Payroll’s percentage of a company’s expense account often depends on the type of business or industry involved. For example, service industries typically have higher payroll costs. From an overall financial standpoint, businesses that pay out 20 to 30 percent of gross revenue in payroll expenses generally are doing OK. Payroll takes up a significant portion of employee compensation. Wages and salaries per hour worked accounted for 70.4 percent of employer costs for employee compensation.
Payroll expense is the sum you pay to employees for their labor, as well as associated expenses such as employee benefits and payroll taxes such as PAYE, NIS and Health Surcharge. In many organisations, payroll expense is the biggest expense category, so it is critical for businesses to manage payroll expenditures carefully. Successful management of payroll expense depends on your ability to pare your workforce to avoid redundancies while simultaneously rewarding your employees sufficiently to motivate them.
Salaries: represent the payroll expense that you pay to employees who earn the same amount of money during each payroll period, regardless of the number of hours they work. While paying employees on a salaried basis may seem like a convenient way for employers to save money on overtime wages, asking too much of salaried employees can alienate them, giving them incentive to move on and look for new jobs.
Gross Wages: represent the part of your payroll expense that you pay to employees who are paid an hourly wage. To calculate gross wages, multiply the number of hours that each employee worked during the payroll period — up to 40 hours per week — by that employee’s hourly wage. Multiply hours worked in excess of 40 hours per week by one and a half times the hourly wage during the week and by two on weekends and Public Holidays.
Payroll Taxes: are the amounts that your business must pay based on gross payroll figures. Employers must make contributions to employees’ NIS in the combined amount of 13.2% of gross wages as of 2016.
Benefits: Businesses also accrue payroll expenses in the form of employee benefits. If you contribute to your employees’ health care plans or make contributions to their retirement funds, then these payments are part of overall expenditures on your workforce or payroll expense. When calculating your payroll expense, don’t include amounts that you take out of employee pay cheques, even if you remit these amounts to third parties such as health insurance providers. These amounts have already been included in your employees’ gross wages. Only include the amounts that your business pays to supplement these withholdings.
Other Employer-Paid Benefits: An employer may offer its employees other paid benefits such as holidays, sick days, vacation time and personal leave. Two weeks of paid vacation usually is standard following one year of employment. In many cases, employees can earn additional weeks of vacation time after five years of service. Depending on a company’s sick leave policy, employees sometimes are allowed to carry over unused vacation days to the following year.
Next week…how to keep your payroll expenses under control.
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