Understanding and Reducing Payroll Costs for a Small Business

October 21, 2024
uAttend Staff

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Payroll is a major expense for most businesses. You have the actual cost of hiring and paying employees for the work they do for your company, along with other related expenses, including benefits, payroll taxes, and running payroll. If payroll is cutting too far into your bottom line, you might be looking for ways to reduce your costs.

Fortunately, there are options besides the obvious — laying off employees or limiting their hours — that can significantly reduce your payroll expenses. In this article, learn the factors that impact your payroll costs and a few small business payroll tips (such as leveraging software solutions tailored to small business needs) to reduce expenses.

Exploring the Types of Payroll Expenses

Payroll costs for small businesses encompass all the expenses associated with hiring employees to work for your organization. They include employee wages, salaries, bonuses, commissions, and other costs like payroll taxes and benefits. In addition to compensating your employees for their hard work, you’ll incur expenses for running payroll, retaining adequate payroll records, and utilizing payroll software. Some businesses may pay additional costs for outsourcing their payroll activities to external accountants or payroll professionals.

Some of your payroll costs are set in stone. For instance, a worker’s salary or hourly wage won’t change, though their work hours may go up or down. Benefit costs usually stay the same throughout the year, but they may shift if you make adjustments, such as changing health insurance plans.

Other payroll costs have more room for fluctuation. Running payroll more frequently will lead to higher expenses. Some payroll software providers are more expensive than others. And, if you outsource your payroll to a firm, you’ll pay for the service. Knowing the various elements that impact your payroll can help you identify ways to keep it within your desired budget.

How Do You Calculate Payroll Costs

The types of payroll costs fall into two categories: direct and indirect payroll expenses.

Direct Payroll Expenses

Direct payroll expenses include all payments made to an employee based on their hours worked or milestones achieved, such as making a specific number of sales. Here are a few examples of direct payroll expenses.

Basic Salary and Wages

Any employee you hire receives a set annual salary or hourly wage, usually stipulated in an offer letter or employment contract. You pay the employee their wage in exchange for performing tasks for your organization. Salary and wages typically form the biggest chunk of an organization’s payroll expenses.

Overtime Pay

Some of your employees may be eligible for overtime pay if they meet the FLSA’s definition of non-exempt and work more than 40 hours weekly. Overtime pay is equal to time and a half of an employee’s hourly wages. For instance, if a non-exempt employee earns $15 hourly, they would receive $22.50 per hour during overtime.

Overtime pay can quickly add up, especially if it’s regularly required in your organization. Businesses may be able to reduce it by hiring additional staff and cutting back on overtime hours.

Bonuses and Commissions

Some companies pay staff based on a commission structure. Workers who work on commission usually hold sales-oriented roles and earn a percentage of each sale they make.

Organizations may also offer bonuses for good performance or meeting a specific goal. Bonuses may be discretionary, and a company may cut back on bonuses if it doesn’t meet profit or revenue expectations for a period.

Indirect Payroll Expenses

Indirect payroll costs include all other expenses associated with hiring employees besides their earnings. Some examples include the following.

Benefits

Employee benefits include various programs and plans your workers can opt into, such as health, dental, and vision insurance and retirement plans. Other examples include paid tuition reimbursement, professional development support, and stock options.

Time Off

Many organizations offer paid and unpaid time off, such as vacation or sick leave. If employees take paid leave, they’ll still earn their regular wage for the time they weren’t at work. Unpaid leave allows workers to take time away from their jobs, but they don’t receive pay for the days they weren’t at work.

Taxes

Employers must deduct payroll taxes from an employee’s wages. Most taxes are the employee’s responsibility, but businesses also incur FICA and FUTA taxes, which cover Social Security, Medicare, and unemployment insurance.

Payroll Options for Small Businesses

Running payroll is time-consuming and complex. While you can handle the process in-house with a competent payroll team, some businesses outsource it or use a payroll software solution.

