Managing Payroll, Employees,
Benefits and Salaries Effectively

The last thing you want is to shutter your business or lay off employees because you didn’t plan appropriately for payroll expenses. Employees will likely be the largest expense in any small business, and paying a fair salary for their time and expertise is essential to your success.

Staff with the right balance of experience, skills and attitude will help you grow, but you need to manage that against your cash flow and budget while factoring those costs into your profit margins. Here’s how to consider the real cost of employees to make sure you can keep them on board long-term.

What Do Employee Costs Include?

There are plenty of areas to consider when hiring employees to ensure you can pay them fairly without running out of money. These include:

  • Understanding the true cost of employees
  • Calculating fair wages and salaries
  • Factoring in hiring and training costs
  • Exploring employee benefits
  • Managing hidden costs
  • Incentivizing employees
  • Working out taxes

With the right information and advice, you can properly budget employee expenses and ensure you can retain the right people to strengthen your business.

Understanding the True Cost of Employees

Do you know how much it really costs to hire, pay and otherwise support your employees? It’s much more than their base salary — and you’ll need to know how much revenue you must bring in to support payroll.

For starters, product-based businesses like retailers and manufacturers can expect to spend between 15 and 30 percent of their gross revenue on staffing costs, while service-based businesses can expect to spend between 30 and 50 percent on employees.

We’ll dig into the details below, but here are the areas you’ll need to consider:

  • Hiring and training: Costs to advertise, interview, hire, train and manage new staff members
  • Benefits: Costs to provide employee benefits like health insurance, retirement contributions and vacation
  • Hidden expenses: Costs to provide equipment, office space, utilities and other essential overhead
  • Incentives: Costs to provide bonuses and commission or work-related perks like a company car or cell phone
  • Taxes and insurance: Costs for payroll tax and various employee insurance requirements

Taken together, all these costs can add between 20 and 50 percent to your base salary figures.

Calculating Fair Wages and Salaries for Employees

It’s important to set salaries and rates that attract the right quality of employee, while still allowing you to keep your costs under control. Make sure that you carefully define the job including roles, responsibilities and accountability. Review job descriptions to find a role that sounds similar to what you’re offering. Once you’ve done that, you can get an idea of salary ranges from websites like The Bureau of Labor Statistics, Payscale or Glassdoor.

You should take into account the job market and cost of living in your local area. If employees are in demand and housing is expensive, you may need to offer above the average salary for the role. If potential employees are plentiful and housing is cheap, you may be able to offer slightly less.

If you’re after more experienced employees, you may need to offer more. You should always build some “wiggle room” into the salary you offer in case the perfect employee tries to negotiate better pay.

You decide to hire a customer service agent (CSA) for your new business. Reviewing job descriptions and salary ranges, you learn that a typical entry-level wage is around $30,000. You live in an expensive area with lots of demand for new staff, so you decide to set the starting salary at $35,000.

Hiring and Training Costs for Employees

Once you know the types of employees you need and the roles they’re going to fill, you need to start advertising, hiring and training. You’ll need to take the following costs into account:

  • Recruitment agency costs
  • Costs to advertise the role locally and with online job portals
  • HR costs to review, shortlist, interview and manage applicants
  • Onboarding costs including training, education, support and management overhead

The total cost to hire and train your CSA is $300 for advertising, $500 for HR, $1,000 for training and $700 for management overhead, for a total of $2,500.

Benefits Costs for Employees

In addition to salaries, many employees will expect to be paid benefits. This can make a big difference in the quality of employees you will attract. Typical benefits include:

  • Health insurance for medical costs, possibly including vision and dental insurance
  • Retirement and pension contributions for employee 401(K)s or other retirement plans 
  • Paid vacation time (likely between 10 and 20 paid days off a year)
  • Paid sick time (likely up to 10 days a year)

Vacation time alone could add up to 10 percent to your costs, and factoring in healthcare and retirement contributions could add another 10 percent on top of that.

Your CSA’s vacation costs will be around $2,300 a year, and you’re also offering basic health insurance that will cost you $100 a month (or $1,200 a year) for a total of $3,500.

Hidden Costs for Employees

There are plenty of operational costs in your business for having employees. These include:

  • Office rental costs for space to house your employees
  • Furniture, equipment and technology so your employees can work effectively 
  • Utility costs for heating, lighting, water, etc. 
  • Payroll processing costs to pay your employees
  • Other hidden overhead

Go through your business bank statements and figure all of the costs you’re paying. Then calculate how many are attributable, in full or in part, to having employees.

Your CSA’s hidden costs are :
$1,000 a year in additional rental costs
$200 a year in utilities
$100 a year in furniture
$500 a year in software and hardware
$200 a year in other costs

This brings the hidden cost total to $2,000 a year.


Incentives Costs

Incentives are all the things you provide to get the most out of your employees, make them want to work for you and help boost their attitude and productivity. These can include: 

  • Bonuses for meeting certain objectives 
  • Commission for making sales 
  • A cell phone or other equipment to help them work better 
  • A company car for more senior employees 
  • A gym, childcare or subsidized food

You provide performance bonuses to your CSA employee up to $2,000 a year.

Taxes and Insurance

Finally, you will also need to pay taxes and insurance for your employee. These break down into several areas: 

  • Employer’s payroll tax, which includes Social Security and 
  • Medicare (FICA) taxes that account for around 8 percent of salaried pay 
  • State unemployment tax, which can run from anywhere between 0 percent to 4 percent depending on your state 
  • Federal unemployment tax, which runs to around 0.6 percent on the first $7,000 of wages
  • Worker’s compensation insurance, which varies widely. You can use a rate of 1.5 percent of earnings as a rough comparison

Your CSA employee costs an extra $5,000 in various taxes and insurance.

Bringing It All Together

Once you have calculated all your costs, you can add them together to come up with a “fully-loaded” cost for a member of staff. A good rule of thumb is that extra costs will add between 30 percent and 50 percent to the salary cost of an employee, although this can vary substantially.

Your CSA costs are:
  • Salary: $35,000
  • Hiring and training: $2,500
  • Benefits: $3,500
  • Hidden costs: $2,000
  • Incentives: $2,000
  • Taxes and insurance: $5,000

This adds up to a total of $50,000, or an increase of around 43 percent from their base salary.

As you can see, it’s vital to understand all the costs of hiring and retaining employees so you can properly work their costs into your budget and ensure you don’t run out of money.

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