How to Calculate Payroll Expenses

Keeping track of payroll expenses is challenging. Some days, it’s even painful. No matter how difficult it is, understanding your payroll liabilities is essential to the successful operation of any business, regardless of its size.

Keeping on top of payroll helps you budget effectively, forecast your cash flow, and ensure you’re paying your employees accurately and on time. How you track your payroll expenses is a key part of this essential task.

What Are Payroll Expenses?

Payroll expenses are the costs you incur as a result of paying your employees, such as wages, benefits, bonuses, and payroll taxes. If you don't manage these expenses effectively, you could end up overspending or run into trouble with regulatory authorities.

By tracking payroll expenses with a payroll cost calculator, you can avoid legal issues, make informed decisions about resource allocation, and keep your business profitable.

Types of Employee Payroll

Let’s take a look at two of the most common types of employees and learn how to calculate their payroll:

Payroll for Hourly Workers

Hourly workers are paid for each hour worked. To calculate their pay, you need a timesheet containing the details about the time they worked during each pay period. You also need the rate assigned to different work categories.

For instance, if Veronica works thirty-six hours per week at a rate of $20 per hour, her weekly pay would be $720. If she worked overtime, she gets paid time-and-a-half (or at the overtime rate dictated by the state where she works).

Payroll for Salaried Workers

Salaried employees receive a fixed amount per salary period, which can be weekly, biweekly, monthly, etc. They may also be entitled to bonuses, commissions, and other forms of compensation.

For instance, if David earns $114,000 annually and is paid per month, you should divide his wage by twelve to determine his gross salary for the pay period ($114,000/12 = $9,500).  

Types of Payroll Taxes

As a business owner, you have to make mandatory tax deductions from your employees’ pay. The following are some examples from the U.S. If you’re looking to expand your operations to another country—such as Mexico—you’ll also need to get in touch with a local payroll expert such as Tetakawi to understand local taxes. 

Federal Income Tax

Federal tax is calculated according to Publication 15-T, released annually by the U.S. Internal Revenue Service. The publication offers two calculation options: the wage bracket and percentage methods.

These calculations depend on:

• Information from W-4s
• Employee filing status (e.g., single, married, divorced)
• Pay frequency
• Employee’s job status (whether they have multiple jobs)
• Deductions
• Dependents
• Additional withholdings

Social Security Tax

Social Security is mandatory under the Federal Insurance Contributions Act (FICA). It ensures that workers have access to Social Security benefits such as retirement benefits, disability programs, etc. when they need them.

This tax rate is 6.2% and the benefit base is $160,200, meaning employers should withhold Social Security taxes on wages up to $160,000. To figure out the amount for this tax, multiply 6.2% by your employee’s gross taxable wages.

Medicare Tax

Medicare is a mandatory tax paid with the Social Security tax. The total Medicare tax for 2023 is 2.9%, with employers and employees each contributing 1.45%.

Employees with wages exceeding $200,000 pay a 0.9% Additional Medicare Tax. This tax also applies to married couples filing jointly with an income of over $250,000.

To calculate the Medicare tax, multiply your employee’s wages by 1.45%. If their salary exceeds $200,000, you’ll have to withhold an additional 0.9%. 

State Income Tax

The amount (if any) of state income taxes will depend on where your employees live and work. If they live in income-tax-free states, such as Texas, Washington, Tennessee, or South Dakota, you don’t have to withhold state income taxes from their pay.

If your employee lives in a flat tax state, such as Arizona, Michigan, North Carolina, Indiana, or Utah, you’ll have to deduct a flat percentage no matter how much they earn. To determine how much flat rate tax to withhold, multiply your employee’s gross wages by the state’s tax rate.

Other states use a progressive tax rate. You can calculate an employee’s progressive state income tax using tax tables provided by the state.

How to Calculate Payroll Expenses?

Here’s how to calculate your business’ payroll expenses:

Determine Your Employees' Gross Salary

Your employees’ gross salary includes all the wages your employees earn before any deductions or bonuses, such as taxes or benefits. Gross wages may vary depending on the wage type used for hourly or salaried employees.

For instance, if Sienna works forty hours per week at a rate of $26 per hour and is paid once a month, her gross monthly salary will be $4,160. 

Calculate Employee Benefits

Employee benefits include any benefits you provide to your employees, such as health insurance, retirement plans, and paid time off (PTO).

Let’s say you offer your employees a health insurance plan that costs $15,000 per year. You pay 60% of the premium, while your employees pay the remaining 40%. Your portion of the health insurance premium is $9,000, and employees contribute $6,000.

You also offer ten days of PTO per year. If Sienna earns $50,000 per year and works five days a week, her daily pay rate would be $192.31. That means her ten days of PTO cost the company $1,923.10.

When you add the cost of the health insurance premium and PTO, the cost of these employee benefits for Sienna would be $10,923.10 per year.

Figure Out Payroll Taxes

Payroll taxes must be withheld from your employee’s wages. They include federal income tax, Social Security tax, and state income tax as described above.

These taxes are calculated according to state and federal tax laws. 

Add All Expenses

Once you've determined your employees' gross wages, your share of benefit expenses, and payroll taxes, add them to get your total payroll expenses. This will help you learn how much you spend on payroll each pay period.

Summing It Up

Get ahead of the game by having a firm grip on your payroll liabilities and processes to manage cash flow, keep your employees happy, and stay compliant with state and federal tax laws. 

If you learn what a payroll calculator is, it can save you a lot of time and effort when working on payroll.