In-House

Keeping your payroll in-house means you or your staff will be responsible for calculating your employee’s paychecks, submitting withheld taxes, and retaining payroll documentation. While you won’t need to pay extra fees to consultants or external firms for payroll processing, you will need to find the time and resources to complete payroll. There’s also a learning curve. If you’re new to processing payroll, you’ll need to get up to speed on payroll regulations and taxes. You must also keep up-to-date on changing wage regulations that impact your business. In-house payroll processing costs depend on whether you hire a full or part-time employee to handle the task and their annual wages.

Outsourced

Outsourcing payroll shifts the burden of responsibility to an outside firm. You won’t need to worry about spending long hours tallying each worker’s pay for the period, withholding taxes, or calculating benefit payments. There’s also less risk of making payroll errors since payroll companies have experienced staff familiar with current regulations, tax rates, and other payroll concerns. However, outsourcing isn’t a perfect solution. You’ll be handing over sensitive employee and business data to a third party, which can be risky. You won’t have control over how the company handles your payroll since it will follow its own best practices. It can also be costly. Most outsourced payroll firms charge a set monthly fee for their services, plus a variable fee for every employee and paycheck they issue.

Software Payroll Solutions

A payroll software solution such as uAttend can handle all the complicated parts of processing payroll for you, including automating tax withholdings, benefit plan contributions, and tracking paid time off. Some payroll solutions include extra features, like time tracking, printing paychecks, and handling direct deposits. Payroll software is usually the cheapest option for businesses seeking to save on payroll expenses. However, since there are lots of payroll software options available, you’ll want to look for a solution that best fits your business needs and comes at a price that aligns with your budget. If you opt for software payroll, be aware that many companies charge base and monthly fees for each employee. You may also need to commit to a contract, which requires you to stick with the software for a set period before making any changes.

Cost Comparison of Payroll Options

How much do companies pay for in-house, outsourced, or payroll software solutions? Here’s a breakdown of what to expect.

Payroll Option	Average Cost
In-House	$54,690 is the median annual wage for a full-time payroll clerk
Outsourced	Monthly fee between $20 and $150, plus $2 to $12 per employee, per paycheck
Software Payroll Solution
uAttend	*$5 per month, per employee
Gusto	Starts at $40 monthly, plus $6 per month, per employee
QuickBooks	Starts at $75 monthly, plus $6 per month, per employee

Tips To Lower Payroll Costs

If your payroll expense is exceeding your budget, there are a few steps you can take to lower costs.

1. Invest in Payroll Software

It may seem counterproductive, but buying payroll software can actually lead to payroll cost reduction. Most payroll software programs automatically calculate tax and benefit withholdings, reducing the risk of costly errors and tax penalties. If your payroll software includes automatic time tracking (like uAttend does), you won’t need to tally up your employee’s working hours — all that information will be available at your fingertips. Plus, since you and your team won’t need to spend hours calculating each employee’s earnings, you can use the time for other value-added activities.

2. Don’t Overhire

Adding new employees to your team means more hands on deck to complete business tasks. However, you may have employees sitting around without much to do if you overhire. For small businesses, overhiring can be a significant mistake that inhibits profitability. Before bringing on new full-time employees, know exactly what you’re hiring for and make sure it’s a long-term need. If you need short-term help, consider seasonal or contract staff.

3. Limit Overtime

Overtime hours can quickly add up, eating into your payroll budget. Try implementing a system to control overtime, such as requiring management approval before an employee can rack up overtime hours. You can also use a timekeeping system such as uAttend to know when employees are reaching their weekly 40-hour limit and prevent overscheduling.

4. Negotiate Benefit Plans

Company benefits are another considerable payroll cost. While you want to offer competitive benefits to attract talented employees, you’ll need to balance your offerings with your budget. Look for cost-effective benefit options, and don’t hesitate to negotiate major expenses like health insurance. Shop around with different providers to ensure you get a good deal.

Simplify and Reduce Payroll Costs With uAttend

uAttend is the go-to payroll solution for many small businesses. Our affordable software includes time-tracking and punch-in features so your employees can sign in for their shifts directly through a time clock, smartphone, or computer. Plus, uAttend offers extensive reporting capabilities to track your payroll expenses in real time. To learn more about how uAttend can reduce your payroll costs, schedule a demo with our team.

*For 3 or more employees. Accounts with 2 employees or fewer will be charged $5/mo.