How to Calculate Payroll Expenses: A Guide for Small Businesses

You may be surprised to learn that payroll expenses are an extra 25-35% on top of a worker’s base pay. For some small businesses,this extra cost can be the difference between making and losing money. But with effective payroll processing, you can manage these expenses more efficiently.

This guide will show you how to figure out your real payroll costs and add them up the right way. You'll learn how to avoid expensive payroll mistakes and how tools like Homebase can make payroll easier by doing the math for you.

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What are payroll expenses?

Payroll expenses, also called payroll costs, are the total costs of maintaining your workforce. From wages and salaries to every additional financial obligation that comes with employing people—understanding your true payroll expenses helps you keep an accurate budget and a profitable business.

Why is it important to calculate payroll expenses accurately?

Messing up payroll leads to more than just dealing with angry employees and paying hefty government fines. When your calculations are off, it throws off everything from your labor percentage to your prime costs. You're looking at:

• Surprise overtime charges that wreck your labor budget
• Time clock rounding errors that add up to thousands annually
• Missed break penalties that could have been avoided
• Tax headaches from misclassified employees during busy seasons

That's why a lot of small businesses use systems like Homebase. It catches those costly mistakes before they happen, like when someone's about to hit overtime or when labor costs are trending too high for your sales volume.

What are considered payroll expenses?

Now that you understand what payroll expenses are, let's break down exactly what goes into them. Think of payroll expenses like layers. The basic wage is just the first layer, and there are several more on top that make up the full cost of employing someone. Let’s break them down:

Salaries and wages

Base pay comes in two forms: salaries and hourly wages. Salaried employees, like store managers and supervisors, earn a fixed amount each pay period (at least $35,568 annually in 2024 to be exempt from overtime). Their pay stays the same whether they work 40 hours or 50 during busy seasons. Payment starts off as gross pay, which is the total amount, but after deductions like taxes and benefits becomes net pay, which is what your employees take home.

Hourly employees earn based on their time worked, with rates varying by position and shift. A server might earn $15/hour plus tips, while a shift lead makes $22/hour, and everyone gets overtime pay for hours over 40 in a week.

Employer payroll taxes

Beyond wages, every employer has to pay a list of mandatory payroll taxes. These taxes typically add about 10% to your total payroll costs and must be paid according to strict government deadlines. 

Federal income tax is a significant component of these payroll taxes, requiring accurate withholding and reporting to the IRS. While tools like Homebase calculate and file these automatically, it's important to understand what you're paying for.

• FICA (Social Security and Medicare): The employer's matching portion of these retirement and healthcare programs that all employees pay into.
• FUTA (Federal Unemployment Tax): A federal tax that funds unemployment benefits, with a reduced rate when you pay state unemployment tax.
• SUI (State Unemployment Insurance): State-specific tax that varies based on your industry and claims history, funding state unemployment benefits.
• State and local taxes: Additional payroll taxes that vary by location, like disability insurance in certain states.

Benefits

Employee benefits are optional but strategic payroll expenses that can significantly impact recruitment and retention. While not required by law (except for mandatory sick leave in some states), offering competitive benefits is the most important factor that helps you attract and keep great employees.

• Health insurance: Often the most expensive benefits, typically costing employers several hundred dollars per employee monthly.
• Retirement plans: Usually 401(k) plans with optional employer matching.
• Paid time off: Including vacation, sick leave, and holidays.
• Additional benefits: Life insurance, dental and vision coverage, employee discounts, or meal allowance.

Bonuses and overtime penalties

Extra compensation like bonuses and overtime can quickly add up, especially during busy seasons. Overtime kicks in after 40 hours in a workweek, requiring time-and-a-half pay for hourly employees. And don't forget about compliance penalties. Missing required breaks or miscalculating overtime rates can lead to expensive violations.

• Overtime pay: Time-and-a-half for hours over 40 in a workweek.
• Break penalties: Fines for missed meal periods or rest breaks.
• Holiday pay: Extra compensation for working on holidays.
• Performance bonuses: The extra pay that has to be factored into overtime rates.

Best payroll software and tools for calculating payroll expenses

With all these payroll expenses to track, using the right payroll software is the most important factor in making sure everything’s accurate and compliant. Here's a look at the most popular options for small businesses, especially in retail, restaurants, and service industries.

