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In order to create a payroll budget, you must be aware of the cost and benefits of each expense in relation to your company. It is important for an employee to understand how much they should spend on their salary from month-to-month so that they can accurately calculate how much money will remain leftover at the end of the year.
The “how to prepare personnel cost budget” is a crucial step for any business. It helps you decide how much money you can spend on salaries, and it also helps your employees understand their responsibilities.
Payroll is one of the most costly and crucial aspects of any organization. To establish a successful payroll budget, think about what you want your firm to achieve in the following 12 months and how you want to do it.
You’ll need access to the previous year’s payroll spending, as well as non-salary payroll items such as overtime, taxes, and benefit payments. You won’t have to worry how and where your money was spent later if you learn how to construct an efficient payroll budget today. Let’s go through the steps one by one.
1. Make a list of job titles.
Begin with current positions, such as your own. Sort them into categories based on their criticality and department. Take into account everyone you pay:
- You, by yourself (if you are on payroll)
- Personnel in charge of administration
- Team of salespeople (may need to estimate commissions)
- Employees who are paid by the hour
- Employees that work on-site
- Employees who work from home
- Employees on a contract basis (flag them, as you will not be paying taxes or benefits and may have a different pay schedule)
- Temporary workers
2. Make a list of each position’s payroll expenses.
Then, calculate the costs associated with each location.
You may be able to obtain historical figures from reports if you utilize payroll software like Gusto. If not, go through last year’s statistics and sum the costs on a spreadsheet like Excel or Google Sheets. Calculate yearly compensation for each job, taking increases and bonuses into account. Check with your local employment agency or sites like Glassdoor for typical pay in your region or salaries provided by your rivals if you’re developing a new job for which you don’t have statistics.
When estimating, it’s better to be conservative and budget more than you think you’ll need than less. Break bonuses and compensation hikes away from normal earnings so you can see them for individual person and the company as a whole.
Identify costs that do not belong to a particular role with a generic designation such as “Corporate,” which shows that the expense benefits the whole firm.
Examine Payroll Expenses from the Previous Year
Perform a review before entering the previous year’s payroll figures. Ask yourself the following questions as you’re going through the numbers:
- Are there any workers that deserve to be rewarded with a raise?
- Should you do an overtime audit to determine how you might save costs?
- Are there Employees who are paid by the hour that should be salaried? Or vice versa?
Try breaking down any of the statistics you’re utilizing into months if they’re yearly totals. Working over a longer amount of time may make it simpler to answer these questions.
Budget for Hourly & Salaried Workers
When creating a monthly budget for salaried personnel, just divide their gross earnings by 12 months. If you pay every two weeks, though, you’ll get three payments in certain months. Consider how often you pay your staff here.
The lives of hourly employees might become increasingly complicated. You’ll need to factor in the number of hours worked every month, which may vary over the year. Make sure to factor in peak seasons and off-seasons depending on your specific company. If you hire new employees during the busiest season, be sure to account for them as temporary workers in your budget.
You could also want to do research to ensure that you are efficiently scheduling your employees. If your restaurant is consistently busy on Thursday afternoons, for example, you may cut the number of employees on that day and plan them for the Friday night rush, resulting in a smaller budget for that time.
Payroll Taxes Should Be Included in Your Budget
Payroll taxes must be paid by all employers, so plan ahead. Check the latest recent tax tables to ensure that your figures are valid, however below are the most recent:
- Unemployment benefits are based on the first $7,000 of each employee’s earnings.
- 6.2 percent of each employee’s income goes to Social Security.
- 1.45% of each employee’s earnings goes to Medicare.
- 0.9 percent additional Medicare (for workers earning more than $200,000)
Taxes: A Word to the Wise:
You won’t include income taxes in your payroll budget since they originate from employee earnings. However, knowing these statistics might help you budget for withholdings each month. Calculate them based on the national average pay. This will be straightforward if you have past data to work with. Use past data from comparable roles as a roadmap for future ones.
Costs of Project Delay
In general, most businesses expect that overtime will account for 10% to 15% of their annual payroll expenditure. Using a generic estimate, on the other hand, is not a good technique to build an overtime budget. Instead, consider which roles and when they are most likely to collect overtime. Then, for that month, calculate the expected overtime and add it into the budget.
Take into account the following:
- Do certain employees be paid overtime on a regular basis because it saves the organization money versus recruiting more people?
- Is it usually busier on particular days of the week or during specific seasons of the year?
- Do certain jobs need more overtime than others?
- Are you planning a major event, such as a new product launch, a major software update, or a special event at your business, that may generate a spike?
Calculate Bonuses for Employees
Bonuses must be budgeted for if they are given to employees. If they are based on performance, you may use previous year’s numbers as a reference. Determine which workers will get the bonus and schedule it in the appropriate month if they are event-oriented, such as a bonus for years of service.
