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Every company needs employees. But more than that, every company needs skilled employees, the right number of employees, and happy employees. The foundation of those things is a good payroll system that rewards employees properly and keeps them happy. Managing employees is one of the most important elements of operating a business successfully and one of the key measures of effective management is aiming for payroll as a percent of business revenue.

Why it is Important to Have a Good Payroll System 

A good payroll system allows a business to save time because payroll tasks are repeated routinely in a reliable and timely manner. Payroll information is stored and managed in one place. The payroll process is conducted error-free, thus avoiding employee frustration, legal penalties, and additional taxes. And most important, employees are paid the right amount at the right times.  

Effective payroll management helps build a business’s reputation as a strong and reliable employer. It also leads to greater employee trust, productivity, satisfaction, motivation, and loyalty. It has a tangible impact on employee retention as well. 

Best Practices for Managing Payroll 

Here are 10 best practices for managing payroll: 

  1. Make sure that employees are classified correctly. Misclassification can result in tax-related issues that can result in serious IRS penalties. 
  2. Develop a payroll calendar that considers all payroll dates and payroll tax deadlines. The Department of Labor has specific and strict requirements regarding payroll document submission and retention. Proof of proper payment information is required to be kept for retirement information, pay records and tax information. Set payroll notifications and reminders to meet your established calendar on time. 
  3. Use direct deposit to eliminate mountains of manual work. That also makes the required end-of-year reporting much easier. 
  4. Create appropriate HR policies and procedures to guide all payroll decisions and be transparent in sharing those policies with all employees.  
  5. Keep all payroll records and documents organized, and up to date. Know which records you will need to keep and how long. 
  6. Protect all your online data. 
  7. Regularly gather employee feedback. 
  8. Consider outsourcing payroll activities to make your management team more efficient plus more focused on customer service and building revenue. 
  9. Determine a comprehensive payroll budget. Of course, payroll expenses have a significant impact on business finances, so it makes sense to watch payroll expenses carefully. 
  10. Spend the proper amount on the payroll. Examine your cash flow and revenue projections and then determine an appropriate percent of business revenue.  

What Percent of Business Revenue Should be Used for Payroll 

The measure of payroll to revenue is a useful guide to allocating employee wages and benefits. However, there is no single universal percentage that describes what is “best.” Rather, the ratio used will depend on the company’s size, industry, age, and other specific circumstances. On the extremes, too high a percentage may stretch a company’s finances and too low a percentage may indicate there are too few employees to keep a company moving forward. 

The commonly cited general guideline is a range of 15-30% of revenue for payroll. Businesses that are labor-intensive like restaurants, hotels, theme parks, agriculture, mining, healthcare, and caregiving will usually be on the higher side of the ratio. Service-oriented businesses where payroll is the dominant factor in the business can have a percent of revenue as high as 50% and still preserve profitability. 

In addition to salaries, the total employee cost and percent of revenue calculation should include benefits, sick days, vacation days, insurance, and taxes. 

In every case, it is important for managers to have some leeway on the margin to deal with business volume changes, employee sicknesses, and employee shrinkage.

Choose an Expert Payroll Service  

Choose an expert payroll service, Palmetto Payroll, to assist you with your payroll system. We have offices in Columbia and Charleston serving over 300 business owners statewide. We offer expertly tailored solutions to save you time and money so you can thrive and grow. Our services include payroll, tax depositing and filing, management reporting, Human Resource Services, and timekeeping services.