How to Budget Personnel

How to Budget Personnel

Last week we looked at How to Budget COGS, which utilized our per-unit sales budget to determine costs. This week we are tackling How to Budget Personnel. A personnel budget consists of more than just gross salary. For each employee, there are additional costs that only exist because they are part of your company.

When we tackle this budgeting section, we want to factor in all the associated expenses: salary, payroll taxes, medical benefits, retirement match, plus any additional perks that your company might offer.

How to Budget for Payroll Taxes

Budgeting Federal Unemployment Tax (FUTA)?

The 2020 FUTA rate is 6%. This applies to the first $7,000 earned by each employee. The FUTA cap is $420 for each employee ($7,000 x .06).

The good news is that most states qualify for a max tax credit of 5.4%, which reduces the FUTA liability to 0.6%. At that rate, the total amount most companies would pay per employee is $42 ($7,000 X .006). The U.S. Department of Labor maintains a list of credit reduction states here (currently, only the Virgin Islands is considered a credit reduction state).

Budgeting Federal Insurance Contributions Act (FICA)

FICA consists of Social Security, and Medicare contributions have an equal part employee and employer contribution amount. For Social Security, each part pays 6.2% of taxable wages up to a max pay of $137,700 (in 2020) per employee. For Medicare, it’s 1.45% each on all wages paid. A combined rate of 7.65% up to $137,700 then 1.45% for all taxable wages over the cap.

Budgeting State Unemployment Insurance (SUI)

Your SUI percentage is determined by your state, and each business gets its own rate. If you’re a new employer, you’re assigned a new employer rate until you have filed unemployment taxes. After a designated period of time, you’re assigned an experience percentage. It might be higher or lower than the new employer rate. Your rate depends on your reserve account balance. The less unemployment that your workers experience, the lower your tax rate will be.

Curious about your SUI rate? Find the letter your state sent you when you signed up to pay state unemployment taxes. If you can no longer locate the notice, contact the state agency responsible for the SUI rate.

Budgeting Employment or job-training tax rate

Some states have instituted taxes for employment or job-training. Since taxes such as these vary from state to state, you should work closely with your accountant or payroll service company to ensure that you are following all state tax rules.

Creating a personnel budget spreadsheet calculator

After you have compiled all of your payroll tax information, create a spreadsheet where you can compile your cost by employee. It should look similar to this:

Salary Calculator Image

Additional Employee Perks and Bonuses

Many employers like to offer additional employee incentives and you’ll want to make sure that your budget accounts for all of these. What you should be thinking about:

  • Do you offer transportation or commuter benefits?
  • How about monthly company happy hours?
  • Sometimes companies like to get a birthday card for employee birthdays, does yours?
  • The trendy thing in tech now is to offer weekly staff lunches.
  • And don’t forget about Quarterly or Annual Bonuses!

These are some of the many additional compensation benefits that employers offer, and each of these should be budgeted. I recommend creating additional tabs in the payroll calculator spreadsheet where you budget these by each type and roll it up into your budget as one additional line titled Add’l benefits.

Additional Benefit Calculation Image

Before you can tackle this section there needs to be rules or limits set for these accounts. For this example I’ve used the following assumptions:

  • The company pays all employees a 5% bonus based on coming within 2% of quarterly sales goals. Which you will want to incorporate into your salary calculation to ensure that you take into account the additional payroll tax and 401k match expense.
  • Once a month, the company will pay up to $200 for a group Happy Hour.
  • That over the course of the year, there is a discretionary $600 to spend on birthday and holiday parties.
  • For staff lunches, I estimated that once a week the company would spend $10/employee for a company lunch. I budget this amount over 52 weeks and divide that total by 12, then round up that total.

Bringing your Personnel Budget together

Finalize your personnel budget by bringing it together in a line summary spreadsheet.

For the salary expense I have combined the total salary costs for different departments, and presented the additional costs in their own summary lines, like so:

Personnel Budget Image

Keep an eye out for next week’s blog: Finalizing your Budget.

About the author: Jeanine Hall is the founder of Quant Solutions. As an entrepreneur herself, Jeanine is an active supporter of the startup/entrepreneur ecosystem and enjoys helping others manage and grow their business.

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