With many employers having a payroll-to-revenue percentage of 33% — meaning a third of their gross sales go to payroll expenses — and global businesses spending 60% or more of their operating costs on payroll, payroll costs easily qualify as one of the larger expenses businesses have to shoulder. As a direct result, reducing payroll costs can help you increase profit in an efficient manner, even if your revenue stays the same.
What’s Included in Payroll Costs?
Payroll costs extend well beyond salaries and wages to include all direct employee costs such as healthcare benefits, employer contributions to retirement plans, payroll taxes — income tax, Social Security tax — accounting and payroll software or processing fees, and administrative costs to maintain personnel records.
In essence, payroll costs are all costs incurred by employers to compensate their employees. That’s part of why it’s often the largest cost category of any organization and why there are so many routes you can take to reduce overall payroll costs.
16 Ways to Reduce Payroll Costs
Payroll expenses are as plentiful as they are varied — so much so that it can take a while to fully understand all the individual costs or how much gross revenue should go toward payroll. But you don’t need to know all the small business payroll statistics to start decreasing your employee payroll costs. Here are some actionable steps you can take now.
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Focus on Hiring
The longer a position goes unfilled, the more cost it incurs as you spend time and resources to source candidates and guide them through the interview process. So, the sooner you and your team are able to hire a candidate for an open position, the less you’ll spend in the search to find that candidate.
But focusing on hiring isn’t solely about the time it takes to hire an employee. When adding to your team, it’s important to hire the right people — whenever possible, multiskilled people. Adding team members with multiple skills can help reduce the need for additional staff and overtime hours, since these effective employees will be able to take on more responsibility. In this way, hiring the right people helps reduce payroll costs while simultaneously increasing workplace efficiency.
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Optimize Employee Schedules
Overscheduling and underscheduling employees both have their cons, including decreased efficiency and superfluous payroll costs. When you overschedule, there isn’t always enough work to go around, resulting in wasted time that your business has to pay for, not to mention a decrease in efficiency, because the employees who aren’t directly working on something can distract those who are. Conversely, underscheduling leads employees to tackle more work than should be expected within their standard hours, leading to unnecessary overtime and the higher wages that come with it.
Optimizing employee schedules is the cost-effective and efficient sweet spot business should try to strike. When employees are properly scheduled for the tasks at hand, there is less need for additional staff or overtime hours and team members are able to focus on their jobs without superfluous distractions, increasing overall productivity.
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Reduce Payroll Errors
From expenses to deductions and reporting, there are many opportunities to make an honest mistake when it comes to payroll items, even with small business payroll. But simple as they may seem, these mistakes levy a heavy financial toll. The IRS estimates that roughly one third of employers make a payroll mistake in any given year — in 2021 alone, this led to the agency collecting nearly $7 billion in penalties.
These payroll errors don’t just affect a business’s bottom line: They affect a business’s people too. In fact, payroll problems affect 82 million U.S. employees, with 25% of all workers dealing with paycheck errors. This can lead to struggles paying rent, buying groceries, or handling a medical bill for the 64% of Americans who live paycheck to paycheck.
In better news, there are plenty of payroll tips and tricks to use to avoid these consequences. Acquiring the proper payroll and project management tools, such as enterprise resource planning (ERP) software with payroll capabilities, is a great place to start.
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Manage Overtime
No matter how well you optimize your employees’ schedules, overtime hours are sometimes unavoidable. But you may also find yourself paying for unnecessary overtime. Even if your employees generally stay just six minutes late each day, that time adds up, and quickly those six minutes a day equate to an overtime hour every biweekly pay period.
One way to prevent this is by implementing overtime alerts and other reminders to ensure your team members know when overtime pay kicks in. You can also ask managers to schedule other employees to relieve those who may be approaching overtime. In this way, you can promote a healthy work–life balance while maintaining workplace productivity at a lower cost.
