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6 Strategies to Reduce Payroll Costs

6 Strategies to Reduce Payroll Costs

Businesses spend about 1.25 to 1.4 times an employee’s salary on payroll costs, according to the Small Business Administration (SBA).

While these costs are a necessary part of running a business and maintaining staff, they can eat into revenue and hinder growth. Optimizing costs and improving labor efficiency is crucial.

Not sure where to start? Here are six effective strategies to reduce payroll costs.

6 Strategies to Reduce Payroll Costs

1. Leverage Tech to Automate Payroll Processing 

Many business owners personally handle their payroll, but research from Accounting.com found that 40% of these business owners spend 80 hours a year on accounting.

That’s a lot of time and energy spent on non-core tasks that aren’t driving growth and revenue.

Hiring an in-house payroll specialist can cost $55,000 a year or more in salary. 

Payroll software offers a happy medium by automating payroll processing, saving businesses time and money. 

Automated payroll solutions also reduce the risk of costly errors and ensure your information is accurate and centralized.

At Redmond Accounting, we help businesses leverage the power of payroll processing solutions like Gusto.

Get in touch with us today to learn more about how we can help reduce payroll costs and meet your software setup needs.

2. Optimize Staff Scheduling

An optimized employee schedule can help ensure that you’re never understaffed or overstaffed. When businesses are chronically understaffed, it can result in more overtime and higher employee turnover

Overstaffing leads to unnecessarily higher payroll costs (and overall costs).

Finding a balance is key. 

Bringing on temporary or seasonal staff at the right time can be a practical solution for many businesses that want to save on payroll costs without compromising quality.

For example:

  • A beachfront restaurant may hire seasonal employees in the summer to manage the influx of customers and avoid being overstaffed in the winter.
  • A customer support call center may schedule more staff in the days and weeks following a new product launch.

Just be mindful not to overdo it when optimizing. While reducing staff is an obvious way to cut payroll costs, it’s generally not a beneficial solution unless you are truly overstaffed.

When businesses are consistently understaffed, it can lead to burnout, stress, poor customer service and a higher employee turnover rate. 

Ultimately, it will cost your business more in the long run to operate chronically understaffed than to operate at optimal staffing levels.

3. Conduct Benefit Plan Reviews

When was the last time you reviewed your benefit plans? You may be spending more than necessary and not even realize it.

Reviewing your benefit plans regularly can help lower payroll costs while still ensuring that employees get the benefits they deserve.

When reviewing your current plans, consider whether they:

  • Fit your budget
  • Are cost-effective
  • Align with employee needs

If not, consider negotiating better rates or exploring alternative options.

How can you determine whether your benefits are aligned with employee needs? Ask them. Gather feedback every year so that you know which benefits to prioritize.

4. Review Employee Classification

Up to 30% of employers have misclassified at least some of their workers. If you fall into this category, you could face:

  • Back taxes
  • Penalties
  • Legal and court fees
  • State and federal fines
  • Additional overtime pay owed to affected employees

If you want to avoid these indirect payroll costs, take the time to regularly review your employee classifications to ensure they are accurate.

5. Take Steps to Reduce Employee Turnover

Employee turnover is costly. Some experts suggest that employee attrition costs about half the departed employee’s salary – sometimes more.

Taking steps to reduce turnover can also reduce payroll and labor costs overall. 

Each time you hire a new employee, you invest time and resources into training and onboarding them, but you’ll also incur other costs, like those associated with:

  • Enrolling new staff in benefits plans
  • Processing new information for payroll and HR
  • Meeting compliance deadlines and termination requirements

Talent retention can naturally reduce your payroll costs, but a low turnover rate will have other perks as well. 

  • Experienced workers are more likely to outperform new employees.  
  • Satisfied workers are generally more productive.

There are endless ways to reduce employee turnover, but a great place to start is with work/life balance. Encourage your team to take time off to avoid burnout. Consider offering flex scheduling to accommodate workers who have demanding personal obligations. Make sure that you’re offering opportunities for growth and development, so your team members feel satisfied in their work.

Focus on making your company a great place to work, and your team will be more likely to stick around. Understanding what your employees value can help you identify key areas to focus on and improve. 

6. Identify and Plug Payroll Leakages

Payroll leakage is unintended or unexpected spending caused by the mishandling of employee data. This can occur due to:

  • Not adhering to compliance guidelines
  • Manual input errors
  • Incorrect time tracking
  • Unfettered employee spending

Payroll automation software can help plug payroll leaks by:

  • Setting rules and limits on employee expenses
  • Ensuring compliance 
  • Implementing an approval system for validating employee hours
  • Using software for employee time tracking 

Final Thoughts

Taking steps to reduce payroll costs in a thoughtful and strategic way can help improve profitability without compromising employee happiness or performance.

Automation can go a long way in helping reduce many payroll-related costs. Finding the right solution is key.

We can help!

To learn more about payroll software setup or how we can help you with your accounting needs, schedule a consultation now!