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The company uses the payroll budget to forecast payroll expenditures for the coming year. These budgets also include related expenses, such as federal payroll taxes, employee benefits, and overtime pay.
Therefore, a detailed and accurate salary budget will help the company manage expenditures and make important business decisions.
But the process of setting this budget can be time-consuming and complicated. There are many factors to consider when creating a salary budget, so we will break it down into simple, manageable steps.
Why it’s worthwhile to create a salary budget
Let’s take a look at the benefits of creating a salary budget:
Salary is a major expense
Salaries usually account for 20-30% of the company’s total income. It accounts for a large part of the total budget. Therefore, careful management of the salary budget is very important.
Wage overspending and underspending can cause problems. Overspending can cut your profit margins, and underspending may mean that you have failed to promote growth. After all, as your business expands, your salary budget should increase.
Budget can help you stay on track
A salary budget can help you maintain the financial status of your business. In particular, having a budget that correctly breaks down every expense related to payroll will help you stay within your limits.
When it comes to critical decisions, such as whether you can hire a new employee or give someone a raise, you will know exactly whether the company can afford it.
In addition, if you need to reduce expenses, you will know where to reduce expenses and/or how to manage payroll expenses more effectively.
You will always comply with legal requirements
Forecasting payroll taxes and employee benefits is a key part of creating a payroll budget, so you will have an in-depth understanding of mandatory payments that need to be paid in advance.
This means you can ensure that you have sufficient funds to comply with these legal requirements. Failure to do so may result in unnecessary penalties.For example, if you delay filing quarterly federal payroll tax forms, you may face Fines up to 15% Of unpaid taxes.
Investment required to create salary budget
Depending on your method and the size of your company, developing a salary budget can be time-consuming. There is a lot of information that needs to be obtained, namely employee data and payroll records.
The good news is that you can use Payroll software, like Gusto.
Gusto automatically runs and tracks payroll and provides other useful features, such as filing taxes on your behalf. You can access and download reports that contain all the information needed to create a salary budget, such as each employee’s income information and total benefits.
Of course, payroll software requires financial investment. The basic price of Gusto’s core package is $39 per month, plus $6 per employee per month.
However, you may find that this is a worthwhile investment because payroll software can greatly improve efficiency. This is important considering that many processes involved in payroll are labor-intensive if performed manually.
9 steps to create a salary budget
To create a salary budget, you need to collect the correct data and make several important forecasts.
The truth is that you may need to consider many variables. However, once you understand all the items that need to be included in your salary budget, you will definitely get it right.
#1-List all employees
First, make a list of everyone paid by the company. This includes all different types of positions, including remote and temporary positions as well as positions that work in the field.
Don’t forget to include yourself in the list. Please also note that you may want to separate contract workers because your calculations for these workers will be different because you will not pay taxes or benefits for them.
Unless you are a startup, you are unlikely to make this list from scratch. I hope you have detailed employee records available. This is just a matter of organizing information.
Many HR tools store employee records. Some will even save your time by providing a self-service system. In other words, the employees themselves enter the latest information into the database.
#2 – List the employee’s basic salary
Next, you need to record the salary rate of each employee and the number of hours they work each month. Use these numbers to calculate their estimated monthly and annual income. If you are already using payroll software, you can simplify the process by extracting historical data.
When calculating the basic salary, there are several other aspects that need to be considered to ensure that your estimate for the coming year is accurate:
- Raise or raise
- Mandatory salary increases, such as raising the minimum wage
- Foreseeable termination, such as retired employees
- New or additional employees that may be needed
- Changes to existing staff time due to operational changes
#3-Estimate overtime pay
Carefully consider the number of overtime hours to be as precise as possible.
Some positions may require more overtime than others. You also need to consider seasonal fluctuations and events that will increase overtime in the coming year. For example, there may be new product releases that require more working hours.
When it comes to numbers, there are other factors you need to consider. According to federal law, if workers work more than 40 hours a week, they are entitled to 1.5 times the overtime pay.
You also need to check state requirements.Some states slightly Different overtime rulesFor example, in California, if employees work more than 12 hours a day or work more than 8 hours on the seventh consecutive day, they are entitled to double wages.
In addition, there may be a company policy regarding overtime or premium wages, which is to increase the rate when an employee’s working hours or number of days are unsatisfactory.
#4 – Estimate bonuses and commissions (if applicable)
Depending on company policy, you may need to consider different types of bonuses.
