Paying employees accurately and efficiently is a critical part of running a successful business. Not only does proper payroll management ensure that your team is compensated fairly, but it also helps businesses stay compliant with federal, state, and local tax laws. Without accurate bookkeeping and data tracking, payroll miscalculations can lead to costly penalties and financial instability.
In this guide, we’ll break down the key components of payroll costs, including taxes, benefits, payroll withholdings, and how much of your business’s revenue should be allocated to payroll. We’ll also highlight the importance of accurate accounting and financial management in ensuring smooth payroll operations.
Before diving into payroll calculations, it’s important to stress that accurate payroll depends on good bookkeeping and financial records. If your business doesn’t track employee hours, salaries, and benefits properly, it becomes impossible to:
This is why a well-maintained accounting system, like QuickBooks Online or a professional bookkeeper, is essential for any business. Payroll should never be calculated based on assumptions or outdated financial data.
When budgeting for payroll, business owners need to account for more than just the employee’s base salary or hourly wage. The true cost of an employee includes mandatory payroll taxes, benefits, and other expenses.
| Tax Type | Who Pays? | Rate |
|---|---|---|
| Social Security Tax | Employer & Employee | 6.2% each (total 12.4%) |
| Medicare Tax | Employer & Employee | 1.45% each (total 2.9%) |
| Federal Unemployment Tax (FUTA) | Employer | Usually 0.6% - 6.0% (on first $7,000 of wages) |
| State Unemployment Tax (SUTA) | Employer | Varies by state (e.g., 1%-5%) |
| Local Payroll Taxes | Employer & Employee | Depends on location (e.g., NYC charges 4%) |
Let’s say a business pays an employee a $10,000 monthly salary. Here’s how the actual employer cost adds up:
📌 Total Employer Cost: $11,125/month ($10,000 salary + $1,125 in payroll taxes)
This doesn’t include employee benefits, which add additional costs.
Beyond salary and taxes, businesses must account for employee benefits, which may be required for full-time employees under federal and state laws.
Using the $10,000 salary example, adding a $600 monthly health insurance premium and a 3% retirement match ($300) brings the total employer cost to approximately $12,025 per month.
While employers pay certain payroll taxes, they also withhold taxes from an employee’s paycheck before issuing payment. These withholdings include:
For a $10,000 salary, an employee’s paycheck after withholdings could look like this:
The business must send the withheld taxes to the IRS and state tax agencies on behalf of employees.
The percentage of revenue allocated to payroll varies by industry. Generally, businesses fall into two categories:
○ Payroll typically accounts for 50%-60% of total revenue.
○ Example: Restaurants, consulting firms, law offices, and agencies rely heavily on labor.
○ Payroll expenses usually range from 20%-30% of revenue.
○ Example: Manufacturing, e-commerce, or retail businesses have higher Cost of Goods Sold (COGS) instead.
Here’s how payroll costs break down for different industries:
| Industry | Payroll as % of Revenue |
|---|---|
| Restaurants & Hospitality | 50%-60% |
| Professional Services (Law, Accounting) | 40%-55% |
| Retail & E-commerce | 25%-40% |
| Manufacturing | 20%-30% |
A business making $1 million in revenue should budget payroll based on industry standards to maintain profitability.
Payroll is one of the largest expenses for any business, and miscalculations can be costly. Without accurate bookkeeping, business owners risk:
At LedgerFi, we help businesses track payroll expenses, ensure compliance, and optimize payroll spending to maximize profits.
Need help managing payroll for your business? Contact LedgerFi today for expert bookkeeping and payroll support!