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.
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.
Here’s a quick overview of some of the most significant payroll costs:
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 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.
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 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.
Companies that offer employee benefits will need to factor in the employer portion of the following costs:
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.
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.
Here are some tips for keeping your company’s payroll costs under control:
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.
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.
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.
Payactiv is a pioneer of modern, digital payroll solutions. Here are some benefits for employers that partner with us:
Electronically disburse bonuses, expense reimbursements, and termination pay to employees’ payroll cards. Payactiv provides a 2-day cash float.
Today’s workforce prefers to work for employers that support their financial wellness. Our EWA is free with direct deposit to Payactiv cards.
We work with you to ensure a successful plan and launch of our program.
We prepare and provide customized materials to promote the program to your employees.
We are payroll compliant in all 50 states, and Payactiv is the only EWA provider that received an approval order from the CFPB.
We offer tools and training to get the most value from the program and a dedicated Account Manager.
We provide 24/7/365 customer support in English and Spanish by toll-free phone and online live chat.
Our data is encrypted, SOC2 compliant, and we have ISO 27001 controls in place. We don’t store sensitive employee data.
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.
* 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.
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* The Payactiv Visa Prepaid 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 877-747-5862, 24 hours a day, 7 days a week.
**Central Bank of Kansas City is the issuer of the Payactiv Visa Prepaid Card only and does not administer, endorse, nor is liable for the Payctiv App.
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