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A payroll budget estimates how much your business expects to spend on employee compensation over a set period. That includes wages and salaries, overtime, bonuses, benefits, commissions, employer payroll taxes, employee-paid benefits, and other payroll-related costs. Planning these expenses ahead of time makes it easier to manage cash flow, staffing, and growth more accurately.
This guide walks you through how to create a payroll budget and includes a free template you can use to organize the numbers. If you want more visibility into payroll costs, tools like QuickBooks Workforce (previously QuickBooks Payroll), paired with its accounting module, QuickBooks Online, can help you monitor payroll expenses and compare planned costs to actual spending over time.
For a simpler way to track payroll budgets, sign up for QuickBooks Workforce and save up to 50% for your first three months.
Download our payroll budget template
Steps for building your payroll budget
Step 1: Create a list of positions
Start by listing every position, including yours. Group roles by department and function to get a clear picture of all the people you pay. These can be:
- Yourself (if you are on payroll)
- Administrative staff
- Sales team (may need to estimate commissions)
- Hourly employees
- On-location employees
- Remote employees
- Temporary or seasonal employees
- Contract employees (flag them separately, as they’re typically paid differently and aren’t included in employer payroll taxes or benefits)
Step 2: List payroll expenses for each position
The next step in learning how to budget payroll is understanding who you’re paying and what those roles actually cost. The easiest place to start is last year’s payroll. It gives you a solid baseline for wages, taxes, and benefits without having to guess from scratch.
Checking last year’s payroll data in a spreadsheet works just fine, but if you use tools like QuickBooks Workforce, you can easily pull historical payroll reports to see pay and deductions by employee or pay period. It also offers a wide range of standard payroll reports, from paycheck history to payroll summaries.
From there, estimate annual pay for each position and adjust for expected raises, bonuses, commissions, and new hires. For a role you haven’t hired before, check market salary data to help you get a reasonable pay range. When estimating, be cautious and budget more than you think you’ll need rather than less.
As you build out your numbers, separate regular wages from variable costs, like bonuses or commissions. Doing this upfront makes it easier to see which payroll costs are steady and which ones may shift during the year.
Pro tip: Rather than padding every salary estimate, add a reasonable contingency only where costs are less predictable, such as overtime or seasonal staffing. That makes it easier to see whether a future variance came from real workforce changes or simply from an intentionally inflated budget.
Work through the following areas when estimating your total payroll costs:
Employee pay and overtime costs
Regular wages will typically account for the largest share of a payroll budget, but the timing and predictability of those wages depend on how employees are paid. Start by separating salaried and hourly paid employees or roles. Then, look at expected overtime costs.
- Salaried employees: Budgeting for salaried employees is pretty easy — just take their gross wages and divide by 12 months if you’re doing a monthly budget. However, if you pay on a two-week schedule, some months will have three paychecks. Be sure to consider how often your pay periods are here.
- Hourly employees: Hourly pay can vary throughout the year, especially during busy seasons or slower periods. Use past schedules as a guide and adjust for expected peaks or slowdowns. If you bring on extra staff during high-demand periods, include those workers as temporary or seasonal employees in your payroll budget.
- Overtime: Some businesses estimate overtime at 10% to 15% of payroll, but that approach can miss how overtime actually shows up. A better option is to look at which positions are most likely to accrue overtime and when. Check past schedules to budget for overtime in the months it’s most likely to occur. You can also use our overtime calculator to compute anticipated costs.
Payroll taxes
All employers must pay payroll taxes, so be sure to budget for them. Check the current tax tables to make sure your numbers are correct, but these are the most current:
- Federal unemployment: 6% on the first $7,000 of each employee’s pay
- Social Security: 6.2% of each employee’s pay, up to the wage base of $184,000
- Medicare: 1.45% of each employee’s pay
- Additional Medicare (for employees earning over $125,000 married filing separately, $250,000 married filing jointly, and $200,000 for all others): 0.9%
Bonuses and other variable pay
If you pay employees bonuses or other variable compensation, those costs should be included in your payroll budget. For performance-based bonuses, use prior payouts as a reference and adjust based on current goals or expected changes in company performance. Plan for these costs in the months they’re typically paid rather than spreading them evenly across the year.
