Ask an Accountant: Pt 2

Retail businesses often operate with tight margins and rely heavily on sales volume. You may offer several sweet extras to your employees so you can stay competitive in the job market or comply with relevant state laws. Besides national wage estimates, you must also consider the minimum wage laws.

Track all your Financial KPIs in one place

• Skilled workers and compliance with safety regulations contribute to higher payroll costs.
• Payroll percentage is a key financial metric reflecting a business’s total expenditure on employee compensation relative to its revenue or operating costs.
• For example, a software company might have a lower payroll percentage than a restaurant due to differences in their business models.
• They reduce mistakes, boost productivity, and help ease tension between teams with centralized information and transparency.

Other important aspects to factor in are the benefits, taxes, sick days, insurance, vacation pay, etc. Suppose you need some help to get the proper percentage for your payroll expenses and be educated about managing these costs. In that case, payroll consultants may assist you in identifying the number percentage that should go to your employees’ salaries.

What Percentage of Revenue Should Be Spent on Payroll?

Training and development programs can enhance employee skills and reduce errors, leading to improved efficiency and potentially less need for additional hires. A well-balanced ratio helps ensure that payroll expenses are sustainable and aligned with the company’s revenue performance. Industries with higher automation or significant capital investments may exhibit lower payroll percentages.

Easy-to-use payroll systems for every role

Expected revenue is the total amount of money a business anticipates earning from its sales or services over a specific period. This projection isn’t just a random number; it’s a crucial element for sound financial planning, creating realistic budgets, and gauging the potential success of your projects. Without a clear understanding of your expected revenue, it’s difficult to make informed decisions about hiring, investments, and overall business strategy.

Spend

Net sales are derived by subtracting returns, allowances, and discounts from gross sales. Gross sales represent total revenue before deductions, while net sales show the money a business truly keeps after these reductions. For Social Security, employers contribute 6.2% of an employee’s wages up to an annual wage base limit, which is $176,100 for 2025. For Medicare, employers contribute 1.45% of an employee’s total wages, with no wage base limit. These combined Social Security and Medicare taxes are often referred to as Federal Insurance Contributions Act (FICA) taxes.

Adopting technology and automation tools for repetitive tasks, such as automated invoicing, inventory management, or customer service chatbots, can significantly reduce manual labor. Pursuing revenue growth without a proportional increase in payroll lowers the payroll percentage. Evaluating each new hire to ensure they are essential and directly contribute to revenue generation or operational efficiency prevents unnecessary payroll expansion. Payroll as a percentage of revenue varies across different industries due to their unique operational models and labor demands.

Another major expense for Early Childhood Education businesses is occupancy or rent. If you don’t own your childcare facility, your monthly mortgage or lease payment represents another significant percentage of your total income revenue. The employee vs. revenue ratio, also known as the revenue per employee ratio, is a financial metric formula that measures the revenue generated by a company per employee.

If you do offer sales commissions, you can track individual sales performance and calculate commissions accordingly. This will save you a lot of time and reduce the possibility of errors. On one side, you have your team’s wages, which are crucial to keeping them motivated and committed.

These typically involve salaries, hourly wages, commissions, bonuses, and overtime pay. Beyond direct compensation, payroll costs also include employer-paid expenses such as payroll taxes and employee benefits. For example, if a company’s payroll is $1,000,000 and its revenue is $5,000,000, the ratio would be 20%.

For example, sophisticated oil refineries and laboratories might have labor costs of less than 10 percent, while restaurants have an average around 30 percent. In the retail industry there is generally a higher labor cost from around 15 to 20 percent. Service-based industries, where your employees are your primary cost, have a percentage as high as 50 percent. In general, the safe zone for most type of businesses is between 15 to 30 percent. Employee retention initiatives can also lower payroll costs by reducing expenses related to recruitment, hiring, and training new staff.

• For more information on HubiFi’s pricing and how our solutions can benefit your business, visit our pricing page.
• These averages provide context, helping a company understand its standing relative to peers.
• Base wages and salaries refer to the regular pay you offer your team members—as stated in their employment contracts.
• And for companies with a global presence, the right platform helps simplify regional compliance, too—so Payroll teams aren’t managing risk on their own.
• Most businesses should shoot for salaries in the 30 percent to 38 percent range, according to Second Wind Consultants.

Calculating what percentage of business income should go to wages is vital for keeping business afloat and what percentage of your business should be payroll not drowning in their own overheads. Determining what percentage of your revenue should be spent on salaries is one of the most important decisions for your business. If the percentage is too large, you risk running out of money for other expenses.

Nonpayment of debt may lead creditors to increase finance and other charges or undertake collection activity, including litigation. Some industries, particularly labor-intensive fields, require more employees to operate and drive revenue. For example, a “good” ratio for the restaurant industry might be 25% – 40%.

However, if you want to hire talented individuals who know their stuff, you must at least offer competitive pay. Let’s check out payroll to revenue ratio benchmarks for different industries. In construction, you usually have a payroll percentage of 20% because you rely on skilled workers that require safety training. In addition, you might also need to cover their per diem travel expenses. With product, marketing, and payroll costs, you might often feel like you’re biting off more than you can chew. While there is no blanket standard for how much each business should spend on payroll, considering some guidelines can help business owners determine whether they are on the right track.