Payroll’s percentage of a company’s expenses varies by industry, with service industries typically having higher payroll costs. From a financial standpoint, businesses spending 20-30% of gross revenue on payroll are generally in good shape.

Payroll expense includes not just salaries but also benefits and taxes. Since it’s often the largest expense category, proper management is crucial for business success.

What Exactly is Payroll Expense?

Payroll expense is the total cost of employee compensation, including:

• Wages and salaries
• Employee benefits
• Payroll taxes (PAYE, NIS, Health Surcharge)

Successful payroll management requires balancing workforce efficiency with fair compensation to keep employees motivated.

Breaking Down Payroll Components

1. Salaries

Fixed amounts paid to employees regardless of hours worked. While convenient for budgeting, overworking salaried employees can lead to burnout and turnover.

2. Gross Wages

Payment for hourly employees calculated by:

• Regular hours (up to 40/week) × hourly wage
• Overtime hours (over 40/week) × 1.5 × hourly wage
• Weekend/Public Holiday hours × 2 × hourly wage

3. Payroll Taxes

Employer contributions based on gross payroll. For example, employers must contribute 13.2% of gross wages to employees’ NIS (as of 2016).

4. Employee Benefits

Employer contributions to:

• Health care plans
• Retirement funds
• Other supplemental benefits

5. Other Employer-Paid Benefits

Additional paid time off including:

• Holidays
• Sick days
• Vacation time (typically 2 weeks after one year)
• Personal leave

Many companies offer additional vacation time after 5 years of service, and some allow carrying over unused days.

Why Understanding Payroll Costs Matters

With payroll representing such a significant portion of business expenses—and wages/salaries making up 70.4% of total compensation costs—effective payroll management is essential for profitability and sustainability.

“A wealthy person is simply someone who has learned how to make money when they’re not working.” – Robert Kiyosaki

Stay tuned for next week’s post where we’ll explore practical strategies to keep your payroll expenses under control while maintaining a motivated workforce.

Struggling to manage your payroll costs? Contact us today for a comprehensive payroll analysis and optimization strategy!