Commissions and other incentive pay often fluctuate with revenue, which makes timing especially important. Estimating these costs based on expected performance can help you anticipate when payroll expenses may increase.
If you offer companywide or milestone-based bonuses, such as years-of-service awards, plan ahead for when those payments will occur. Setting aside funds can make these less-frequent costs easier to manage when they arise.
Employee benefits
These are the regular costs of maintaining employees. They include employee benefits such as contributions to health insurance premiums and matching fund programs like 401(k). Be sure to check with your insurance and/or retirement service providers to get the most accurate charges for the coming year. Don’t forget to include administrative and other fees.
Using a tool like QuickBooks Workforce can also simplify benefits budgeting by keeping benefits deductions and payroll costs connected. It also provides access to plans for health insurance, 401(k), and workers’ compensation — so you can run payroll and manage benefit-related deductions and contributions all in the same system.
New hires and contract workers
When considering new hires for new positions, place their projected wages, payroll taxes, and benefit costs in the month when the role is expected to begin. For example, if you are opening a new location in May, you don’t need to budget all the employees for that location in January. If hiring timelines are uncertain, prioritize critical roles so you can adjust start dates if budget constraints come up later.
Contract workers, freelancers, and temporary employees aren’t usually part of payroll, but they still affect your overall labor budget. Include contract fees and any administrative costs so these expenses don’t get missed. Budgeting for them alongside payroll gives you a more accurate view of what you’re really spending on labor.
Also read: Types of Employees: A Guide to Employee Categories
Step 3: Total each expense category
Once you've estimated costs by position, total them by month and by category. The annual number tells you what payroll may cost overall, while the monthly view shows when the business is most likely to feel the cash-flow impact.
At a minimum, break out regular wages, overtime, bonuses and commissions, employer payroll taxes, and employer-paid benefits. Keeping these categories separate makes it easier to identify what changed when actual payroll begins drifting from the forecast.
If you use payroll and accounting software like QuickBooks Workforce with QuickBooks Online, its reports can help you see monthly and annual expenses without manually adding each item. You should also be able to view payroll totals by major categories, such as wages, payroll taxes, and employee benefits.
Step 4: Review and refine your payroll budget
Now that you have the numbers, check that they are reasonable. Create charts or graphs to better understand the flow of the data. Pivot charts can help you dig into the data by quickly reorganizing it in a manner that best answers your questions.
Payroll tools integrated with accounting systems, such as QuickBooks Workforce with QuickBooks Online, can also make it easier to review payroll data. In addition to an extensive report library, it has built-in charts and smart tools that provide snapshots of monthly earnings, total expenses, and gross profit margins.
As you review the data, focus on the following areas to make sure your payroll budget holds up.
- Check that the information is correct: Get a second set of eyes to make sure the numbers were entered correctly and all spreadsheet formulas (if any) are right. Also, run it past department heads for “sanity checks,” just in case they have more current information.
- Compare it to last year’s projected vs actual expenditures: If you had problems with payroll last year, are you going to have similar issues? If you miscalculated an area (such as overtime) last year, did you correct it for this year?
- Compare it to projected earnings: Especially if hiring new employees, do you expect to make enough profit to cover all of their expenses? If not, how will you change this budget or other areas of your budget to compensate?
Why you should create a payroll budget
Now that we’ve covered the steps required to create an effective payroll budget, it’s important to understand the value of creating one. A payroll budget matters for these key reasons:
- Understand how much of your revenue goes to payroll: Payroll generally accounts for about 7.5% to 30% of a company’s gross revenue, depending on the industry and business model. Seeing payroll as a percentage of revenue helps put wages, taxes, benefits, and bonuses into a clearer context.
- Track payroll expenses: Having a budget in place allows you to track and compare actual expenses as you run payroll throughout the year. This makes it easier to spot when budget adjustments may be required to keep the business running smoothly. Keeping accurate payroll records also supports your payroll accounting and helps if you ever need to do a payroll audit.
