Did you know that payroll costs are usually your largest expense as a business owner? Understanding your payroll costs – from wages and taxes to benefits – can help you price your offerings more effectively and plan your revenue needs to support your small business growth. In this overview, you’ll break down what’s included in your payroll expenses.
Be sure to consult with a good third-party payroll service or an experienced accountant to set up and manage your payroll, while also staying updated on this aspect of your business yourself.
What is payroll?
Payroll is the wages you pay to your employees – not including independent contractors you contract with for services.
Payroll includes a group of expenses that are all related to compensating employees, such as:
- Wages
- Withholdings
- Employer taxes
- Benefits
What’s included in your payroll expenses?
Here is a deeper look into the expenses included in your payroll:
Wages
Wages are the money you pay your employees, calculated either from their salary over a period of time or their hourly rate multiplied by the number of hours they worked. This total will count for the actual wages expense that your business pays.
Employees who receive tips will need those tips reported on their paystubs as they are subject to the same withholdings and taxes as their salary. Generally, employees are entitled to their entire tip; however, when tips are paid by credit card, you can withhold an amount equal to the fees paid for those tips.
Withholdings
Many of the taxes you’ll pay related to an employee are withheld from the employee’s paycheck. So, if an employee has $1,000 in wages and $200 in withholdings, that doesn’t mean that your business pays $1,200 for that employee. It means you’ll pay $1,000, with $200 of that going toward the employee taxes. The employee would then receive a paycheck for $800. The specific withholdings that every employer needs to make from their employee’s checks are:
- Federal, state, and local income taxes: These are the employees’ payments for income taxes, based on the information they entered on their W4 form when you hired them.
- Employee’s payroll taxes: This includes taxes for Social Security and Medicare, which equals 7.65% of the employee’s wages.
Employer taxes
Employer taxes are what your business needs to pay on top of the amounts you’ve withheld on behalf of your employees. As an employer, you’re required to match the amount of money that the employee paid toward Social Security and Medicare in their withholdings. You’ll withhold 7.65% of your employees’ wages, and then also contribute that same amount as part of your employer taxes.
Federal and state unemployment insurance are one of the required payroll taxes that you’ll pay directly to the government. This expense can range from 3-5% on top of wages paid. New York State has another small tax called “Re-employment insurance,” which is usually factored into the payment made for various NYS employer taxes.
Benefits
Employee benefits are the most diverse and wide-ranging in terms of payroll costs. Some benefits are required, some are just accruals that an employee can cash in on later, and some are put in place to attract the best talent.
Required benefits
- Workers’ compensation insurance: Most states require that employers carry workers’ compensation insurance. Workers’ comp covers the cost of an employee getting injured on the job, and it’s the only required benefit that is regularly occurring.
- Paid leave: Some states and localities, such as New York City, require certain types of leave to be accrued and paid for employees. This includes leave for an employee when they’re sick, or for the employee to take care of a sick family member. It also covers maternity leave and leave for an employee to support a family member who is on active military duty.
On a pay period by pay period basis, this might not amount to actual cash coming out of your business’s accounts. But you need to accrue these types of leave in your payroll system so that when your employees need them these funds are available. In New York State, employees are eligible for up to 10 weeks of paid leave, and New York City employees can earn more than 40 hours of paid sick leave per year. - Health insurance: Per the Affordable Care Act, health insurance is required to be paid for by all businesses with 50 or more employees. Businesses of this size need to either use a private HMO or purchase insurance on one of the state healthcare marketplaces.
For businesses with fewer than 50 employees, health insurance is still deductible but not required.
Non-required benefits
Benefits that your business chooses to provide beyond those that are required might include:
- Retirement plans
- Health insurance (for businesses with less than 50 employees)
- Life insurance
- Gym memberships
- Childcare programs
Most of these costs are deductible as an expense to your business if they’re provided to non-owner employees.
What is a Professional Employer Organization (PEO) service and how can it benefit your business?
The wage, tax, and benefit rules listed above are the most basic rules for your business, but the full scope of these laws can get very detailed and is constantly changing.
PEO services are a comprehensive human resources outsourcing that can handle your:
- Payroll payments
- Tax withholdings
- Recordkeeping
- Workers’ compensation
- Benefits administration
- Compliance and risk management
- Human resources support
This can be an easy, affordable, and safe way to handle the complicated responsibilities. Many of these service providers now also have deals with major insurance and retirement planning services to offer bulk pricing that wouldn’t be available to smaller businesses.
Strengthen your business with Pursuit
By learning how to manage your payroll costs, you can better understand how to run your business for long-term success while increasing your financial stability. Staying organized about collecting taxes, monitoring important employee laws, and maintaining important tax documents will not only protect your business, but strengthens your financial management.
And if you need funding to support your business goals, Pursuit can help! We offer more than 15 loans and a line of credit to businesses in New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware.
Contact us today to learn more about ways we can support your business.