Homebase

Homebase started as a scheduling tool for small businesses but has evolved into a complete payroll and team management platform. It offers comprehensive payroll processing services, which include software, online services, processing fees, and support from payroll specialists. The payroll service integrates with the free scheduling and time tracking tools, making it super valuable for those small businesses with hourly workers and varying schedules.

Pricing is straightforward: after a free 14-day trial, payroll starts at $39/month base plus $6 per employee. This includes all tax filings, direct deposit, and integration with the scheduling tools. The basic scheduling and time tracking features remain free for single-location businesses.

Consider Homebase if:

• You run a shift-based business: Homebase is ideal for businesses like restaurants, retail, and service industries that rely on hourly employees and shift scheduling.
• You need automatic tax filing: Homebase handles tax filings and ensures compliance with federal and state regulations.
• You want to integrate payroll with employee scheduling: It integrates payroll with your scheduling system, making it easier to manage both.

Gusto

Gusto is popular with small businesses that need more advanced HR features. While it doesn't include scheduling tools, it offers robust benefits administration and HR support that growing businesses often need.

The pricing reflects its broader focus: plans start at $40/month base plus $6 per person. Higher tiers add features like team management tools and dedicated HR support, but can get expensive for larger teams. Gusto's contractor pricing starts at $6 per contractor monthly, making it flexible for businesses with mixed workforce types.

Consider Gusto if:

• You need HR features: It offers a full HR suite, including employee benefits, compliance assistance, and time tracking.
• You have both employees and contractors: Gusto allows separate payment management for both.
• You want scalability: Gusto offers different pricing tiers to accommodate your growing team.

QuickBooks Payroll

QuickBooks Payroll makes the most sense if you're already using QuickBooks for accounting. It's built to work seamlessly with QuickBooks' accounting software, which can save time on bookkeeping and tax preparation.

Pricing starts at $45/month plus $5 per employee, but most small businesses need the higher tiers for features like same-day direct deposit and tax penalty protection. The premium features can push costs up quickly.

Consider QuickBooks if:

• You need accounting integration: Direct sync with QuickBooks accounting saves double entry.
• You file taxes in multiple states: Built-in support for multi-state tax filing.
• You want automated tax forms: Automated W-2s, 1099s, and tax form filing.

Wave Accounting Payroll

Wave Payroll is the budget-friendly option, especially appealing if you're already using Wave's free accounting software. It handles the basics of payroll but doesn't include some of the advanced features you'll find in other platforms.

Pricing is simple: $20/month base fee plus $6 per employee in tax service states, or $35/month plus $6 per employee in self-service states. There's no contract required, and you can pause the service during off-seasons.

Consider Wave if:

• You're budget conscious: One of the most affordable payroll options available.
• You use Wave Accounting: Free accounting software integration.
• You need basic payroll: Direct deposit, tax forms, and employee self-service portal.

Expensify Payroll

Expensify started as an expense management platform but now includes payroll features that work alongside their expense tracking tools. It's unique because payroll comes included with their expense management subscription, making it cost-effective if you need both services.

Pricing is based on their expense management plans, starting at $5 per user monthly. The payroll feature is included at no extra cost in their corporate plans, though you'll need their collect or control plans for full functionality.

Consider Expensify if:

• You manage lots of expenses: Perfect for businesses that need robust expense tracking with payroll.
• You want all-in-one pricing: Payroll comes included with expense management.
• You need reimbursement tracking: Seamlessly handles expense reimbursements through payroll.

How to calculate payroll expenses step-by-step

If you're running a restaurant, retail store, or service business, payroll isn't just another task on your to-do list. It's the lifeline that keeps your team showing up and your business running smoothly. But between managing shift swaps, tracking overtime, and staying compliant with labor laws, calculating payroll expenses can feel like you're trying to juggle plates during the dinner rush.

To accurately calculate net pay and gross pay for your team, here’s a practical, step-by-step breakdown that’ll help you master your payroll calculations and avoid costly mistakes.

1. Gather your time and attendance data.

First things first. You need accurate records of who worked when. Whether you're running weekly or bi-weekly payroll, collecting clean attendance data is really important. This means tracking:

• Clock-in and clock-out times
• Break periods (especially in states with strict meal break laws)
• Time off and sick days
• Overtime hours
• Tips collected (for tipped employees)

Pro tip: Ditch the paper time cards. They're a recipe for disaster with smudged entries and math errors. Modern time tracking tools like Homebase automatically flag missed breaks, early clock-ins, and approaching overtime, saving you from expensive compliance headaches down the road.

