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What Are Payroll Costs?

Expenses relating to the preparation of payroll are referred to as payroll costs.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 11 December 2014
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Payroll costs are expenses that are associated with the preparation and distribution of a payroll as part of the compensation to employees for their services. There are several key elements that are classified as costs of payroll in addition to the actual amount of net pay that is forwarded to the employee. Some of these have to do with the labor and materials used in the preparation of the payroll, while other costs have to do with complying with government regulations regarding withholding. Additional costs such as supplying incentives and benefits to employees are also considered to be examples of payroll costs.

The most basic payroll cost is the amount of cash that is paid to the employee. This amount consists of what is left after any necessary withholding has been deducted from the employee’s salary or wages. The figure may also include any commissions or bonus pay that is due the employee, less any taxes or other withholding that may apply.

Along with the net pay provided to the employee, payroll costs also include any taxes withheld on behalf of the employee. These taxes may include federal, state, and local taxes, depending on the tax structure that prevails within the area where the business is located. Companies are normally charged with calculating the amount of employer taxes that must be submitted along with the amounts withheld for employees, using formulas supplied by the applicable tax agencies.

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Another example of payroll costs has to do with the health and pension plans that are provided to employees as part of their compensation. In some situations, the cost of health insurance is shared with the employee, with a percentage of the total costs withheld from the employee’s gross pay, and the remainder paid by the employer. The same approach may be used in funding pension plans, with both the employee and the employer making contributions each pay cycle. There are businesses that absorb the entire cost of providing health insurance, pensions, and other benefits, choosing to not withhold any portion of the cost from the employee’s pay.

Along with various withholdings and disbursements, payroll costs also include the actual cost involved in preparing and maintaining the payroll records. The cost of labor involved is an example of these additional costs. In the event that payroll functions are outsourced, any fees assessed by the payroll service are considered to be payroll costs. Today, many companies choose to utilized a payroll processing service as a means of keeping the overall costs of payroll as low as possible.

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