How to Manage Your Small Business Payroll

For most businesses in the service industry, especially labor-intensive ones such as restaurants, the cost of payroll is the biggest expense on the profit and loss statement. If you are in the service industry, you need to monitor these costs and budget them.

What Are the Significant Elements of Payroll Administration?

The key elements of setting up an effective payroll system are:

– Establishing a company policy that has to do with pay

– Determining how often you will be doing payroll

As a business owner, you need to take the time to think this through instead of just making hasty decisions.

Establish a Time-off Policy

Unless you are subject to a labor contract or using union labor, you are in charge of setting the parameters of your payroll. You should discuss vacation time with new employees and set a standard for the whole company. Make sure that you are conservative in the beginning then loosen your policy as time passes.

Even with paid holidays such as Christmas and Thanksgiving, you should figure out how many you can afford. Find out what the norm in your industry is and make decisions based on that. Remember to be cautious with time-off because you do not want to spend a high percentage of your labor costs paying for nonproductive time. Far beyond wages, employees are more expensive than you think.

Think about this, if you give 2-week vacations, five personal or sick days, and five holidays to your employees, you will have given a total of twenty days. A normal work year is 260 days long, which means that you will spend 8 percent of your labor costs paying for time off. You should remember this costly time off when setting your budget.

Get Payroll Processed

If you have a good computer system and a few employees, you can do in-house payroll processing. However, if you find the whole thing tedious, you should consider hiring a company to handle your payroll. As the number of employees grows and the information that you require for payroll becomes more complicated, you will see the need for outsourcing.

Make sure that you hire a company that will keep accurate records. Paid time-off and vacations should be fair to both the employees and employer. You can use a time clock to make sure that all working hours are maintained properly.

Consider the Benefits

Your payroll will increase by at least 24 percent when you consider the cost of vacations, unemployment insurance, and social security contributions. You should also think about benefit packages such as life insurance, car expenses, and health insurance. If not controlled, all these costs can add up quickly and make your business unprofitable.

As with vacation time, you should approach benefits with caution because adding them is easier than reducing them. Full health coverage for a family can be as much as $1,250 a month. If an employee earns 40,000 dollars per year, the benefits can be as much as 62 percent when you consider health, tax, and vacation insurance. Unless you are working in a situation that is highly competitive with specific talents and skills, this is a high place to start.

Many employers require their employees to pay for half their health insurance; you should also do this to reduce costs. Even if you pay half their health insurance, you will still need to add 19 percent to their base salary of forty thousand dollars. The issue of company vehicles is also tricky because the cost remains constant regardless of company sales and employee productivity.

Instead of jumping straight into company cars, you should start with a reimbursement plan such as getting your employees gas cards: if that works out, you can consider cars. When it comes to company cars, you also need to consider parking, insurance, maintenance, as well as other incidentals. Because there are many costs beyond employee salary itself, you need to create a budget and stick with it.

Payroll Taxes

Payroll Taxes

You need to budget for the add-on taxes on your payroll. The first ones you should consider are FICA taxes, which cater for Medicare and social security. Moreover, you need to pay taxes to the state for your unemployment fund contribution. This rate is not fixed; it fluctuates over time depending on the number of former employees that collect from the fund.

Figure out how much and when you should pay for payroll taxes then set aside some money to pay for them. Although it is possible to calculate your payroll taxes yourself, you should consider hiring someone to do it.


You should not let these extra payroll costs keep you from hiring great help. Hiring a good employee can make all the difference in your business because you need hard workers to build a successful business.

News Reporter