2. Calculate base pay and premium wages.

Next, you'll need to calculate what you actually owe each employee. For hourly workers, this means:

• Regular hours × hourly rate
• Overtime hours × 1.5 × regular rate
• Shift differentials (like +$1/hour for closing shifts)
• Service charges or auto-gratuities
• Performance bonuses or commissions

For salaried employees (like your managers), divide their annual salary by your pay periods. Remember that even salaried employees might be entitled to overtime if they make less than $35,568 per year.

Pro tip: Homebase's scheduling tool shows you exactly how much each shift will cost as you build it, factoring in overtime rates and wage premiums automatically. You'll get alerts if someone is approaching overtime or if your labor costs are trending above target for the week.

3. Calculate employer taxes

This is where things get tricky for many business owners. For every employee on your payroll, you're responsible for:

• Social Security tax (6.2% of wages)
• Medicare tax (1.45% of wages)
• Federal unemployment tax (FUTA) - usually 0.6% on the first $7,000
• State unemployment insurance (rates vary by state and claims history)
• Workers' compensation premiums
• Any local payroll taxes

For example, if you have a server making $500 weekly, you'll need to budget about $38.25 just for Social Security and Medicare taxes. Multiply that across your whole team, and it adds up fast.

Pro tip: Missing tax deposits can result in penalties up to 15% of the amount due. Homebase handles all tax calculations and payments automatically, ensuring you never miss a deadline, even during your busiest seasons when you're focused on running the floor.

4. Sum everything up and double-check your math.

This is where all those little details come together and where many business owners discover hidden costs they didn't expect. Your total payroll expense needs to include:

• Gross wages (regular + overtime + premium pay)
• All employer taxes (FICA, FUTA, state taxes)
• Benefits contributions
• Any other compensation (bonuses, commissions, etc.)

For example, if you've got a full-time server making $15/hour ($600/week), your actual weekly cost might look more like:

• Base pay: $600
• Employer taxes (roughly 10%): $60
• Health insurance contribution: $75
• Portion of workers' comp premium: $15
• Total weekly cost: $750

That's 25% more than their base pay, and that's before any overtime or shift premiums kick in.

Pro tip: Homebase's payroll dashboard gives you a complete breakdown of your true labor costs, including all taxes and deductions. You can see costs by department, location, or employee type, making it easy to spot trends and make better scheduling decisions. Plus, all your payroll reports are stored securely in the cloud, so you're always ready for tax time or audits.

Common mistakes to avoid with payroll expenses

Running payroll for a busy restaurant, retail store, or service business is like walking through a minefield of potential mistakes. One wrong calculation during a holiday rush or a missed deadline during your peak season can trigger expensive penalties and upset your employees. And failing to properly manage taxes withheld from employee paychecks can lead to significant issues with the IRS.

Here are the most expensive–and common–payroll mistakes we see small businesses make, plus how to protect yourself from them.

1. Misclassifying employees as contractors.

Classification mistakes get expensive fast, and they're not just about employees vs. contractors. Even business owners often misclassify themselves, leading to tax headaches down the road. Just ask the coffee shop owner who had to pay $25,000 in back taxes for misclassifying their baristas.

The IRS looks at factors like:

• Whether you control their schedule and how they do the work.
• If they're free to work for other businesses.
• Whether they use their own tools/equipment.
• How they're paid (hourly vs. by project).

This gets especially tricky for family businesses where relatives help out, or when you're first starting out and wearing multiple hats as both owner and worker.

Pro tip: Homebase helps you properly classify workers from day one with built-in employee type settings and compliance alerts. Plus, our HR Pro advisors can review your classifications to keep you safe from expensive mistakes.

2. Miscalculating overtime pay.

Overtime isn't just base pay × 1.5. You need to include non-discretionary bonuses, shift premiums, and other incentive pay in the regular rate calculation. 

Common mistakes include:

• Forgetting to include tips in overtime calculations.
• Missing daily overtime requirements in states like California.
• Not paying overtime when employees work across multiple locations.
• Incorrectly calculating overtime for employees with multiple pay rates.

Pro tip: Homebase automatically factors in all pay types when calculating overtime rates and alerts managers before employees hit overtime thresholds.

