6 Fair Ways to Reduce Payroll Costs

Key points about how your business can reduce payroll costs:

  • Payroll-related costs are usually a business’s largest expense.
  • To make your payroll more cost-effective, you can optimize employee schedules, set overtime alerts, track reimbursements, and more.

Between compensating employees, fixing errors, and managing payroll itself, payroll-related spending is usually a business’s largest expense. You can reduce unnecessary payroll expenses without lowering salaries or laying off employees.

If you’re looking for ways to reduce payroll costs without negatively impacting your employees, check out the tips below:

6 Ways to Reduce Payroll Costs

1. Pay employees according to time worked, not time scheduled

When you calculate how much to pay your employees, do you use their scheduled hours? Or do you use the amount of time they actually spent working? Using an employee’s scheduled hours is often easier than tracking their actual time worked. However, if you use this method, you could be spending more money than necessary. 

Employees often arrive late, leave early, schedule personal appointments, and take breaks or extended lunches during the workday. If you pay your employees according to their scheduled hours, you don’t account for any of these gaps. As a result, you end up paying them for time when they aren’t actually working.

This doesn’t mean that your employees aren’t allowed to take breaks, leave early, or do anything else permitted in your company policy. After all, no one is completely focused throughout the entire work day. It just means that you may want to track employee time more accurately and make sure employees record the instances when they’re not actively working.

If you decide to pay employees according to time worked instead of time scheduled, be sure to communicate this change and stay consistent.

2. Manage overtime

Sometimes, it’s unavoidable for employees to accrue overtime. It may be a particularly busy week, or they may have a large new project to work on. But in many cases, overtime happens because an employee stays a few minutes late each day. Those small bits of time add up, and before you know it, they qualify for an hour or two of overtime for the pay period.

To reduce unnecessary overtime, make sure employees and managers know when overtime pay kicks in. If managers know an employee is approaching overtime, they can try to schedule another employee instead.

If you use time tracking or HR software, you may be able to set automatic alerts that notify employees and managers when overtime is approaching. These notifications can reduce overtime hours and, as a result, reduce the amount of overtime pay you have to provide.

3. Minimize overstaffing

Without the right tools, employee schedules can be difficult to coordinate. Understaffing is common – but so is overstaffing. When overstaffing occurs, you end up paying for labor you don’t need. With deliberate scheduling, though, you can avoid paying for these extra shifts. 

As you create employee schedules, make sure you don’t have more coverage than you need. When you’re finished, share the finalized schedules with your employees well in advance. This gives you time to make adjustments and avoid costly last-minute changes. If you need some extra help, scheduling software can help you easily optimize schedules and prevent overstaffing.

4. Track expense reimbursements

More than 50% of travelers fail to follow their company’s policy when booking business travel. This means that they may book flights outside of your preferred airline, join exclusive airline lounges, or stay in fancy hotels. In some cases, they may even purchase things like alcohol and entertainment, expecting you to reimburse them. If you don’t carefully track reimbursable expenses, you could be paying your employees for failing to follow your company policy! 

When your employees use company funds, make sure they’re using the money for business-related purposes. Review their receipts. Are they following your company’s business expense policy? What goods and services are they expensing? How much did they spend on each item? Are they asking to be reimbursed for more than your policy allows?

Most businesses reimburse expenses directly through payroll. Because of this, limiting unnecessary expense reimbursements will also reduce your payroll-related costs.

5. Lower payroll taxes

Payroll taxes are taxes imposed on employee wages. These taxes help finance Social Security, Medicare, and unemployment programs. You can minimize your payroll tax amount by:

Using an accountable plan to reimburse employees

When you use an accountable plan to reimburse employees, those reimbursements are exempt from the employee’s gross income. As a result, they are not taxable. To have an accountable plan, you must meet all three of the following criteria:

  1. An employee incurs an expense that is business-related or paid “while performing services as an employee” of your organization.
  2. The employee documents the amount, time, place, and purpose of the expense and submits them to you within a reasonable amount of time.
  3. The employee returns any excess reimbursement to you within a reasonable amount of time.

Supporting employee compensation with fringe benefits

Fringe benefits are non-wage-related perks that allow you to supplement employee compensation. Fringe benefits are considered a form of compensation but are usually exempt from payroll taxes. Examples of fringe benefits include life and disability insurance, tuition reimbursement, retirement plan contributions, and fitness center discounts.

The type of fringe benefit you offer will determine whether or not it’s taxable. Check relevant guidance and legislation for taxation requirements and other regulations.

6. Automate payroll with an HRIS

If you process payroll by hand, the various laws and regulations can quickly become complicated. Payroll errors aren’t uncommon and they can be expensive to fix. If you use payroll software, though, you don’t need to worry about payroll errors, penalties, and other potential expenses. Payroll software uses automated tools to help ensure accuracy and compliance each pay period. 

In fact, according to the American Payroll Association, automating payroll reduces manual paycheck errors, which can then reduce costs related to payroll by as much as 80%. Automation is one of the easiest ways to reduce payroll costs since it saves you money and time.

How SentricHR Can Help

SentricHR’s complete software solution for payroll, time tracking, and everything HR makes it easy to control payroll-related costs. We help you automate your payroll processes, set overtime alerts, schedule employees, manage expenses, reduce payroll errors, and more. 

To learn more about how SentricHR can help you reduce payroll costs, schedule a demo today!


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