Make a note of what the incentive is for; for example, if a performance bonus is expected in November but the employee does not get it, you will know not to include it in their compensation.
If you give everyone a yearly bonus, you should calculate how much it will be and put away some money each month. This might be a fixed sum or a portion of the company’s earnings. This is a fantastic example of why you should designate the spending as “Company bonus” rather than assigning it to each individual job.
Employee Benefits Projected Costs
These are the ongoing expenses of keeping personnel. Employee perks such as payments to health insurance premiums and matching fund plans such as 401(k)s are examples (k). To acquire the most precise rates for the future year, check with your insurance and/or retirement service providers. Remember to include in administrative and other costs.
You may broker employee benefits for your team straight via a payroll program like Gusto if you utilize it. You may choose plans and set up deductions, and your workers can complete open enrollment immediately via an employee dashboard. Budgeting is a breeze when you can manage all parts of your payroll in one spot. For 30 days, you may try it for free.
Gusto is a great place to visit.
Keep track of any new or open positions.
When thinking about new roles, factor in their expected pay in the month you plan to hire them. If you’re launching a new store in May, for example, you don’t need to budget for all of the personnel in January. Also, make a point of prioritizing them. That way, if your budget won’t allow for all of your desired employees, you’ll be able to know which ones you can postpone.
Employees who work as freelancers, contract workers, or temporary workers
You should budget for contract workers if you rely on them, or if you want to use freelancers in the future. They are, however, often allocated to a distinct budget category than payroll.
These personnel are simpler to budget for since you simply have to think about how much you spend each contract plus any administrative expenses associated with hiring them if you utilize a service. If you intend to utilize a temp agency to recruit more staff for a portion of the year, contact the agency for an estimate of any administrative costs associated with hiring, and include them into your budget.
3. Add up the totals for each expense category.
You may now see your totals for each month and the whole year once you’ve entered all of your data into the spreadsheet or software. You must be able to view entire payroll expenses for each job and category, including gross compensation, taxes, and benefits.
To confirm that the totals for each month and the yearly amount are fair, check the totals for each month and the annual sum.
4. Conduct a budget audit
Now that you have the data, double-check that they are accurate. To better comprehend the flow of the data, create charts or graphs. Pivot charts may assist you in delving deeper into the data by swiftly restructuring it to best answer your queries.
- Verify the accuracy of the information: Make that the numbers were input properly and that the spreadsheet formulae (if any) are valid using a second pair of eyes. Run it by department heads for “sanity checks” in case they have more up-to-date information.
- Compare that to the planned vs. actual spending from the previous year: Will you experience the same troubles with payroll this year as you had last year? Did you make any adjustments for this year if you made a mistake last year (for example, overtime)?
- When you compare it to expected earnings, you’ll see that: Do you plan to produce enough profit to pay all of their expenditures, especially if you hire more employees? If so, how will you compensate by adjusting this expenditure or other elements of your budget?
If you’re new to payroll, check out our guide to payroll compliance to make sure you’re always on the right side of the law.
Why Do You Need a Payroll Budget?
Now that we’ve gone through the methods to building a successful payroll budget, it’s crucial to comprehend the importance of doing so.
Making a payroll budget will help you figure out what proportion of your budget should go to payroll and keep you on track throughout the year.
Recognize how much of your budget should be allocated to payroll.
According to financial analyst The Conclusion Group, payroll should contribute for between 15 percent to 30 percent of a company’s overall income. Payroll expenditures in certain areas (such as service organizations) may be as high as 50%, according to experts.
It’s crucial to keep in mind that as your company expands, so will your payroll costs. As your company’s demands grow, more resources will be necessary to meet them. Payroll adjustments may be accommodated as your company develops and evolves if you include flexibility into your budget.
Maintain Your Routine Throughout the Year
Once you’ve established a budget, keep track of real spending as you process payroll throughout the year. Keeping track of them on a monthly basis is a good idea. Maintaining proper payroll records can assist you in keeping track of your payroll accounts, as well as if you ever conduct a payroll audit.
It might be beneficial to build a fresh spreadsheet for a changed budget or to utilize a budget for year-end projection comparison. Actual spending override projected expenses from previous months, and the totals are added to the budget figures for future months in this situation. This will allow you to keep track of how successfully you’ve budgeted and if you need to reallocate any budget monies to keep things running smoothly.
Check out our free payroll templates to help you create a sound payroll budget and procedure.
Conclusion
Having a precise payroll budget will assist you with one of your company’s largest and most significant expenses: employee pay. Remember to factor in salaries, taxes, benefits, and other costs. Break it down by month to account for shifts in work hours, bonus months, and other seasonal costs. You may plan more efficiently and assure a smooth year with a good payroll budget that has been evaluated for correctness.
The “payroll budget template excel free” is a step-by-step guide that will show you how to create a payroll budget. This is important because it helps people understand the importance of creating a payroll budget, and also helps them plan for the future.
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