What Are Payroll Expenses and Costs – A Quick Overview

Payroll expenses are the costs associated with compensating people for the work they do for your business – whether they’re full-time workers, hourly workers, or contractors.

Payroll costs often represent a company’s greatest expense category, so it’s vital to keep a close eye on your payroll expenditures and manage them carefully.

In this article, we’ll explore the various types of payroll expenses that organizations incur, share some tips for managing your payroll effectively, and look at some practical ways to keep your business’s payroll costs to a minimum.

An Explanation of Payroll Expenses

Payroll expenses represent all the costs an employer incurs to compensate its workers for their labor. However, this goes well beyond regular salaries and wages, as we’ll explore in the next section. It extends to the employer-paid portion of payroll taxes, FICA taxes, unemployment insurance contributions, and more.

Depending on a worker’s employment type and the nature of the company’s benefits, other payroll costs could include bonuses, tips, commissions, and paid leave. The labor cost of administering the payroll function also represents an expense for most businesses.

Payroll Costs Beyond Salary: A Deeper Dive

Here’s a quick overview of some of the most significant payroll costs:

Gross Wages

This portion of your payroll expenses goes to paying hourly workers. You can calculate gross wages by multiplying your employees’ hourly wage amount by the number of hours they work during your payroll period. Don’t forget to factor in any overtime pay, which is paid at a rate of one and a half times the hourly wage.

Salaries

Salaries are payroll costs associated with payments made to salaried employees – those who earn a fixed income over every pay period irrespective of how many hours they work.

Payroll Taxes

Employers are required to pay payroll taxes to state and federal agencies based on their gross payroll figures. Contributions in this category include Social Security and Medicare as well as industrial and unemployment insurance premiums.

Tax Withholdings

Tax withholdings are the federal income taxes you withhold from your employees’ paychecks. The amount you need to withhold will depend on your employees’ income levels and the information contained in their Form W-14.

Employee Benefits

Companies that offer employee benefits will need to factor in the employer portion of the following costs:

• Insurance (health, dental, vision, life, and disability)
• Paid leave (vacations and sick days)
• 401(k), savings plans, or pension plans
• Post-retirement health insurance

How Payroll Costs Affect Business Cash Flow

As an employer, it’s vital to understand how payroll impacts your business’s cash flow. If you don’t pay close attention to your payroll expenses and manage them closely, you might compromise the financial stability of your company.

Payroll timing is one of the key factors impacting cash flow. In most companies, payroll runs follow a regular schedule, such as weekly, bi-weekly, or monthly, so a significant portion of your cash flow goes toward payroll expenses. This can lead to cash flow problems if you don’t have enough reserves to cover your regular payroll expenses. It’s vital to have a clear understanding of your cash flow patterns so you can anticipate when you’ll need to make payroll payments and plan accordingly.

If possible, it’s a good idea to establish a cash reserve by setting aside a certain percentage of your revenue every month into a separate account. These funds can be used to cover payroll expenses if your business experiences unexpected cash flow shortages, for example, during quieter times of the year or if you lose a major client.

You may also want to explore alternative payroll options or offer employees flexible payment options, such as direct deposit or electronic payments. These can help to streamline the payroll process and reduce the time and resources dedicated to managing payroll.

During lean times, it’s important not to prioritize other expenses over payroll. After all, your employees are the lifeblood of your business, so maintaining their trust and stability should be your top priority. Tactics like negotiating the terms of payments to suppliers can free up cash to ensure your employees get paid. This will not only safeguard employee morale but also ensure continuous productivity, which is vital for business stability and growth.

What Are Payroll Costs for Employees?

Salaried and hourly workers don’t incur any direct payroll costs (given that you, as the employer, withhold their personal tax obligations to the government).

However, if you use the services of freelancers or contractors, you’re not required by law to pay taxes on the fees you pay them, and they’re responsible for their own tax withholdings.

Why Payroll Costs Should be Managed

Whatever the size or nature of your business, your payroll is something you have to manage carefully. Payroll can be a complex issue to understand, especially as the many rules and regulations governing it are constantly changing.

If you fall foul of legislation, you could face steep payroll penalty fines. This could damage your reputation in the market and the eyes of your customers and employees. Other potential payroll pitfalls include human error, negligence, fraud, natural disasters, or technology failures.

The cost of processing and managing your payroll is another factor. Ideally, the administrative burden associated with your payroll should be kept to a minimum.

Optimizing Payroll Costs Through Automation

Utilizing payroll software allows you to automate calculations, track your expenses, and generate reports. This reduces the level of manual effort involved and streamlines and de-risks the payroll process. The technology takes care of calculating figures like deductions and overtime rates for you, thus ensuring your workers get paid on time and accurately. Additionally, your employees can access their financial information when and where they want.

