Every dollar counts when you’re running a small business. Chances are you’re already stretching every penny to grow your business, and paying for an inefficient payroll provider (or draining time processing payroll in-house) can quickly become a profit-killing nightmare.
Keeping your payroll costs within a healthy range is critical to staying in the black. Not knowing what percentage payroll should be for your small business or how to get–and keep–yours in the standard range can have serious consequences many small businesses don’t recover from.
This article answers the question, what percentage should payroll be for a small business? We’ll also cover some industry averages and practical tips to help you better regulate your business’ payroll now and in the future.
What Percentage Should Payroll Be for a Small Business: The Averages
When it comes to payroll, one number that you should keep an eye on for your small business is payroll percentage as it relates to your total revenue. This ratio gives you a quick snapshot of how much you're paying out to your team, contractors, and other essential roles compared to the sales you're bringing in.
Overall, most small businesses have a payroll percentage of anywhere from fifteen to thirty percent of revenue. But there's a significant variation between different industries. For example, trucking payroll can top sixty percent of total expenses. On the other hand, highly automated industries like factories or product production have a far lower range since they use more machines and less staff per dollar earned.
Small business owners should also be aware of the impact of scaling on payroll costs. Payroll tends to eat up more of the pie for newer and smaller companies, then trends down as you grow and can spread out staff costs across more sales. Experts recommend keeping payroll expenses under thirty percent of total revenue as a general guideline.
Suppose you see your percentage regularly creeping up past forty percent. In that case, that's usually a red flag that your costs are getting unsustainably high (unless you know you do business in a heavy-labor industry and account for it).
Partnering with a trustworthy payroll provider can help benchmark your payroll against the standard for your industry and find the right balance to keep things stable as your business grows. So, what percentage should payroll be for a small business? Knowing the answer can save you from nasty surprises down the line.
4 Tips to Better Regulate Payroll for Your Small Business
Keeping payroll costs in check is essential to managing your small business in a healthy way. But knowing what levers to pull when that precious percentage rises can be tricky. These four tips will help you regulate payroll even through the ups and downs of business growth.
Review payroll percentage frequently
Reviewing the numbers consistently when keeping tabs on your payroll-to-revenue ratio is wise. Keeping a close eye lets you quickly catch any anomalies and take corrective action before things get out of hand.
The frequency can depend on what works best for your payment schedule. Many small businesses opt for monthly reviews. Others find quarterly checks are enough to stay on track. Whatever you choose, ensure you know the legalities around pay frequency for tax filings and compliance in your state. Though the IRS recognizes weekly and semi-monthly payroll, other specifics can vary by location.
Improve internal efficiencies
If you notice your payroll percentage creeping upward, the knee-jerk reaction can often be bringing on more staff to help lighten the load. But take the time to look for opportunities to streamline processes, automate tasks, and improve employee productivity before you pull the trigger on hiring. There’s more than one way to save costs, and increasing your operational efficiency is typically cheaper than adding to your headcount.
Start with a hard look at where workflows seem clunky or redundant. Do you have bottlenecks causing unnecessary slowdowns? Have manual processes you can better optimize? Are your team’s skills being used in the highest impact way?
Once you identify these efficiency gaps, you can explore solutions like updating systems, redistributing responsibilities, adjusting schedules, or providing more training. Equipping your existing team to work smarter recaptures capacity and naturally brings that payroll ratio back into balance.
Automate when possible
Speaking of automation, one key efficiency play is looking at where technology tools and software could substitute simple tasks that aren’t best for your team’s time - like data entry or inventory management. Solutions like scheduling software, e-commerce platforms, payment processing, and CRM systems can all reduce the staff hours needed to do manual activities.
Investing in the right tools tailored to your business is the simplest way to create meaningful cost savings and hone the percentage payroll should be for your small business. For example, ConnectPay’s proprietary payroll software can run and process payroll automatically for salaried employees. Removing this manual work from payroll frees up your team’s bandwidth for higher-value activities.
Other smart integrations include using a point-of-sale system to replace cash registers, implementing an applicant tracking system to screen recruits, or building an online booking system versus phone scheduling.
Be strategic if you need to make changes
If payroll costs are eating up more revenue than they should, you might swing the other way and be tempted to make fast, across-the-board cuts to bring your payroll percentage down. These sweeping reactions, like company-wide layoffs, freezing raises, and holiday bonuses, can crate morale and productivity.
Instead, make careful, targeted moves to reduce costs and minimize disruption. Can staff or hours be selectively reduced in non-essential areas? Consider postponing pay raises in favor of retention bonuses for key talent.
Or, rather than immediately granting permanent salary hikes, consider temporary incentives like higher commission rates to keep your payroll flexible long-term. Whatever you choose, the goal is to keep your top players motivated while trimming expenses where it won't dramatically slow down your operations.
What Percentage Should Payroll Be for a Small Business? Find Your Ideal Percentage With the Right Payroll Partner
Through this post, we’ve examined the ins and outs of payroll costs, helping to answer the critical question: what percentage should payroll be for a small business?
Whether your payroll falls within the standard range or this article has made you realize it’s time for a change, the right payroll partner can help you consider the percentage of payroll for a small business.
Curious about what our payroll services can do for your business? Schedule a free Payroll Tax and Compliance Review today! We’ll discuss your biggest payroll blockers and provide suggestions and solutions. Are you ready to simplify payroll?