For many businesses, payroll is the largest expense. The cost of an employee can be 32% more than their wages. Plus, you have to pay for the cost of running payroll. But savvy business owners know there are ways to cut back on expenses, including payroll costs.
Thirty percent of business owners cite managing business finances as their biggest challenge, while 29% say it’s having to do more with less. Is managing high payroll costs—or doing more with less—your biggest challenge of being a business owner?
Learn how to reduce payroll costs—including employee wages and overtime pay, benefits, and the cost of your payroll provider—without layoffs.
What payroll costs do employers have?
Payroll costs go beyond an employee’s salary or hourly pay. Other expenses that come out of your pocket include the employer portion of payroll taxes and health insurance premiums.
Not to mention, you have to pay to run payroll, i.e., using payroll software or hiring a professional employer organization (PEO).
By breaking down and analyzing each of your payroll costs, you can come up with a better strategy to reduce expenses.
Here’s a list of common payroll costs you may have. Use this list to help you create a personalized list of payroll expenses. If you use payroll software, you can check out the payroll reports to see how much you spend on employee wages, employer taxes, and employer contributions.
1. Employee pay
How much you pay employees is likely the first cost you think about. The amount you pay employees can include:
- Salaries/hourly wages
- Bonuses
- Commissions
- Overtime pay
Salaries and hourly wages are the bulk of your payroll costs. But you may also dole out bonuses and commissions that can quickly drive up your total payroll costs. Overtime pay, or time and a half, is mandatory compensation that nonexempt employees are entitled to when they work over 40 hours in a workweek. Overtime pay can significantly increase your regular payroll costs.
2. Employer payroll taxes
You’re responsible for withholding taxes from each employee’s paycheck. You’re also responsible for paying an employer portion of payroll taxes.
Employer payroll taxes include:
- FICA tax (employer portion)
- FUTA tax (federal unemployment tax)
- SUTA tax (state unemployment tax)
- Other state-specific taxes, such as paid family and medical leave premiums
Say you pay an employee $40,000/year. In employer taxes alone, you must pay $3,060 in FICA tax, $420 in FUTA tax, and $189 in SUTA tax annually. Check out our infographic here to learn more.
3. Workers’ comp insurance
Workers’ compensation is insurance for employees who get sick or injured on the job. The majority of states require that businesses obtain workers’ comp insurance.
You can generally obtain workers’ comp insurance through a private provider or state-operated fund. However, North Dakota, Ohio, Washington, and Wyoming require that employers sign up through the state-operated fund.
Workers’ comp insurance rates vary, but the average coverage rate is $1.04 per $100 in employee wages.
4. Employee benefits
Eighty-one percent of employees think benefits are important. You likely offer a selection of employee benefits to recruit and retain employees.
Benefits include:
- Health insurance
- Retirement plans
- Employee assistance programs (EAP)
- Life insurance
- Paid time off
- Educational assistance
Employers can pay thousands of dollars annually (per employee) for benefits. For example, small business health insurance costs employers approximately $5,946 for single coverage and $14,561 for family coverage annually (per employee).
5. Payroll administration
When calculating your payroll costs, don’t forget about the actual cost of running payroll itself.
How much does your payroll administration cost?
Some businesses outsource payroll (e.g., PEO) while others use payroll software. Consider how much you pay for the payroll process when calculating your payroll costs.
How to reduce payroll costs
Fifty-eight percent of business owners are looking for areas to cut expenses. Whether you’re looking to cut costs because of a looming recession or high inflation, payroll is a common place to start.
Here are five ways to reduce hefty and often unnecessary payroll costs—without layoffs.
1. Use affordable payroll software
How you process payroll can drive your payroll costs up or down.
For example, one Firehouse Subs franchise owner who used a PEO spent $4,794.37 in payroll processing fees one year. The next year, he switched to Patriot’s payroll services and only spent $610.18 (an 87% cost savings).
Switching to an affordable payroll software provider can cut down on unnecessarily high payroll costs. Determine the features you need and compare costs among top payroll providers.
2. Avoid overstaffing
Overstaffing is a cycle as old as time: Customer demand goes up. Business increases hiring. Customer demand goes down. Business is overstaffed and must either implement a hiring freeze or make cuts.
The COVID-19 pandemic is a great example. Many companies went into a hiring frenzy and later found themselves overstaffed.
Avoiding overstaffing is a challenge for many businesses. It can be a delicate balance between overburdening your team and overhiring.
Some ways to avoid overstaffing include:
- Demand forecasting using historical data and market trends
- Cross-training employees to take on new roles and responsibilities
- Using automation to streamline manual processes
- Hiring seasonal employees to help you keep up with customer demand during peak seasons
3. Reduce overtime hours
Do you require employees to work overtime? Excessive overtime can inflate payroll costs. Of course, you can’t stop paying employees time and a half if they’re entitled to it (that’s illegal!). But you can implement policies to monitor and control overtime hours worked.
You can reduce the need for overtime hours by efficiently training employees to be more productive and accurate during regular hours. You can also require employees to get approval before working overtime.
4. Shop around for benefits
Benefits, like health insurance premiums, can quickly add up. To reduce payroll costs associated with benefits, you can shop around for better rates.
Can you find better health insurance premiums with a different insurance provider? Can you take advantage of 401(k) tax credits that can save you thousands of dollars? Should you stop offering a benefit with a low adoption rate? Are there alternative payment options (e.g., pay as you go workers’ comp) that can help you better manage your cash flow?
Make a list of the benefits you want to keep, cut, and shop around for. Compare rates between providers, and don’t be afraid to negotiate a better deal for your business.
5. Furlough employees
Nobody likes talking about pay cuts or reduction in hours worked. But if your business struggles to make payroll, a furlough is an option.
A furlough is a temporary, unpaid leave of absence from work. Employees can completely stop working during a furlough or reduce their hours.
You may consider implementing a furlough if you don’t have enough money for payroll, have a significant drop in customer demand, or need to cut back on business expenses.
Because furloughs are temporary, businesses typically use them during difficult economic times (e.g., recession).
Furloughed employees return to their regular schedule when the furlough ends.
Looking to reduce payroll costs? Don’t be afraid to give your current payroll provider the side eye. Switch to Patriot Software’s online payroll for tremendous value, unmatched USA-based customer support, and time savings. Find out how much you could save—start your free trial today!
This is not intended as legal advice; for more information, please click here.
