Thursday, August 1, 2013

The Cost of Payroll (Tradecraft)

Last August I wrote about the three buckets that comprise expenses for my store operation. All stores are going to have these three buckets, with some larger than others, and the sizes changing over time. The bucket I want to look at today is payroll. This is probably of no interest to most people, but if you want to start a small business, you need to understand the various parts.

First, nobody in their right mind does their own payroll. You use a service. It's not that it's ridiculously complicated, because it's conceivable you could keep up with and figure out all the state and federal regulations. The real reason is liability. If you screw up your payroll taxes, you're boned. The same is true with sales taxes, but payroll is far more complicated and the likelihood of you screwing up is pretty good (for me it's a certainty). My payroll companies have screwed up a couple of times, racking up fines with the state in the process. I call them up and tell them and they take care of it, eating the fines and apologizing for the mistakes.

So for $70/month, I have a GAMA recommended payroll company deal with everything. They remind me to submit my hours. They keep track of employee rates, calculate bonuses and advances, collect taxes, and I even use them to collect my workers comp insurance. They file quarterly paperwork and provide me the forms to hand to my accountant during tax time. It's money well spent and when they called yesterday to see if I was looking to switch, I laughed. It's far too much hassle for far too little savings. Keep up the good work.

Typical pay period

Workers compensation insurance adds another 3% or so to payroll costs. What you pay will vary dramatically by state. It's also important to make sure you're classified properly by the insurance company. They have wiggle room, since there's not likely to be a game store classification. I know with standard business insurance, there are significant cost differences between hobby store and book store, for example.

The California default is Workers Compensation Insurance Fund, a quasi governmental organization that will likely have the lowest rate, but they will make you crazy, as you would expect from a quasi governmental organization (I used to work as an IT contractor for them; oh the stories).

Wages include the taxes shown in the chart. It's employee gross pay, minus taxes, which all comes out of your pot, of course. We require (or at least strongly suggest) direct deposit for employees so we don't have to pay the costs of cutting and shipping physical checks.

How much you pay your employees depends on a lot of issues, but I generally don't want compensation to be a reason they leave. I often find myself competing with large retail chains, who can pay better and with benefits, but I'm not terribly far off. The California minimum wage is currently $8/hour, and we pay well above that. In good times, I tend to give bonuses during record periods and try to avoid raises. Raises are great, but when times are tough, you've painted yourself into a corner. It would be horrible to have to let an employee go because you, the business owner, let your wage growth get out of control.

We are very low tech with payroll. We use paper time sheets. We send them an email of our hours. There is no time clock or technology involved. It's also, as you see, a fairly cheap service. If I were to look for a new service, I might check out the various "cloud based" payroll companies, like Paycom. If I were an absentee or part-time owner, I would insist on it.

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