Payroll is arguably a business’s biggest expense. Between taxes and benefits, an employee costs up to 32% more than their wages. To accurately budget for your payroll-related expenses, try payroll forecasting.
Payroll forecasting is an essential part of financial planning that requires you to analyze and understand your company’s payroll data. Read on to learn about forecasting payroll and how to forecast payroll expenses.
What is payroll forecasting?
Payroll forecasting is the process of predicting your future payroll-related expenses. Use historical data, look at current data, and determine your future needs to estimate your payroll expenses.
Knowing how to forecast payroll requires you to anticipate your company’s future payroll expenses for improved budgeting, decision-making, and cash flow management.
Examples of payroll expenses include salaries and wages, payroll taxes, and benefits. Consider adding payroll forecasting to your to-do list the next time you prepare your small business budget.
Why is knowing how to forecast payroll important?
Forecasting payroll can help you avoid overspending, help you plan for future expenses, and better allocate business funds.
Use payroll forecasting for:
- Cash flow management: When you have employees, payroll is often one of your biggest costs. Forecasting payroll ensures you have sufficient funds to cover your payroll liabilities.
- Budgeting: Create accurate budgets by forecasting payroll. Accurate budgets allow for better resource allocation and reduce the risk of overspending.
- Hiring decisions: Forecast payroll expenses to help you know how many future employees to hire.
- Risk mitigation: Compare your estimated payroll costs to external threats, like predicted recessions or other economic downturns.
How often should you forecast payroll?
Your payroll forecasting frequency may depend on several factors, such as your business size and how often you prepare a budget. You might forecast payroll monthly, quarterly, and/or annually.
Many businesses forecast payroll monthly to match a typical accounting period. A monthly forecast gives you the ability to frequently update your predictions to account for internal or external changes.
Quarterly reporting allows you to make adjustments relating to significant payroll expense updates, such as business operations or economic changes.
An annual payroll forecast gives you a more high-level overview, helping you set goals and plan your budget for the following year. Because payroll expenses likely change throughout the year, consider pairing an annual forecast with a monthly or quarterly cadence.
How to forecast payroll tip #1: Analyze historical payroll data
Your first step of forecasting future payroll expenses is to look at past trends and patterns. You can analyze past trends by looking at historical payroll data.
Historical payroll data can show you consistent payroll expenses and fluctuating costs. Collect payroll data—including salaries and wages, overtime pay, bonuses, taxes, benefits, and contributions—from previous periods.
Use payroll software to simplify the process of gathering payroll data. Software includes payroll reports that show breakdowns of your company’s total and per-employee payroll expenses.
Once you pull payroll data, look for trends:
- Do you give annual salary increases or bonus payments in December?
- Are employees working more overtime during the summer?
- Was there a mass layoff, and if so, is there a possibility there could be another?
How to forecast payroll tip #2: Add up all payroll expenses
After reviewing your historical payroll data, add up your current payroll expenses. Payroll expenses you should include in your forecast include:
- Salaries and wages
- Bonuses
- Overtime pay
- Payroll taxes
- Benefits (e.g., health insurance)
- Payroll services
Adjust for any known changes, such as planned raises or bonuses, increases in overtime pay, or foreseeable changes in employee headcount.
You might consider breaking down your payroll expenses by department or job type for a more detailed expense analysis.
Heads up! Do you use a biweekly pay frequency? If so, there are months with three pay periods. Remember to account for 3-paycheck months in your payroll forecast.
How to forecast payroll tip #3: Expect the unexpected
Historical data is a great baseline for predicting future expenses, but things happen. Nobody has a crystal ball, but you may be able to predict upcoming changes in your payroll expenses.
Consider different scenarios that could impact your forecast, including:
- Surges in demand that require new hires
- Economic downturn that requires layoffs
- Price changes relating to payroll, such as payroll software, workers’ compensation insurance, and health insurance
You might consider adding a safety net in your payroll forecast to account for possible changes in your expenses.
How to forecast payroll tip #4: Update your forecast regularly
Don’t set your payroll forecast aside for dust to grow. Continuously update it to reflect changes in your business that can impact payroll expenses.
For example, update your forecast if you:
Switch payroll service providers
What do you use to run payroll for your business? Do you use a PEO, payroll software, or another service provider? Not all payroll services cost the same.
Update your payroll forecast if you switch the way you run payroll to a more affordable (or expensive!) system.
For example, one Patriot Software customer cut his annual payroll processing fees from $4,794.37 to $610.18 when he switched to Patriot’s payroll software.
Hire new employees
When you hire a new employee, your payroll expenses increase. Add up the cost of the new hire’s salary, benefits, taxes, and workers’ comp insurance.
Remember to factor in the cost of hiring and training costs, too. Update your payroll forecast to account for the expense increase.
Terminate an employee
If an employee leaves your business, your payroll expenses decrease. Add up the employee’s salary, benefits, taxes, and workers’ comp insurance costs.
Update your payroll forecast to account for the expense decrease.
Are subject to a new payroll tax or tax rates
Every year, federal, state, and local tax rates and wage bases are subject to change. These changes can impact how much you pay in employer taxes.
Some states release new payroll taxes during the year, too. For example, Vermont will require all employers to pay a 0.44% child care tax on all employee wages earned in Vermont beginning July 1, 2024.
Update your payroll forecast to account for payroll tax or tax rate changes.
Have new benefits costs
Costs typically change at the beginning of the year, depending on the benefit. For example, your health insurance costs may increase at the beginning of the year.
If an employee signs up for a 401(k) plan with a company match during the year, you will have a new payroll expense. Or, let’s say an employee has a qualifying life event and they decide to sign up for your company’s health insurance plan, which you contribute to.
Whatever the case, update your forecast to include changes to your benefits expenses.
Give employees a raise
Your payroll expenses will increase if you give your employees a raise. Many employers give employees cost of living raises, merit raises, or length of service raises.
The average raise percentage is 3%. A 3% raise can significantly impact your payroll forecast, especially if you give each employee a raise.
Update your forecast to account for the increase in salary or hourly wage expenses.
Choose Patriot Software for affordable payroll
Patriot’s payroll software tops the charts for value for money, ease of use, and customer support, according to users.
Use Patriot’s robust payroll reports to get the data you need to forecast your business’s payroll expenses.
Some of Patriot’s payroll reports include:
- Payroll register report: View all the payroll you’ve run for all employees in the software.
- Payroll details report: View year-to-date payroll details by employee, including wages, taxes, and deductions.
- Payroll tax liabilities report: View your federal, state, and local payroll tax liabilities.
Sign up for a no-obligation video demo to explore Patriot’s payroll software, or get started today with a free trial!
This is not intended as legal advice; for more information, please click here.
