Payroll costs include more than just the net salary paid to employees, such as taxes withheld, health and retirement plans, and costs associated with preparing and maintaining personnel records. Outsourcing payroll functions can help keep costs low.
Payroll costs are expenses associated with preparing and distributing a payroll as part of compensating employees for their services. There are several key items that are classified as payroll costs in addition to the actual net payroll amount that is passed on to the employee. Some of these have to do with the labor and materials used in preparing payroll, while other costs have to do with complying with government withholding regulations. Additional costs such as providing employee incentives and benefits are also considered examples of personnel costs.
The most basic personnel cost is the amount of money that is paid to the employee. This amount is made up of what is left over after any necessary withholding has been deducted from the employee’s wages or salaries. The figure may also include any fees or allowances payable to the employee, less any applicable taxes or other withholdings.
In addition to the net salary provided to the employee, personnel costs also include taxes withheld on behalf of the employee. These taxes may include federal, state and local taxes, depending on the prevailing tax structure in the area in which the business is located. Companies are normally responsible for calculating the amount of employer taxes that must be filed together with the amounts withheld for employees, using the formulas provided by the applicable tax agencies.
Another example of payroll costs has to do with health and retirement plans provided to employees as part of their compensation. In some situations, the cost of health insurance is shared with the employee, with a percentage of the total costs withheld from the employee’s gross wages and the remainder paid by the employer. The same approach can be used to fund retirement plans, where both the employee and the employer make contributions to each pay cycle. There are companies that absorb the entire cost of providing health insurance, pensions and other benefits, choosing not to withhold any part of the cost from the employee’s compensation.
Along with various deductions and disbursements, personnel costs also include the actual costs involved in preparing and maintaining personnel records. The cost of the labor involved is one example of these additional costs. Where payroll functions are outsourced, any fees assessed by the payroll service are considered payroll costs. Today, many businesses choose to use a payroll processing service as a means of keeping overall payroll costs as low as possible.
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