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Reduce Employee Turnover
Between the costs when an employee leaves, like paying overtime to those filling in the gap created, and the new employee hiring costs — recruiting expenses, signing bonuses, the training and onboarding period — replacing team members typically costs 33% of their annual salary. And that goes not just for low-wage workers but also for engineers, senior leaders, and other expensive personnel. So, the lower the employee turnover rate (the rate at which employees leave the company after being hired), the better.
Prioritizing benefits and promoting their use is a good way to keep your employees on your team. Nearly nine in 10 employees highly value health insurance benefits and retirement benefits, and a healthy PTO offering can also be crucial to employee retention — 68% of employees are happier at work because their employers encourage taking PTO.
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Minimize Overstaffing
Overstaffing often occurs when hiring becomes reactive rather than strategic, addressing short-term needs without long-term planning. This results in more people being on the job than needed, which in turn means paying employees for doing nothing, eating away at your business’s bottom line. An underused staff can also lead to reduced employee morale and a decrease in productivity, ultimately costing your business more than just the payroll costs associated with overstaffing.
The best way to combat overstaffing is to assess current utilization rates and work with human resources (HR) to create a staffing plan — a document detailing the number of employees as well as the skill sets and qualifications your company needs for current and future projects — before you bring on a new hire. If you’re already overstaffed, a staffing plan can also help you avoid layoffs by identifying skill gaps in your workforce so you can cross-train employees accordingly.
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Cross-Train Employees
Hiring a multiskilled employee isn’t the only way to ensure you have effective employees who are able to take on more individual responsibilities. Consider cross-training your current employees, teaching them another set of skills to perform in a job they didn’t initially qualify for. This can help your business address specific needs without having to incur the costs involved in the hiring process…or the employee departure process, in the event you opt to cut a less-skilled employee in favor of hiring a multiskilled one.
When done properly, cross-training identifies the skills and tasks your business needs going forward and works to fill in those gaps. Cross-trained employees can hop in and keep up a high level of business activity without you having to crisis-train or outsource work at a moment’s notice.
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Integrate All Your Payroll Systems
It’s not uncommon to use different systems for employee schedules, healthcare benefits, labor expenses, pension plans or other retirement plans, and all other aspects of your payroll. But every system you use comes at a cost, and those costs accumulate. Whenever possible, integrate all your payroll systems into a central software such as ERP to help you cut costs without cutting corners.
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Track Expenses
Between travel, meals, educational expenses, and more, businesses end up paying back their employees for a lot of reimbursable expenses. But an employee’s reported expenses aren’t always accurate or in accordance with organizational policy — most travelers actually fail to follow their company’s policy when booking business travel. Left unchecked, this results in businesses reimbursing employees more money than they should.
It’s important to establish a policy for reimbursable expenses and to track them accordingly, even if that means spending a little on a mobile app that makes it easier for employees to submit expenses and payroll personnel to approve them. Organizations risk being oblivious to the amount they’re overreimbursing otherwise.
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Stay Compliant
Payroll forms and deadlines vary by location, making it easy to miss deadlines between states and countries. And when a business misses these deadlines, they face the consequences — compliance fines. Implementing a system to make sure your business meets all compliance requirements helps tighten the financial reins as you bypass avoidable payroll expenses.
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Go Remote
Strictly speaking, real estate isn’t part of payroll. But in a practical sense, it’s a quasi-payroll cost — it’s the place you’re putting the people who work at your organization. That means that reducing or eliminating your real estate footprint can reduce your overall costs.
Depending on how you navigate the transition from a physical space to remote work, going remote may include initial costs, such as work-from-home setups for your employees. But these short-term costs often pale in comparison to the expenses reduced in the process.
Without a physical workspace, remote-based businesses don’t need to deal with a mortgage loan or the mortgage interest payments or the lease payments that come with renting a workspace. Going remote is a path to drastically reducing payroll costs by eliminating costs associated with an in-person workplace.