3. Missing tax deadlines and deposits.

"But I was too busy with Restaurant Week" won't fly with the IRS. Tax penalties stack up fast. We're talking up to 15% of the underpayment, plus interest. And that's before any state penalties kick in. 

Watch out for:

• Federal deposit deadlines varying based on your size (monthly vs. semi-weekly)
• State unemployment tax due dates (different from federal)
• Quarterly filing requirements
• Year-end W-2 and 1099 deadlines
• Special state requirements (like California's DE9 reporting)

The worst part? Missing one deadline often snowballs into missing others as you try to catch up during busy seasons.

Pro tip: Homebase automatically handles all your payroll tax deposits and filings based on your specific business needs and location. We track every deadline and guarantee on-time, accurate payments. If we mess up, we'll pay the penalties ourselves.

4. Missing deductions and benefits in payroll calculations.

Think payroll is just about hourly wages? Those "little extras" like health insurance and 401(k) matches can throw off your whole payroll if tracked incorrectly. 

Here's what commonly gets missed:

• Health insurance premiums (both employer and employee portions)
• 401(k) matching contributions
• Garnishments and child support orders
• Uniform deductions and meal credits
• Transit benefits and parking allowances

The tricky part is timing these deductions correctly. Take health insurance: If an employee starts mid-month, you need to prorate their premium deduction. Or if someone terminates early, you might need to refund part of their deduction. Get it wrong, and you're either shorting your employees or your business.

5. Using outdated tax rates and regulations.

Tax laws change faster than a seasonal menu. In 2024 alone, we've seen changes to:

• Minimum wage rates in 22 states
• Overtime exemption thresholds
• Paid leave requirements
• State unemployment tax rates
• Local tax jurisdictions

Miss one change and you're looking at back pay, penalties, and a lot of paperwork to fix it.The challenge? These changes often happen at different times:

• Federal changes typically start January 1.
• State changes might kick off on July 1.
• Local changes can start any time.
• Industry-specific changes (like tip credit rules) have their own timings.

Pro tip: Homebase automatically updates all tax rates and regulatory changes in our system. Our compliance team monitors changes across federal, state, and local jurisdictions, so you never have to worry about missing an update. Plus, we'll alert you about upcoming changes that might affect your payroll costs.

Reporting payroll expenses: Stay audit-ready without the headache.

Now that you know how to calculate payroll expenses correctly and avoid costly mistakes, let's talk about keeping your records organized for your payroll reports. Keeping track of payroll tax journal entries is crucial for your financial bookkeeping. Because the only thing worse than making a payroll mistake is not being able to prove you didn't make one when the auditor shows up.

Smart reporting isn't just about satisfying the IRS, it's about having the data you need to make better business decisions. Your payroll reports tell you when labor costs are creeping up, which locations are managing overtime best, and whether your staffing matches your sales patterns. Most small businesses we work with keep these essential reports ready:

• Payroll summary reports (wages, taxes, and deductions)
• Tax liability reports (federal, state, and local)
• Labor cost analysis (percentage of sales, overtime trends)
• Employee earnings records (for loan applications and audits)
• Benefits and deductions reconciliation
• Quarterly and annual tax returns

The key is having these reports accessible when you need them, whether it's for your monthly P&L review, a surprise audit, or a bank loan application. That's why Homebase automatically generates and stores all your payroll reports in the cloud. You can quickly pull up any report you need, spot labor cost trends, and make better scheduling decisions. 

Plus, when tax season rolls around, you'll have everything your accountant needs in one place.

Streamline your payroll expenses: Next steps for success

Running payroll doesn't have to be the most stressful part of managing your business. We've covered everything from basic calculations to common pitfalls, but what really matters is having the right system in place to handle your payroll expenses accurately and efficiently.

Think about it: Every hour you spend double-checking tax calculations or fixing timecard errors is an hour you could spend growing your business or training your team. That's why thousands of restaurants, retailers, and service businesses trust Homebase to handle their payroll expenses. Our all-in-one platform not only manages your payroll calculations ,but also helps control labor costs, ensures tax compliance, and keeps all your records organized.

Ready to stop worrying about payroll expenses? Start your free trial of Homebase today and join over 100,000 local businesses who've simplified their payroll process. Your team–and your stress levels–will thank you.

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