Like most organizations, labor costs represent a large majority of total spend - as much as 70% in some industries. This includes gross wages, employer taxes (federal and state) as well as benefits (such as insurance and 401(k)). Given the significance of labor costs to an organization, it’s quite surprising that many budget owner's project labor costs using a simple gross pay multiple (1.1x - 1.3x of gross salary/wages). While this simple, shortcut method may suffice in crunch times or for an organization that has a small headcount, the discrepancies that exist for actual versus projected labor costs become extremely material as headcount and an organization grows.
What’s even more surprising is the fact that although estimating employer payroll tax liability may seem like a black box, the data that’s needed is actually publicly available. Federal Medicare and social security tax rates are available, as well as the wage caps and surplus tax rates. Even more, state unemployment insurance tax rates (and administrative fund fees, if applicable) are also widely available - oftentimes compiled on a tax site.
After experiencing the pain points of projecting payroll spend ourselves at Trace, we started to dig deeper to determine what could be done to project our payroll spend on a more granular level. After compiling employer tax liability rates on a state and federal level, we created a payroll spend model that eliminates the ambiguity of payroll budgeting. Not only do we use this model internally, but we wanted to give it free to our Mobilize community to help finance teams manage their budgets on a more accurate level.
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First, let’s break down what actually goes into employer payroll costs:
Next, identify what information is needed for your current employees and the employees you expect to hire:
The free payroll model we created relies entirely on manual inputs related to headcount, pay, department and other inputs aforementioned above. While extremely valuable in and of itself, for companies with a large headcount and constantly changing pay (due to raises, promotions, etc.), we realized this can create room for error.
In response to this, we modified our internal payroll model to layer on current employee payroll expense on top of projected payroll expense. The idea is to generate a current-employee payroll report from your payroll provider. At Trace, we use Zenefits’ Business Intelligence application that allows us to generate a custom payroll report containing only the fields we need (pay, employee type, department, etc.). We then feed this report into our payroll model, which is then used as the foundation of our payroll expense projection. The model then uses our manual, forecasted hire projections to layer on top of our existing payroll expense to calculate a total forecasted payroll expense. From a high-level perspective, it looks something like this:
Aside from the obvious (more accurate spend projections) what are a few overlooked benefits of more accurate payroll spend projections?
At Trace, we understand from firsthand experience that both understanding and controlling your organization's costs are crucial to its financial health and longevity. Whether your organization is going through a massive restructuring (See Restructuring or not, keep your house in order), wanting to have more transparency, clarity and control over purchase requests, approvals and managements (See Trace Platform), or wanting to project your payroll spend more accurately, we strive to provide finance teams with the tools and resources they need to be successful and meet their financial goals.
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