- Cash flow management: By budgeting for this expense, you can ensure you always have enough cash on hand to meet your payroll obligations. If you don’t, not only could you face legal consequences, but you’ll also lose the trust of your staff. Read more cash flow management tips for your small business.
- Financial planning: A payroll budget helps you project your future financial needs and assess the overall health of your business. This can be especially beneficial when seeking financing or investment.
- Regulatory compliance: Ensuring you have budgeted for all payroll-related expenses, including taxes and benefits, can help you avoid costly penalties and stay in compliance with labor laws.
Budgeting for future growth & non-standard payroll expenses
Creating a payroll budget isn’t just about accounting for the current year’s expenses. It’s also about planning for your business’s future growth and considering non-standard payroll costs that could arise.
As your business grows, so will your payroll. It’s important to plan for this growth in your payroll budget. Here’s how:
- Project hiring needs based on growth plans: If you plan to expand your business, whether by increasing sales, adding new products or services, or entering new markets, you’ll likely need to hire more employees. Estimate your future hiring needs and include these costs in your budget.
- Budget for promotions and raises: As your employees gain experience and take on more responsibilities, they will expect and deserve compensation for their increased contributions. Be sure to budget for regular pay raises and possible promotions.
- Consider the impact of business scaling on payroll: As your business scales, you may find that you need to add new positions or even entire new departments. This could lead to increased payroll costs as you hire more skilled and higher-paid employees.
Non-standard payroll expenses are costs that don’t occur regularly but can significantly impact your payroll budget when they do. These include:
- Training costs for new hires: Whenever you bring a new employee on board, there’s a period of training involved. Depending on the complexity of the job, this could include formal training programs or more informal on-the-job training. Either way, these costs should be considered in your payroll budget.
- Severance pay for potential layoffs: In uncertain economic times, layoffs might become a reality. If your company has a policy of providing severance pay, this could be a significant expense.
- Costs associated with employee turnover: When an employee leaves, there are costs to find, hire, and train a replacement. These amounts can add up, especially if turnover is high.
Legal considerations for payroll budgeting
There are no laws that require businesses to create a payroll budget. However, payroll-related guidelines still need to be considered when planning payroll costs.
Minimum wage laws, overtime rules, and payroll tax requirements can vary by state and location, especially if you employ remote workers. These rules can also change over time, so it’s important to review current requirements and adjust your payroll budget as needed.
If you offer employee benefits, certain states may require specific coverage or employer contributions. Budgeting for these obligations ahead of time can help reduce compliance risks and prevent unexpected costs later.
Payroll budget frequently asked questions (FAQs)
How often should I update my payroll budget?
Review it at least quarterly and whenever a meaningful payroll change occurs, such as a new hire, raise, benefit renewal, staffing reduction, or tax change. For hourly, seasonal, overtime-heavy, or commission-based workforces, compare actual payroll with the budget monthly because costs can move much faster.
What should I do if actual payroll costs are consistently higher than my budget?
Compare actual and budgeted costs by category before cutting expenses. Check headcount and start dates, hours and overtime, raises, bonuses and commissions, employer taxes, and benefits separately. Once you know what created the variance, update the remaining forecast if the change is likely to continue rather than repeatedly treating it as an exception.
How can I reduce my payroll costs without cutting wages or laying off employees?
Start with costs that can change without reducing employees' regular pay. Better scheduling may reduce avoidable overtime, while filling vacancies at the right time can prevent unnecessary overstaffing. Cross-training employees can also give managers more scheduling flexibility. The goal should be to remove avoidable labor costs, not simply push more work onto fewer people.
What payroll expenses are often overlooked when creating a payroll budget?
Some common overlooked expenses include employee turnover, training, bonuses, and benefits costs. Also, businesses often forget to account for increases in wage rates due to raises, promotions, or minimum wage adjustments.
Can I use payroll software to help create my payroll budget?
Yes, many payroll software programs, like QuickBooks, can help you create and manage your payroll budget. They can automate much of the calculation work and track your actual costs against your budget.
