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What's the Difference Between Payroll Expense and the Cost of Labor

What’s the Difference Between Payroll Expense and the Cost of Labor?

Payroll Expense and Cost of Labor Explained

What’s the Difference Between Payroll Expense and the Cost of Labor?

The cost of labor is often the most significant expense a small business incurs. According to the US Department of Labor, it’s only second to the price of a home. Depending on the industry, labor expenses can range from 10% to 30% or even higher. Unless you monitor and modify your labor expenditures for your small business, they can quickly eat into your profits.

At Simplified Payroll & Bookkeeping, we’ve discovered that keeping track of payroll costs is a challenge for some small-business owners. In addition, many business owners have difficulty establishing the pricing of their items when it comes to labor and other costs. This is why we want to take the time now to answer some of the most often asked questions small business owners have concerning payroll costs and labor prices.

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What exactly is a payroll expense?

Your employees’ salaries and wages are part of the payroll expenses you incur as a result of their labor for your company. Employee bonuses, stock options, commissions, and other remuneration should all be included in the payroll costs of your business.

Benefits you provide to your employers are also included in your payroll costs. What you spend for your employees’ health care and retirement plans is part of the payroll expense.

Taxes paid to federal, state, and municipal governments are also included in this calculation, which is based on gross payroll.

Nevertheless, because they are already included in the gross salaries, tax withholdings from employee paychecks aren’t included in your payroll expenses.

The organization’s most valuable asset is its workforce. Consequently, firms devote a lot of resources to attracting, educating, and retaining a large enough workforce to support their daily operations.

In this sense, processing their payroll is a critical part of their job. Employees must know they will be paid regularly without any delays. Payroll has a significant impact on everything from employee morale to the financial health of a firm, regardless of its size.

What is the cost of labor?

An organization’s total cost of labor includes all of the money it pays out in compensation to its workers. Additionally, it covers all of the benefits and payroll taxes that your company has paid to the federal, state, and local governments (not the portion your employees paid). Expenses for labor are split down into direct and indirect costs (overhead).

The term “direct labor costs” refers to the costs incurred directly in the process of making a product. Wages paid to those involved in the production process are included in the term “direct costs.” The costs of supporting the creation of a product are known as indirect labor costs. Wages paid to office staff, security guards, and factory equipment maintenance workers are examples of indirect costs.

What are the labor costs of payroll?

Employees of a payroll company are referred to as payrollers because they are covered by an employment contract.

The costs of paying employees are the same regardless of whether they are on a permanent or temporary contract. According to the contract, the costs are calculated using a method that accounts for both the employer’s and the employee’s portion.

What's the Difference Between Payroll Expense and the Cost of Labor? Simplified Payroll and Bookkeeping 2
What’s the Difference Between Payroll Expense and the Cost of Labor?

Payroll Liabilities

All payroll expenses will be converted into payroll liabilities on the day of payment to employees. If we don’t pay our employees, it’s a debt that we’ve taken from them, thus it’s a payroll liability for us to bear. We might also refer to this as unpaid debts. The amount of cash on hand and the number of payroll liabilities we owe will both fall when we pay our employees’ salaries.

What Is the importance of being able to tell the difference between the two?

To keep your payroll costs under control, you need to know how to manage them wisely. Labor costs might spiral out of control if you don’t keep track of all the costs associated with the company.

It is also necessary to include your labor costs (as well as your material and overhead costs) in your product prices. A reduced profit margin is a result of all of your company’s expenses are not factored into your sales price. Keeping your business viable may require you to reduce your labor costs if, for example, demand for your items falls or a rival pushes you to lower your prices.

Depending on the situation, you may need to reduce your staff, cancel contract workers, cut back on production, or reduce the cost of other direct or indirect goods included in the cost of production, including raw materials, equipment, and so forth.

As part of job costing, which is an accounting approach for tracking the costs associated with a certain product, you must also understand the cost of labor.

When calculating the cost of a job, it’s important to consider not only the cost of labor but also the expenses of materials and other incidentals. Using this accounting strategy, you may figure out if future jobs will have lower expenses. Alternatively, you may wish to charge clients more for any additional expenditures.

What's the Difference Between Payroll Expense and the Cost of Labor? Simplified Payroll and Bookkeeping 1
What’s the Difference Between Payroll Expense and the Cost of Labor?

Payroll Expenses and Labor Costs: What to Do if You Need Assistance

Contact Simplified Payroll and Bookkeeping, if you need assistance evaluating your small business’s payroll costs and labor costs. To make educated decisions about pricing your products, recruiting new employees or contract workers, or cutting production costs inside your firm, Nancy Fierro, our expert bookkeeper, can assist you to understand how to compute your payroll expenses and the cost of labor.

If you’re interested in learning more about our bookkeeping services, please contact Simplified Payroll and Bookkeeping, you can reach us at 737-931-1413. It’s possible to keep your payroll and labor expenditures under control while still making money in your small business with the help of the Simplified Payroll and Bookkeeping. Whether you have one employee or fifty, Simplified Payroll and Bookkeeping can handle your payroll needs.

Simplified Payroll and Bookkeeping offer the following services include:

·Getting back into the swing of things in the books

·Reorganizing the current accounting system

·Assisting new companies in their development

·Reconciling financial statements

·Paying and receiving money from customers

·Publication of annual and interim financial accounts

·Configuration of QuickBooks




Tel: 737-931-1413
Fax: 512-717-9517

Simplified Payroll and Bookkeeping
5401 S FM 1626 Ste 170-617
Kyle, Texas 78640

Satellite Office- By Appointment Only
8863 Anderson Mill #117
Austin, Texas 78729