If you've landed on this article, you're probably a new business owner that wants to understand your payroll costs.
Well, the good news is, you're not alone.
Payroll costs are a mystery to most people because the only way to learn about them is to either:
We don't like either of those options, so we made this guide to make sure you're not caught off guard.
https://www.baronpayroll.com/instant-pricing
The biggest thing new business owners don't know about is... the payroll burden.
The payroll burden is the amount you have to pay in addition to paying your employees their wages.
This cost includes things like:
As a new business owner, understanding all these payroll costs may seem overwhelming.
But it's essential to prioritize learning about them before you hire employees.
Start by familiarizing yourself with the top three expenses in your business.
For most businesses, they include:
These three expenses tend to be the largest portion of expenditure across different industries.
And once you understand what your major expenses are, you can develop effective budgeting and cost-control strategies.
Here's another tip: make sure you have a cash reserve of around two months' worth of operating expenses available for your business.
You can secure this reserve through a line of credit from a bank or by saving a portion of your profits.
By proactively planning for cash-flow fluctuations, you can ensure the smooth operation of your business.
Once you’ve set up your overall budget, to get a more accurate picture of the total cost of paying your employees, you should create a separate line item called "payroll burden."
A good rule of thumb is to allocate between 15% and 20% of the payroll cost as the payroll burden expense.
For example, if your total payroll is $10,000, an additional 15% of that, which is $1,500, would cover the payroll tax burden.
A big expense new business owners don’t know about is hiring and firing employees.
You might not know that recruiting, training, and integrating a new employee costs more than $4,500.
So, to combat this cost, it's generally recommended to "hire slowly and fire quickly."
Why?
Because not only do you have to onboard new employees, but if you make a bad hire and have to terminate this person, you also have to pay for their unemployment benefits based on their duration of employment.
So basically, the longer someone stays on your payroll, the longer they can claim unemployment benefits and the more it costs you.
It's like you have a separate bank account at your State Unemployment agency.
And when the employee collects unemployment, they're taking money out of your bank account.
Then, at the end of the year, when your state unemployment agency looks at your bank account, your unemployment rate goes up if your balance is negative.
It's a variable tax rate, so if your rate goes up, going forward, you’ll pay more unemployment tax for every employee on your payroll.
The important thing is…
Managing unemployment and managing who collects unemployment is a big aspect of controlling your payroll tax expense.
For example, in New York, Unemployment insurance is a hundred percent an employer tax, so it's a big difference to you as the employer whether the tax is only 2% or 10%.
And because it's a big number, you want to manage the unemployment tax (who collects it and for how long they collect it) to help protect your bottom line.
That’s why hiring slowly and firing quickly is a best practice every business owner should abide by.
Retaining top talent is crucial for the success and growth of any business.
Employee turnover comes with significant costs, including:
And not only that but, as previously stated, the cost of onboarding a new employee starts at about $4,500.
So, you don’t want your good employees to leave.
But you might be asking, “How can I keep them around?”
Well, the biggest factor is... offering group health insurance.
I know, I know.
As a new business owner, you're probably thinking, "I'm just trying to keep my head above water; I can't afford to give my employees health insurance."
So, if that’s you…
If you can't pay for all of their health insurance, you might want to consider offering it and paying for a portion of the cost.
And if you're still really against it, here are some other options for employee retention and engagement initiatives:
Now that you know about the payroll burden…
How can you successfully manage your payroll expenses?
The thing is, payroll management goes beyond calculating wages and issuing paychecks.
It involves handling tax withholding, ensuring compliance with labor laws, and staying up-to-date with changes in regulations.
Many businesses outsource their payroll processes to professional payroll service providers like us, Baron Payroll, or use DIY payroll software like Gusto to streamline operations and minimize errors.
Choosing a reliable payroll provider can save you time, reduce administrative burdens, and help prevent costly mistakes that can arise from DIY or manual payroll processing.
Also, keeping accurate records of employee hours, overtime, and paid time off is crucial for compliance and accurate payroll calculations.
Monitoring and analyzing payroll costs regularly is essential to ensure financial stability and make informed decisions.
By reviewing your payroll expenses frequently, you can identify trends, pinpoint areas of concern, and make necessary adjustments to control costs.
If you’re like most business owners who use a payroll service, you have no idea what they’re charging you for. Do you really need all the things they’re billing you for? Are you over-paying?
Here's an article on how to read your payroll invoice to see if you’re getting ripped off.
One of the best things about us at Baron Payroll is that we'll actually explain payroll costs to you.
And every time you run a payroll, you'll get an email, called the owner's report that will clearly show you what the payroll wages were and what your payroll burden was exactly.
And not only that, but we'll help you manage these expenses, so you can keep your business running as it should.
All in all, understanding and managing payroll costs is a critical aspect of running a successful business.
By accounting for hidden expenses such as the payroll burden, creating a comprehensive budget, and implementing effective payroll management practices, you can ensure the financial stability of your business and make informed decisions.
If you found this article helpful, here are some others you might like: