A payroll budget helps you estimate how much your business will spend on employee compensation over a set period. This includes wages and salaries, overtime, bonuses, benefits, employer payroll taxes, and other payroll-related costs. Since payroll is often one of the largest ongoing expenses for businesses, budgeting for it helps you plan cash flow, staffing, and growth more accurately.
This guide breaks budgeting into four steps and explains how to budget payroll in a way that fits into day-to-day financial planning. You can also download our free payroll budget template to get started. 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.
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Steps to build a 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.
QuickBooks Workforce has over 20 standard payroll-related reports, but you can also create a custom one if you need to. Source: QuickBooks Workforce
From there, estimate annual pay for each position and adjust for any changes you expect for the year, such as pay raises, bonuses, commissions, and new hire additions. If you’re planning for a new role, 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.
Below are the payroll cost areas you should review more closely:
Employee pay makes up the bulk of most payroll budgets, so it’s worth breaking it down by how people 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 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.
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
- 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%
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.
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 Payroll 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.
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.
Step 3: Total each expense category
Once you’ve listed payroll costs by role and cost type, the next step in budgeting payroll is totalling everything up. Start by adding payroll expenses by month to see how costs change throughout the year, then look at the annual totals.
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.
QuickBooks Online has a budgeting tool for listing expenses that automatically tracks actual spending when integrated with QuickBooks Workforce. Source: QuickBooks Online
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.
With QuickBooks’ AI tools, you get monthly summaries that provide insight into your company’s financial performance, including earnings and expenses. Source: QuickBooks Workforce
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.
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)
You should review and update your payroll budget at least annually — and ideally, once per quarter. However, any changes to your business that impact payroll, such as hiring new employees, giving raises, or changing benefits, should trigger an immediate budget update.
If your actual payroll costs are consistently higher than expected, it’s time to review and adjust your budget. You might be underestimating certain costs, or there could be inefficiencies in your payroll process that need to be addressed.
There are several strategies you can consider. These include improving scheduling efficiency to reduce overtime costs, investing in training to increase employee productivity, and offering benefits that are valuable to employees but low-cost for you (such as flexible work hours).
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.
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.
