The Hidden Layers of Payroll Cost You Never Knew

Are you struggling to understand and manage your payroll costs? 

Business owners and HR professionals must understand the expenses of compensating employees to run a profitable business.

In this article, we will break down the different types of payroll costs, explore options for payroll management, and provide strategies to run payroll efficiently. 

By understanding and effectively managing your payroll costs, you can ensure accurate accounting, avoid fines, and optimize your business finances.

What Are Payroll Costs?

Payroll costs consist of all the costs you incur to compensate your salaried employees. These expenses include employee compensation as well as your portion in the following:

• Federal income taxes
• Provincial and territorial income tax
• Canadian Pension Plan (CPP) contribution amounts
• Employment Insurance (EI) premiums

Aside from the employer portions, other elements of payroll expenses include commissions, bonuses, health insurance premiums, and paid vacation. If you also outsource business processes such as bookkeeping, a part of your payroll expenses will include the payments you make to the contractors.

Employment costs vary per industry. For example, industries like hospitality will run higher costs in payroll than a typical retail store that may only hire 1-2 employees.

Payroll expenses also differ according to the size of the business. A business with fewer than ten employees will, of course, have lower payroll costs than a company with hundreds of employees and workers.

What Are The Different Types Of Payroll Costs?

Business owners need to understand that the true cost of employment isn't limited to compensation. That common misconception may lead to inaccurate payroll planning, resulting in dissatisfied employees and inaccurate books or fines in worst-case scenarios.

To help you understand your payroll expenses, we've classified them according to their effect on your books. Here are the types of payroll expenses.

Direct Payroll Costs

Otherwise known as direct labour costs, consist of the compensation payments and benefits you make for all employees.

Direct payroll costs will include the following:

Wages for hourly workers

This is the compensation for employees who work on an hourly basis.

You can calculate their hourly wage by multiplying the worker's hourly rate by the number of regular hours worked. For example, a machine operator with an hourly rate of $20 will account for $800 in your weekly payroll costs should they work eight hours daily for five days.

If the employees worked overtime, you'll have to calculate the pay as mandated by federal, provincial, and territorial laws and regulations, often 1.5 times their hourly rate.

Salaries

Salaried employees are paid a fixed amount per pay period compared to hourly workers. Salaried workers are generally paid at the end of each month and enjoy other benefits included in their salary amount.

Salaried employees can also earn overtime pay, subject to applicable laws and regulations, in the location your business is operating in.

Employee benefits

Most employees pay a deduction from their base salary for their benefits. In determining your payroll costs, you should also account for employee benefits.

Employee benefits vary per company, but common examples of these include the following:

• Dental, life, vision, and health insurance
• Paid leave and time off, such as vacation and sick days
• Retirement contribution matching and Medicare

Bonuses and commissions

Bonuses and commissions also form part of your payroll expenses. This is regardless of whether you pay the amount one time or recurring.

Indirect Payroll Costs

Indirect payroll expenses, on the other hand, are the additional costs you incur for other responsibilities.

Payroll Taxes

This is the employer portion of employee taxes, often called withholding taxes.

Your portion of payroll taxes depends on an employee's base or gross pay and includes the following:

• Employer Health Tax
• Federal Employment Insurance 
• Federal and provincial income tax

The Canadian Revenue Agency (CRA) publishes the tax rates for different provinces and territories yearly.

It's important to note that your portion of payroll taxes is for your hired employees, excluding contractors.

Administrative Costs

The administrative burden of managing payroll still lies with the business owner, regardless of whether you're doing in-house or outsourcing payroll services to payroll providers. This is why when determining your company's true payroll cost, you should still account for these costs.

Payroll Management Options

There are a couple of options when deciding how to run payroll for your company.

In-House Payroll

Many small businesses can handle payroll independently. If you decide to go this route, you’ll want to ensure you take the time to plan out the payroll setup.

One of the key steps to setting up payroll is to select the right payroll software. Automation has helped streamline processes in a business, including payroll accounting.

Many payroll software packages on the market have these standard payroll functions. For instance,

• Payroll processing and management
• Direct deposit
• Tax filing
• Year-end T4 slip generation
• Payroll reporting
• Compliance management
• Online pay stubs
• Remittances

The number of features and services included in your payroll software will depend on the plan or version of the software you use.

Using software helps you process payroll faster and ensures accuracy. It can also decrease the risk of costly mistakes that could result in fines due to inaccuracies.

Outsourcing

Outsourcing payroll means hiring a bookkeeper or accountant to handle your payroll process.

Most bookkeepers or accountants have experience and knowledge regarding payroll, tax laws, and regulations. Their expertise with the payroll process allows them to provide you with accurate books and amounts, reducing any potential fines with regulatory bodies. 

