Are hidden payroll tax costs eating your profits?

By Rhonda Campbell
It’s not a long bet to say that you knew little about payroll tax and other payroll expenses when you were an employee. Don’t think so? Let’s go back.

“You’ll be paid $60,000 a year.” Remember the first time you were hired into a job and given your five-figure salary? It’s a good guess that the salary was appealing, quickening your heart beat and putting a wide grin on your face. It probably took months, perhaps years, for the wage to start to feel limited. Talk about motivation to spend all your efforts (i.e. project planning, time management, commuting) to help make someone else earn 20 times or more than you do.

Let several years pass and don’t be surprised if you start thinking as if you’re underpaid, swinging the pendulum all the way from job appreciation to job denigration. Add in a demanding, impossible-to-please supervisor and you might believe that you could never get a sufficient piece of your employer’s payroll to compensate for the amount of energy you put into your gig.

Payroll tax costs quickly add up

Now that you’ve finally gotten your fill of burning the midnight oil to make someone else rich and have started your own business, you’re going to have to look at payroll tax and other payroll costs differently. If you don’t, you could legally be on the hook for payroll tax and employee salaries your bottom line can’t afford.

Hidden payroll tax and other expenses that could derail your budget vary, depending on the type of workers you hire. That shared, basic payroll costs that could sneak up on you include:

• Overtime payroll tax and hourly wages (To keep a good handle on these payroll costs, establish written policies that outline when workers are allowed to work overtime. For example, you could state that workers are only allowed to work overtime with written approval from their supervisor. Absent guidelines, you could spend $30,000 or more a year paying for only one workers’ overtime.)
• Bonuses (Factor in stock and cash bonuses you’re on the hook for before making job offers.)
• Federal and state unemployment insurance taxes (This varies by jurisdiction. However, depending on the size of your company, you could be responsible for paying a monthly or quarterly tax to cover unemployment costs for each worker on your payroll.)
• Social Security/Medicare payroll tax (Generally, only self-employed workers have to pay 100% of these costs out-of-pocket. As of 2013, the per employee Social Security tax employers were responsible for was 6.2 percent; Medicare payroll expenses were at 1.45%.)
• Payroll taxes that you’re required to pay for local and state governments, including short-term disability costs
• State Worker’s Compensation payroll tax
• Medical insurance
• Real estate expenses (If you operate a brick and mortar business, you’re going to have to cover the costs of each workers’ telephone, office space, utilities, etc. expenses while they’re at your place of business.)

Although these are not direct payroll expenses, again, depending on the type of business you operate, you might also be responsible for uniforms, new hire training and reorganizations. Of course, there’s the costs of recruiting new employees and the expense of relocating workers to different locations if your business moves.

Additional payroll costs

Each of these additional payroll costs are added to each worker’s basic pay. It’s these payroll expenses that many employees don’t see, especially in their bi-weekly paychecks. It’s these payroll tax costs that you likely overlooked when you were on the other side of the table, serving an organization as an employee instead of a business owner.

By keeping a record of these expenses and reporting them out to workers annually, you might be able to positively impact employee morale. For example, instead of showing employees their annual salary, show them their base salary, bonus, commissions (for workers who receive commissions), overtime, payroll tax that they and the organization pay and medical and retirement benefits.

Let employees see the total amount of money they are receiving from your organization. To control payroll tax costs, keep your eye on all expenses related to recruiting, training and paying employees by division, level and length of service. Maintain a detailed budget or use payroll software to track all payroll expenses. This is an area that you simply cannot afford to slack on.