The best payroll software will also offer insights into spending patterns, helping you make informed financial decisions, ensuring compliance with tax regulations, and reducing the risk of costly penalties.

Questions you may want to ask while searching for the right payroll management software include:

• Will this payroll solution save me time and money?
• Will it work with my current HR software?
• Will the payroll provider work for the size of my business?
• Does the solution fit within my budgetary constraints?

Next, let’s look at some tips for keeping your company’s payroll costs under control:

3 Methods for Lowering Payroll Costs

1. Reduce Staff Turnover

Employee retention matters to every business because recruiting employees is a time-consuming and expensive overhead. The costs of posting jobs, interviewing candidates, confirming employment eligibility, and training new hires can quickly mount. Constantly adding and removing headcount from your payroll systems also adds an unwelcome burden on your payroll administrators and the wider HR team.

The smart move is to do everything possible to encourage employees to remain with your company. For tips on improving your employee value proposition and reducing staff turnover, read our blog.

2. Introduce Flexible Shift Scheduling

Companies that employ hourly workers often find it tricky to ensure that they accurately and adequately staff every shift. This can lead to them paying unnecessary overtime, the costs of which can be significant. A sensible option is to introduce shift scheduling flexibility. This will benefit both the organization and its employees.

Giving employees the ability to easily swap shifts is a practical way to help them remain loyal. Your employees likely lead busy lives, where others rely on them for care and upbringing. Things come up and go wrong without warning. People might need to swap shifts with a colleague at short notice to provide childcare or take a parent to the hospital.

3. Go Paperless with Paycards

In recent years, more employers have moved away from the practice of issuing paper checks in favor of novel pay delivery options, including direct deposit and utilizing a paycard or debit card. With this approach, employees get their wages loaded on their card, and they can use the card to pay bills online, transfer money to family or other third parties, and make ATM withdrawals.

The best payroll card providers make it easy for people on the go to manage their funds from their smartphones. So, it’s as easy for people to manage their pay as it is to send a text message!

Earned Wage Access (EWA) – the concept of giving people access to money that they’ve already earned – is growing in popularity and can be enabled via the paycard approach. EWA allows employees to receive payments for the hours they’ve worked and tips they’re owed before their normal payday. With EWA, they can demand pay as they need it – sometimes it might be part of their pay; other times, it might be all of it.

The best paycard providers also enrich their services with features to help people manage their finances better – for example, with tools that help them save and budget. Employees can structure their pay so that a portion automatically goes into savings, where they can access it if they need it. These online systems can also allow people to track their spending to see if they’re meeting their budgets.

Employers are beginning to see the value in giving people greater choice as to when and how they’re paid. If people prefer monthly direct deposits (or even paper checks), that’s OK, and they should still be able to get them. However, the growing sector of the workforce who prefer paycards, digital accounts, EWA, and on-demand pay should also be recognized and supported.

Ultimately, this will create a more employee-centric pay ecosystem.

The Payactiv Payroll Card Option

Payactiv is a pioneer of modern, digital payroll solutions. Here are some benefits for employers that partner with us:

Easily Issue Off-Cycle Payments

Electronically disburse bonuses, expense reimbursements, and termination pay to employees’ payroll cards. Payactiv provides a 2-day cash float.

Stand Out with On-Demand Pay

Today’s workforce prefers to work for employers that support their financial wellness. Our EWA is free with direct deposit to Payactiv cards.

Easy Implementation

We work with you to ensure a successful plan and launch of our program.

Marketing Material

We prepare and provide customized materials to promote the program to your employees.

Compliant

We are payroll compliant in all 50 states, and use industry best practices.

Dedicated Account Manager

We offer tools and training to get the most value from the program and a dedicated Account Manager.

Always-On Customer support

We provide 24/7/365 customer support in English and Spanish by toll-free phone and online live chat.

Safe and Secure

Our data is encrypted, SOC2 compliant, and we have ISO 27001 controls in place. We don’t store sensitive employee data.

Make Payroll a Breeze

At Payactiv, we believe that a future of pay that’s faster, digital, convenient, and connected is already here. Your employees want and welcome this new reality and now’s your chance to give them what they need.

Learn more about how Payactiv can help your business and your employees, or book your demo now.

* The Payactiv Visa® Payroll Card is issued by Central Bank of Kansas City, Member FDIC, pursuant to a license from Visa U.S.A. Inc. Certain fees, terms, and conditions are associated with the approval, maintenance, and use of the Card. You should consult your Cardholder Agreement and the Fee Schedule at payactiv.com/card411. If you have questions regarding the Card or such fees, terms, and conditions, you can contact us toll-free at 1 (877) 747-5862, 24 hours a day, 7 days a week.