For salespeople, performance-based bonuses or commissions are difficult to estimate because they are not guaranteed. The best thing you can do here is to create an average based on the performance of employees in previous years or the achievements of employees in specific roles in previous years.
Other types of bonuses may be holidays or annual bonuses. They may be based on seniority. Or based on the number of years the employee has served. You need to increase the different bonuses provided by the company to ensure that you do not miss any projects that exceed your budget.
#5 – Project employee benefits
You may have to include mandatory benefits in your budget.inside Most states, Employers must take out workers’ compensation insurance. Some states and even cities or counties have further requirements, such as disability insurance or paid parental leave.
Be sure to check state regulations to maintain compliance. And watch out for any new legislation.
Depending on the company, you may also need to consider many voluntary benefits. These may be:
- 401k plan
- life insurance
- Medical, dental and vision insurance
- Employee Assistance Program (EAP)
- Flexible Spending Account (FSA)
- Health Reimbursement Arrangement (HRA)
#6-Calculate payroll tax
Every employer must pay federal payroll taxes. Please note that other state or local payroll taxes may also apply.
Income tax, medical insurance and social security payments must be withheld from employees’ wages and paid to the relevant authorities every month.
Employers must also pay their payroll taxes (not from employee salaries), including social security, medical insurance, federal unemployment and state unemployment contributions.
Tax rates may change, so please make sure you stay up to date.
In the actual declaration of these taxes, if you don’t want to bother or worry about making mistakes, then many payroll tools (such as Gusto) can automatically calculate and declare payroll taxes on your behalf.
#7-Total your salary budget
You may have some way to display your total. For example, you may be using budgeting tools or payroll software or a combination of the two, and they will calculate and provide reports for you. Or maybe you are using a spreadsheet, maybe it is based on a template.
Either way, you need to view the breakdown of the total amount of different expenses so that the right people can use this information to make smart business decisions. In addition to the total total extras, it also includes the total amount of total wages, overtime pay, benefits, bonuses, and taxes.
When you have a total, you may need to add a percentage for unexpected expenses. For example, there may be an unexpected termination, or, as we have seen recently, an outage due to global events.
#8-Check your salary budget
The benchmark for salary expenditure is usually 20-30% of the company’s total income. However, certain industries (such as the service industry and the hotel industry) may have a salary budget of 50%, but it will not reduce profits. Check the standard salary budget for your industry to understand how your budget is accumulated.
Comparing salary budgets with projected income is a good idea and there are other reasons. First, if you can afford new employees, you can solve the problem. If there is enough room in the budget, this will be a huge advantage because new employees can help the business grow.
Or, if the estimated salary budget is too high, you can make changes that affect the entire fiscal year. For example, you may want to create an incentive plan to increase employee productivity or reassess overtime hours.
#9 – Tracking salary expenses
You must track the actual salary expenditures throughout the year and compare them with your forecasts. It will help companies stay within their limits when considering bonuses, overtime, etc.
Of course, there are many other reasons for monitoring and keeping payroll records. For example, if an audit is required. And, of course, your records will help you create a salary budget for next year.
The easiest way to keep payroll records is to use a payroll tool, such as Gusto. It tracks everyone’s working hours, vacations, wages, and automatically saves all records for you.
Final tips for creating a salary budget
If you want to create and manage a salary budget like a professional, here are the last things you need to know:
- Use temporary agencies for seasonal workers? Don’t forget to include their salary and the administrative expenses involved in using the agency in the budget.
- You may want to create a recorded payroll strategy based on a budget. For example, setting financial goals (increase or decrease) for the budget for the coming year.
- Ensure that any changes in wage expenditures are sustainable and will not adversely affect other places. For example, removing the annual holiday bonus that employees are accustomed to can severely affect morale.
- Exclude freelancers and contractors from the salary budget. Their financial requirements are different from other salaried employees.
Next step
Once you have created and reviewed your salary budget, the next step is to meet with the relevant people and have them review it. They may be C-level, human resources team, accounting and/or department heads.
In this way, you can discuss and implement any necessary changes. Then, of course, you should continue to maintain a good record and try to stick to the above budget.
As we are sure you know, busy HR professionals have many tasks to perform in addition to payroll management.Therefore, if you want to further simplify the HR process, then you may be interested in our guide The best HR softwareWe will provide you with detailed information on tools that can help you simplify recruitment, human resource management, PTO, payroll, reports, etc.
