Beyond Salary: A Small Business Owner's Guide to Payroll Costs

Growing businesses can be caught off guard by total payroll costs. That's because payroll expenses include more than just your employees' base salaries. According to the Bureau of Labor Statistics, wages account for roughly 70% of total employer compensation costs, while benefits and taxes make up the remaining 30%. This additional percentage is one that many first-time employers miss during their initial budget planning. Let's break down your actual payroll costs to help you budget accurately and maintain healthy cash flow.

What are Payroll Costs?

Payroll costs are your total expenses for compensating employees. Here's what you need to consider when budgeting:

• Direct Payroll Costs: These include gross wages, salaries, overtime pay, bonuses, and commissions. Employees see them before any deductions.

• Indirect Payroll Costs: You may incur recruitment and onboarding expenses, overhead costs, and administrative fees for payroll processing.

• Employee Benefit Contributions: If you offer non-salary compensation packages, you need to consider employer contributions to health insurance, retirement plans, paid time off (PTO), and other types of insurance or benefits.

• Employer Payroll Taxes: You need to pay mandatory contributions to government programs.

Stay Compliant With Non-Negotiable Expenses

Administering payroll involves paying mandatory tax contributions. The Federal Insurance Contributions Act (FICA) governs mandatory contributions to fund social safety net programs, such as Social Security and Medicare. The employer share for both Social Security and Medicare is 7.65% in 2025 . States and local jurisdictions can impose their own payroll taxes to fund local services. Here's an overview:

Many growing businesses choose to simplify payroll and compliance management by outsourcing it. Modern payroll software automates time-consuming tasks, such as calculating an employee's total gross wages and subtracting all required deductions. It helps you distribute payments and file all the necessary employment taxes with the appropriate government agencies.

Take Benefits and Insurance Costs Into Account

Providing health insurance for employees represents one of the most significant non-wage expenses for small businesses. Smaller teams often face higher premium shares and deductibles than their large-company counterparts. Through a co-employment model with a Professional Employer Organization (PEO), small businesses can provide high-quality benefits and more options to their employees.

Workers' compensation insurance adds another layer of mandatory expense that varies significantly from one industry to another. Office workers might cost $0.25 per $100 of payroll, while construction workers could reach $15 per $100 in high-risk classifications. As you grow your team, it's also important to consider how to classify your employees. Misclassifying them can trigger audits and retroactive premium assessments.

Avoid Common Mistakes

Running payroll can seem complicated for small business owners setting up their first payroll systems. Here are some pitfalls to be aware of:

Misclassifying Workers

Hiring a person as an employee or contractor carries financial implications. The IRS examines behavioral and financial control when determining proper classification. When in doubt, conservative classification protects against costly audits.

Ignoring Multi-State Requirements

Remote work has expanded dramatically, but it has also created new compliance challenges. Each state where employees work requires separate registration, withholding calculations, and unemployment insurance accounts. Professional payroll services handle multi-state complexity automatically, preventing expensive oversights.

Underestimating Benefits Drift

Rising health insurance premiums often outpace general inflation. Small businesses should conduct annual benchmarking against authoritative sources to monitor their benefit costs. Small firms usually pay more per covered employee than large companies, making active benefits management essential.

Discounting Manual Processing Costs

Administrative overhead can impact your bottom line. You need a human resources (HR) person or team to handle tax deposit management, compliance requirements, record-keeping, and error corrections. Modern technology can automate these tasks.

Anticipate Costs With a Loaded Labor Cost Model

Understanding the additional payroll costs helps you incorporate them into your financial strategy. You can create a loaded cost model for each employee to budget correctly and make informed hiring decisions. Here's a framework and an example of what this may look like:

1. Base Salary: $60,000 annually

2. Employer FICA: $4,590 (7.65%)

3. FUTA: $42 (after state credits)

4. SUTA: $1,200 (2% state average)

5. Workers' Comp: $600 (1% for office work)

6. Health Insurance: $7,200 (employer portion)

7. Administrative Costs: $1,200 (payroll service, HR time)

Based on this example and using conservative estimates, the total loaded cost for this employee is $74,832 (24.7% above base salary). Your actual payroll costs will vary based on state location, industry classification, benefit offerings, and administrative efficiency.

Develop Strategies for Managing Payroll Costs

Efficient payroll management balances employee satisfaction with business sustainability. The following approaches help you strike that balance:

• Benchmark Regularly: Compare your loaded costs against industry standards using the Bureau of Labor Statistics (BLS) data.

• Invest in Safety: Lower workers' comp premiums through documented safety programs and return-to-work policies.

• Review Classifications: Ensure you've correctly coded employee positions for accurate insurance rates.

• Track Overtime Patterns: Determine whether hiring additional staff would cost less than paying for persistent overtime.

• Consider Voluntary Benefits: Shift some costs while maintaining a competitive benefit package.

As part of your ongoing payroll cost management strategy, you should also review all your year-end payroll tasks. These include any tax rate updates and benefit adjustments.

Simplify Payroll Management With Justworks

Small business owners face a complex web of calculations and deadlines to manage payroll costs, but the right tools can help you save time and resources.

Justworks handles federal and state tax calculations, compliance management, deposits, and filings across all 50 states, automatically calculating employer taxes and providing real-time visibility into labor costs. For businesses seeking large-group benefits rates and reduced administrative burden, Justworks PEO uses a co-employment model that often lowers total costs by securing better insurance rates and eliminating penalties. Get started with Justworks today.