regulations. Therefore, you can hire experts or associated individuals to ensure your business complies with payroll and tax regulations. Failing to do so or facing non-compliance issues comes with extra fines and penalties that can affect the growth of your overall business.

What Is The Average Payroll Cost?

The average payroll cost may differ based on your business operations and the expenses associated with the payroll service. However, payroll service costs may range between $29 and $150 monthly.

When considering a small business, the payroll cost can be kept between 20% and 30% of total revenue, but this may differ based on the standards you want to maintain.

According to NetSuite, approximately 45% of small businesses use payroll services and 42% spend between $101 and $500 monthly on payroll costs.

As a critical note, if your business industry is labor-intensive, the cost may vary and occupy a large percentage of the revenue.

How Do You Calculate Payroll For A Small Business?

You can calculate payroll for a small business easily. All you need to do is sum up the employees' base salaries or wages, payroll taxes, benefits costs, payroll services costs, processing fees, software fees, and compliance-related expenses. The total indicates the payroll cost associated with the chosen period.

How To Cut Payroll Costs?

As a small business, we understand that payroll costs can be overwhelming or even out of the budget. In that case, you must optimize payroll costs and utilize the benefits accordingly. Here are some tips to maximize Payroll costs from Aniday:

• Check the employee compensation you provide: You can review whether the compensation is within the budget and aligns with industry standards and your requirements. If you allocate more, you can add promotional salaries and benefits, which help attract and retain your employees effectively.

  • Implement performance-based pay: Performance-based pay generally depends on employee productivity. This technique helps motivate employees to reach specific goals and win bonuses. 

  • Implement a tiered salary structure: This helps define straightforward employee pay based on their experience and roles. Moreover, you can conduct regular reviews and keep them aligned with your requirements.

• Identify the payroll processes: Ensure your payroll software, services, and fees are handled correctly. If you do this properly, you can reduce administrative overhead costs, check the accuracy of tax calculations, automate repetitive tasks, etc.

• Integrate with accounting systems: When payroll software is integrated with your business account systems, it helps maintain a simple financial management process, create accurate financial documents, and even reduce errors.

• Monitor overtime and paid time off costs: There are instances where you need to monitor overtime hours and calculate the costs accordingly accurately. Also, keep track of paid time off to help avoid unnecessary expenses. You can use effective tools and techniques to calculate overtime hours and off-time requirements.

• Obtain professional advice: If your business payroll costs require strategies, expertise, or monitoring, you can hire an accountant, financial advisor, or HR specialist to inspect the payroll costs. They will help you further optimize your payroll costs according to your requirements and smoothen the operations.

• Outsource payroll processing: If the payroll process is overwhelming, you can outsource payroll services from third-party providers. Therefore, it helps to track the payroll activities and ensure compliance and accuracy. Hence, you can target to maximize business operations and your goals effectively.

Final Thoughts

In conclusion, it is crucial to know how payroll costs work for small businesses, the different types of expenses, and the essential techniques to optimize them. This knowledge helps give you a broader view of how you should manage your business and implement tactics.

Looking for an outsourced payroll solution for your team? Aniday’s Employer of Record service is tailored to your needs, no matter where your team members are. We simplify the complex payroll process, ensuring smooth and hassle-free management.

We hope this guide helped you understand payroll costs for small businesses in detail!