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Reduce Departmental Redundancies
Departmental redundancies can come in many forms — duplicative positions, identical and unnecessary materials — but every redundancy spells an unnecessary cost. By eliminating these redundancies, businesses can reduce labor, tax, and supplies expenses while simultaneously saving in areas such as office space and utilities. Overall, reducing departmental redundancies can make for a leaner operation in both personnel and equipment with increased efficiency and productivity, as the remaining employees can focus on their core responsibilities without distraction, using the equipment and other materials afforded them to their fullest.
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Consider Hiring Part-time
Not all workloads mandate the hiring of a full-time employee — some jobs can be handled on a part-time basis. And while hiring full-time employees certainly has its positives, such as regularity in service flow and overall consistency for your labor management, part-time employees don’t run the same risk of working overtime or spending as much on-the-clock time not working. Part-time employees also don’t need to be offered health benefits or profit-sharing plans.
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Improve Workflows
If your workflows across departments aren’t optimal, you might be paying unnecessary overtime to complete tasks that could be accomplished sooner, or even staffing positions that don’t need to exist. Taking steps to improve your workflows — raising the levels of communication between teams, implementing an ERP so team members can pull needed information from a central database without having to wait on their coworkers’ availability — can lead to a more efficient workplace.
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Consult HR
Your HR team are uniquely positioned at the junction of staffing and employee benefits, making them the perfect people to consult with when trying to lower payroll expenses. After clearly understanding the costs behind payroll, HR can review and streamline job roles, optimize staffing levels, and review and manage employee benefits in a more cost-effective, straightforward way that aligns with organizational goals. They can even negotiate with health insurance providers to get the best rates for employee health benefits.
In this way, consulting HR may help optimize employee schedules, manage overtime, minimize overstaffing, and more, all while reducing multiple payroll expenses and your total payroll cost.
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Automate Your Payroll
Processing payroll by hand isn’t the best idea — it can easily lead to avoidable errors that result in compliance fines and other unwanted penalties. Payroll software uses automated tools that help ensure accuracy and compliance for each pay period and government deadline, helping you avoid unnecessary payroll expenses. Automating payroll can actually reduce costs related to payroll by as much as 80%, making it one of the easiest ways to save money and time.
Saving Money and Time With Payroll Automation Software
ERP software allows you to integrate all your payroll systems and automate your processes, helping you reduce payroll costs with ease. Complete with the SuitePeople Human Resource Management System, NetSuite ERP even connects HR and payroll data to provide a suite of capabilities that make HR service delivery easier and more efficient for everyone across an organization. Learn how implementing the NetSuite SuitePeople Payroll System can help you save money and time while gaining peace of mind.
Payroll costs are almost always an immense expense. But by taking some of the actionable steps explained above, you and your team can start reducing your payroll expenses today.
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Reduce Payroll Cost FAQs
How can I cut payroll costs without layoffs?
There are many things you can do to cut payroll costs without having to resort to layoffs. For instance, automating your payroll could potentially reduce your payroll-related costs by as much as 80%, and optimizing employee schedules could help you better manage overtime hours so that you don’t incur unnecessary costs.
How can I save money on payroll?
There are numerous ways to save money on payroll, including managing overtime, reducing overtime, keeping an eye on compliance, and improving workflows. One easy way is to integrate all your payroll systems so that you only have to pay for one system — such as an ERP —instead of multiple types.
How do you calculate payroll costs?
Payroll costs consist of all costs incurred by an employer to compensate their employees. This includes salaries, health insurance premiums, employer contributions to retirement plans, taxes, and other employee-related costs. So, to calculate total payroll costs, you simply add up all the direct and indirect costs involved in compensating your employees.
What types of costs are included in the payroll account?
The payroll account includes all expenses involved in compensating a business’s employees. This includes costs like wages, Social Security taxes, and the administrative costs to maintain personnel records.
