- May 25, 2019
- Posted by: admin
- Category: Accounting Advice, Accounts Payable
It’s not mission-critical to your business that you understand fully how payroll works. Yet, since a large portion of your annual expenses goes towards labor and therefore payroll taxes, it’s a good thing to understand the payroll basics and the components involved in processing and how they impact your bottom line.
First, let’s explore the option of doing your own payroll. Many companies want to do their own payroll in-house. But this can be very expensive in terms of the labor alone. And then, if you ever have a missed tax payment or a late filing, the penalties, interest, and any back taxes can outweigh the cost of having a third party provide the service to you. There are plenty of payroll companies out there that can take care of handling your payroll for you. This is money well spent and highly recommended. OK, so hopefully you agree that maintaining your own payroll isn’t the right approach (face it, it’s just NOT one of your core competencies and it doesn’t need to be). But for educational purposes, let’s review what is involved with payroll and how much it costs to you.
A Payroll Basics Example:
The “$10-per-hour” Guy- In this example, you’re going to pay a technician $10 in GROSS pay per hour. There are certain taxes that are paid by the employee and others that are paid for by the employer. The employee portion will come out of his or her gross pay. So perhaps the employee may only get $7 in NET pay per hour. The $3 difference gets put aside for various taxes. But, to you the employer, the $10 per hour is wage expense either way. For this example, we will keep it simple and focus on the employer’s perspective. So, you as an employer owe FICA, which includes 6.2% for Social Security and 1.45% for Medicare.
Then there’s Federal Unemployment (FUTA), which typically comes out to 0.8% for the first $7,000 in gross wages. So, FUTA, which is based on how much money the employee made, is usually maxed out at approximately $56 per employee per year. Then after you add assorted State Taxes (varies from state to state as a % of your payroll) including Unemployment and Worker’s Comp, you have an additional 5-13% in added payroll expense. When it’s all totaled up, your payroll could cost you between 20-30% above and beyond the gross pay. The bottom line is that adding a $10 an hour guy on your payroll is more like adding between $12-13 of additional expense per hour when it’s all said and done.
There’s more to it, but that’s the payroll basics every PCO needs to understand. For more PCO management tips click here or contact us below.