What Percentage of Revenue Should Be Spent on Payroll?

What would your business be without the people who keep it running every day? After all, your team is one of your most valuable assets and is essential to driving sustainable growth and long-term success.

However, there’s no doubt that payroll is one of your biggest expenses each month.

So how can you determine whether you’re allocating the right amount? The answer isn’t always straightforward. 

By understanding what percentage of revenue should be dedicated to payroll, you can assess your company’s efficiency and guide your future hiring and promotion decisions. 

In this guide, you’ll learn how your business can strike that perfect balance between investing in your staff and protecting your margins.

What Is Payroll Percentage?

Payroll percentage, or payroll as a percentage of revenue, is a calculation of how much labor is costing your business over a given period of time. To find it, make this simple calculation:

Payroll Percentage = (Total Payroll ÷ Total Revenue) * 100

Total payroll expenses should include gross pay, overtime, vacation pay, insurance, retirement plans and any payroll-related taxes. Your accounting software can typically help you calculate this figure accurately. 

Striking the right balance can be challenging, but it’s key to running a healthy business. 

If your payroll percentage is too high, it may signal overspending or operational inefficiencies.

However, a too-low payroll percentage can also be an issue. It may indicate that your business is understaffed or struggling with retention.

What Is a Good Payroll Percentage?

There’s no one magic number that you should try to aim for when it comes to payroll percentage. It will differ drastically based on what industry you’re in, what your business model is and what stage of growth you’re experiencing. 

To give you a rough idea, here are some examples of average payroll percentages by industry:

• Retail: 10-20%
• Manufacturing: 12%
• Technology: 20-30%
• Professional and technical services: 40%
• Healthcare services: 40%

Even within industries, payroll percentages can vary widely. That’s why it’s important to do your research or consult with an expert to get a good sense of what you should be aiming for.

What Factors Influence Payroll Percentage?

On top of your industry, there are many factors that can influence how much of your revenue is going toward payroll, including:

• Sales volume and margins: A boost in revenue with high profit margins can lower your payroll percentage, while low sales or low margins can push it up.
• Type of labor: Part-time laborers who don’t receive benefits will naturally cost your company less than salaried workers.
• Market positioning: An upscale business that offers its clients a premium service may pay its employees higher wages.
• Project size: If you’re hiring contractors or temporary workers to complete a specific task, your labor costs will go up accordingly.
• Degree of automation: Industries like manufacturing allow a high degree of automation, while human-focused services require a full team of staff members.
• Specialization of staff: Highly trained employees with advanced degrees or certifications may bring significant value to your organization, but that expertise often comes with higher compensation expectations. 
• Seasonality: Highly seasonal businesses may experience changing payroll percentages throughout the year. For example, a brick-and-mortar retail store may have a low percentage in December but a high percentage in January when sales slow but staffing levels remain relatively stable.
• Growth stage: Where your business is in its growth cycle plays a major role in how much revenue goes toward payroll. For example, early-stage tech startups often need to invest heavily in talent before revenue fully catches up.

Understanding all the factors that influence payroll percentage is more important than trying to hit one “perfect” number. Payroll should be seen as a dynamic metric that can (and should) evolve as your business grows and changes.

Tips To Improve Your Payroll Percentage

Looking for ways to reduce your payroll percentage and free up more revenue to reinvest in your business? Here are a few of our top tips (and no, you don’t have to slash your hard-working team members’ wages to do so!).

Watch for Inefficiencies

Are your hourly staff members racking up too much overtime? Is your team constantly stressed about projects? Is one of your departments sitting idle and looking for something to do?

These could be signs that your operations aren’t running as efficiently as they should be. In this case, it might be beneficial to cross-train, restructure or bring on temporary help.

Evaluate Turnover 

Turnover comes at a huge cost: replacing one employee may cost you up to two times that employee’s annual salary, which can seriously cut into your revenue. 

But it’s not just about the financial impact. Losing staff members can lead to reduced productivity, extra stress on the rest of your team and even a loss of morale, especially if turnover becomes frequent. 

Fortunately, there are many ways to reduce turnover, some of which can be surprisingly simple, such as rewarding your current employees for a job well done.

Find Ways to Automate

Repetitive or lengthy tasks can gradually consume employee hours, driving up labor costs over time. Consider automating certain tasks to free up your team for other jobs. For instance, accounting software can automate the billing process each month.

Cross-Train Your Team

Employees will naturally need time off due to vacation or illness, but that doesn’t mean your projects need to slow down. Cross-training your team helps cover the gaps and enables everyone to work on major projects during crunch time.

Use Alternative Labor Options

Full-time, salaried employees aren’t your only option. Freelance, part-time, temporary and seasonal workers allow you to scale your workforce as needed without permanently adding to your fixed monthly costs.

Evaluate Benefits

The benefits you offer your employees may be a significant reason why they’re working for you. However, with insurance costs continuing to rise, the plan you selected a few years ago may no longer be the most cost-effective option. 

Reviewing alternative providers or coverage options can help you find a solution that better aligns with your team’s needs while also supporting your budget.

Outsource the Job

Bringing on a full-time, in-house bookkeeper or HR expert may be beneficial to your organization’s needs, but it also adds a significant cost to your payroll each month.

Instead, consider partnering with a provider that offers payroll outsourcing services, such as Finvisor. Our payroll and HR team can scale alongside your business, delivering reliable support at a simple, consistent price. As a fractional extension of your organization, we help fill critical gaps without adding significant overhead to your monthly personnel costs.

Interested in working with us? Reach out to our team today to learn how we can support your business.