However, because of their expertise, outsourcing payroll can be expensive. The average salary for these professionals can range from about $30,000-50,000+, which can be a large overhead for a small business.

Using Online Payroll Services

There's no doubt that the payroll process is time-consuming and tedious work. This is why many businesses opt for online payroll services to manage their payroll.

Online payroll service companies handle all tasks in managing the payroll process, including the following:

• Payments to employees
• Handling of withholding taxes
• Filing of taxes
• Direct deposits

These services help you save time as well as minimize payroll mistakes. However, you won't have much oversight and flexibility in the payroll process compared to doing it in-house.

If you plan on outsourcing your payroll to service providers, you must assess each provider carefully. Many popular payroll service companies are on the market, each with different offers and price points. Carefully evaluate whether their services will give you the best results and perfectly suit your needs.

How Much Do Payroll Services Cost?

Whether you're using payroll software or a payroll solutions provider, you will still incur costs for payroll processing.

They typically offer a base fee for basic payroll services, plus charges per employee per payroll period. However, you’ll typically get access to more advanced features as you upgrade your plan or version. This allows your business to grow with these services.

Let’s review these factors that can affect your payroll costs which include:

Number of Employees

Payroll companies typically charge per employee. This means that as your employment numbers increase, so will your costs (and hopefully your revenue as well!)

On the other hand, if you're doing in-house payroll accounting, more employees means more time to process your company's payroll.

Payroll Schedule

Another factor to weigh in is your payroll's frequency. Some payroll services charge per employee for every scheduled payroll run.

For example, a provider charges $2 per employee every pay period. If your payroll schedule is bi-monthly, you'll have to pay $4 per employee every month. The amount can increase if you're paying employees weekly or decrease if your payroll payout is done once a month.

Employee Location

Taxes vary from province to province. This means you can pay higher taxes for an employee in one province than another. In short, payroll services providers may charge extra when employees are spread around different locations.

Type of Services Needed

As mentioned, payroll service providers often charge a base fee. As you add services to your subscription or software, you will incur extra costs.

Some examples of additional services include the following.

• Specific remittance types
• Automatic check signing
• Onboarding services
• Printing and delivery of paper checks
• Tax filing
• Tax penalty protection
• Time tracking
• Workers' compensation
• Direct deposit options
• Performance management for staff

Add-on services will increase your payroll expenses, so you should confirm first with your payroll provider regarding the services included in your available package.

What Are The Basic Services Offered By Payroll Companies?

Processing payroll involves several steps. If you're considering a payroll solution, their process will usually involve the following:

• Calculating the gross pay per employee
• Determining net pay by deducting income taxes, the employee portion of CPP, EI, and Health taxes, and the employee contribution to benefits like insurance premiums, retirement plans, and other benefits
• Depositing taxes withheld
• Completing and sending payroll tax forms, as well as sending tax forms to employees and contractors
• Sending of payments to employees

Payroll service companies typically have their proprietary systems to process your company's payroll. This may be software or a cloud-based processing system.

How Can I Process Payroll Costs For Contractors?

Payroll processing and payment are almost the same between regular employees and contractors. Their main difference lies in withheld taxes and benefits.

When processing payroll for contractors, it's important to note that their tax withholdings and benefits aren't included. This means you'll only have to pay the contractor's gross pay. Contractors are responsible for filing their taxes, from income tax to the CPP and EI.

How Can I Efficiently Manage My Payroll Costs?

Payroll expenses form a large and significant part of your monthly costs. This requires business owners and human resource professionals to manage these expenses carefully.

You can start by determining your company's payroll costs for each pay period. Use a payroll calculator if needed, as it can provide you with more accurate numbers. Then, you can formulate strategies to improve your payroll spending, making it efficient.

Some examples of strategies aimed at efficient payroll management include the following:

• Manage staffing and scheduling to reduce necessary overtime
• Assess payroll needs to determine whether processing should be done in-house or a payroll service provider is needed
• Evaluate payroll solutions providers to find the provider that best suits your needs (if opting to outsource payroll)
• Improve management of employees to boost their morale which can reduce high employee turnover, resulting in increased payroll costs

In short, understanding your overall payroll costs is a crucial part of payroll management. It's your starting point in identifying process areas to streamline or improve. You can implement these strategies and make your payroll process more cost-effective.

In A Nutshell

Understanding payroll costs is important to manage your business effectively. Payroll costs include compensation, taxes, benefits, bonuses, commissions, and other expenses. Different types of payroll expenses, such as direct and indirect costs, should be considered to budget and manage payroll accurately. 

HR professionals have various options for payroll management, including in-house payroll, outsourcing, and online payroll services. The cost of payroll services depends on factors like the number of employees, payroll schedule, employee location, and required services. 

By carefully evaluating these factors, you can select the best payroll solution for your organisation's needs and ensure accurate, efficient, and cost-effective payroll management.