Payroll is one of the biggest and most important parts of a company’s budget. To create a successful payroll budget, you have to consider what you expect your company to accomplish in the next 12 months and what manpower it will take to achieve that. You’ll need access to your payroll expenditures from the past year as well as non-salary payroll expenses like overtime, taxes, and benefit contributions. If you learn how to create a payroll budget the right way now, you’ll avoid wondering where your money went later.
Pro Tip: Download our free payroll budget template to start planning for your 2021 payroll expenses.
1. Create a List of Positions
Start with current positions, including yours. Categorize them by criticality as well as department. Consider all people you pay:
- Yourself (if you are on payroll)
- Admin Staff
- Sales Team (may need to estimate commissions)
- Hourly Employees
- On-location Employees
- Remote Employees
- Contract Employees (flag them, as you will not be paying taxes or benefits, and may have a different pay schedule)
- Temporary Employees
2. List Payroll Expenses for Each Position
Next, figure out the expenses for position. If you use a payroll software like Gusto, you may be able to pull historical numbers from reports. If not, review last year’s figures, using a spreadsheet like Excel or Gsheets to total the expenses. Estimate annual pay for each position, factoring in any raises and bonuses. If you are creating a new position that you don’t have data for, check with your local employment agency or sites like Glassdoor for average salaries in your area or that are offered by your competitors.
When estimating, err on the side of caution and budget more than you think you’ll need rather than less. If factoring in bonuses and compensation increases, break those numbers out from regular wages so you can see them for each employee and as a whole, when needed. For expenses that don’t pertain to a specific position, identify it with a general name like “Corporate” or another that indicates the expense benefits the entire company.
Review Previous Year’s Payroll Expenses
Before inputting the payroll numbers for the prior year, do a review. Does an employee deserve a raise? Should you do an audit on overtime to see how you can reduce those expenses? If some of the figures you’re using are annual totals, break them down into months.
If you want to track your payroll expenses better and create a smoother process overall, consider using Gusto. It doesn’t just track wages, benefits, and taxes, but also helps you pay them. Gusto was made specifically for small businesses with less than 100 employees; try it free today.
Budget for Hourly and Salaried Workers
Salaried workers are easy – take their gross wages and divide by 12 if doing a monthly budget. However, if you pay on a two-week schedule, some months will have three paychecks. Be sure to account for those months.
Hourly workers can get more complex. You’ll need to consider the hours worked per month, but this may not be consistent throughout the year. Be sure to account for busy seasons and slow times. If you add staff during the busy season, be sure to include them as temporary workers.
You may also want to do a study to make sure you are scheduling your people most effectively. For example, if your restaurant is always slow Thursday afternoons, you might reduce the number of staff that day and schedule them for Friday night’s rush, which would result in a lower budget amount for that period.
Budget for 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 first $7,000
- Social Security: 6.2%
- Medicare: 1.45%
- Additional Medicare (for employees earning over $200,000): 0.9%
Did you know? Some businesses qualify for deferred payroll tax payments due to COVID-19, employees too. If your business took advantage of any deferrals, be sure to budget for paying the government back by the deadline. Check out our latest update on the Payroll Tax Holiday for more information.
A Note on Income Taxes:
Since income taxes come from employee wages, you won’t consider them in your payroll budget. However, it can be useful to know these figures so you can plan for withholdings each month. Compute them using average wage amounts. If you have historical data to work with, this will be pretty simple. For new positions, use historical data of similar positions as a guide, or make a general estimate of 24%, which is the maximum withholding.
Project Overtime Costs
In general, most companies estimate overtime at 10% to 15% of their annual payroll budget. However, you should not simply calculate this number, divide by 12, and add it to your budget. Rather, think about which positions are most likely to accrue overtime and when. Then, calculate the anticipated overtime for that month and enter it into the budget.
- Do some workers regularly earn overtime, because it’s better for the company than hiring additional help?
- Are certain days of the week or seasons of the year always extra-busy?
- Do certain positions work more overtime than others?
- Are you anticipating an event that will cause a surge, such as a new product launch, a big software update, a special event at your store?
Estimate Employee Bonuses
If you pay employee bonuses, you need to budget for them. If they are performance-based, you may want to look at last year’s statistics for a guideline. If they are event oriented, such a bonus for years-in-service, determine which employees will receive the bonus and place it in the appropriate month. Be sure to note what the bonus is for; for example, if you anticipate a performance bonus in November, but the employee does not earn it, you will know not to include it in his paycheck.
If you pay an annual bonus across the board, then you should estimate how much it will be, and set aside some money each month. This may be a standard amount or a percentage of company profits. This would be a good case in which you would tag the expense as “Company bonus” instead of tying it to each individual position.
Project Employee Benefit Costs
These are the regular costs of maintaining employees. They include employee benefits like 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.
Account for New or Open Positions
When considering new positions, place their projected wages in the month you intend to add them. 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. Also, prioritize them. That way, if your budget will not allow for all the hires you want, you can see which you can push to a later date.
If you have contract employees you depend on, or you intend to hire freelancers in the future, you should budget for them as well. However, they are often in a different part of the budget than payroll.
These employees are easier to plan for, as you only need to consider how much you pay per contract plus any administrative costs in acquiring them, if you use a service.
If you are planning to use a temp service to hire additional employees for part of the year, contact the agency to get an estimate of any administrative costs that go into hiring, and include those when you calculate expenses for them.
3. Total Each Expense Category
Now that you have all the data put into the spreadsheet or program, you can view your totals for each month and the full year. You need to be able to see payroll expense totals for each position and category: gross wages, taxes, benefits, etc. Look at the totals for each month as well as the annual sum to ensure reasonableness.
4. Do a Budget Review
Now that you have the numbers, check to make sure 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 into a manner that best answers your questions.
- 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?
If you’re new to doing payroll, you should take a look at our guide on payroll compliance to ensure you always stay on the right side of the law.
Tracking Your Business Payroll Budget Throughout the Year
Once you have a budget enacted, you should track actual expenses as you do payroll throughout the year. Record them on a monthly basis. Maintaining good payroll records will help you if you ever do a payroll audit or are audited by an external entity like the IRS.
It can help to create a new spreadsheet for a revised budget or to use a budget to forecast comparison as the year progresses. In this scenario, actual expenses overwrite budgeted expenses of the months that have already passed, and the totals are added to the budget numbers of future months. This will help you stay abreast of how well you’ve budgeted and signal whether or not you need to shift some budget funds to keep business flowing smoothly.
To help establish a solid payroll budget and process, check out our free payroll templates.
Having an accurate payroll budget can help you with one of the greatest and most important expenses of your business—paying employees. Be sure to consider wages, taxes, benefits, and other expenses. Also, break it out by month to account for changes in labor hours, bonus months, and other seasonal expenses. With a proper payroll budget that has been reviewed for accuracy, you can plan more effectively and ensure the year goes smoothly.