Budgeting helps determine in advance whether you have enough money to do things you need and want to do. Better yet, it gives you a spending plan to ensure you always have money for the things you need.
Payroll budgeting works similarly, but instead, it focuses on manpower. It tells you what staffing you’ll need to help your company accomplish your desired objectives in the next 12 months and whether you have the money to accommodate them.
In this guide, we’ll dive deeper into the nuances of a payroll budget and cover how you can create one with Gusto to keep track of your money. We’ll also provide alternatives to this service that may be better suited to different scenarios.
Step-by-Step Guide to Create a Payroll Budget
When creating a payroll budget, you can either do it yourself or hire an accountant. Alternatively, you can use a payroll service to automate manual tasks and ensure better accuracy, sans the effort.
Below is a step-by-step rundown of preparing a payroll budget.
Step 1: Prepare a List of All Positions in Your Organization
Make a list of all current positions, including yours, and categorize them based on their criticality and department. You must add every single person you pay to your list, including:
- Yourself (if you’re on the payroll)
- Hourly employees
- On-location employees
- Admin staff
- Sales team (estimate payable commissions, if applicable)
- Remote employees
- Contract/freelance employees (since you don’t have to pay taxes or benefits for them, make sure you flag them)
- Temporary employees
You can gather this information in a simple spreadsheet.

Step 2: Include Payroll Expenses for Every Listed Position
The next step is to figure out the expenses for each position. This is where using reliable payroll software like Gusto can come in handy.
Assuming you already have your employees set up in Gusto, you can pull historical numbers from reports. Since you can pay your employees via the software, you’ll have a complete record of your employee compensation. Alternatively, you can review last year‘s figures to total all the expenses.
Once that’s done, you’ll estimate annual pay for every position after taking into account any raises and bonuses. If you want to create a new position you don’t already have data for, check local employment agencies or websites like Glassdoor to get an idea of the average salaries in your area or what your competitors are offering.

Remember, it’s always better to budget more than what you think you’ll need rather than going with a lower amount. If you find bonuses and compensation increasing, break those numbers out from the regular wages. This will allow you to see this data for every employee and as a whole, when needed.
If you find yourself dealing with specific expenses that don’t pertain to any position, you can use a generalized name like “Corporate” or something similar to indicate it’s a business expense.
Let’s take a look at how this will look for every position.
For Salaried and Hourly Workers
Salaried workers and hourly workers are very different from each other. While the former is simple (take their gross wages and divide by 12 when doing a monthly budget), the latter is more complex. For hourly workers, you have to estimate the number of hours worked every month, which may not be consistent throughout the year.
Additionally, if you pay salaried workers on a two-week schedule, some months will have three paychecks. You must account for these months.
For Payroll Taxes
Every employer has to pay payroll taxes, so a budget is necessary to make sure you can fulfill this obligation.
You should check the tax table every time before preparing the budget to ensure the numbers are correct. Here are the current figures:
- Federal Unemployment: 6% on first $7,000
- Social Security: 6.2%
- Medicare: 1.45%
- Additional Medicare (for employees earning over $200,000): 0.9%
For Project Overtime Costs
Think about the positions more likely to accrue overtime and when. Proceed to calculate the anticipated overtime for that month and enter it into the budget.
Consider the following questions to make a more accurate budget:
- Is paying overtime to certain workers better than hiring additional help?
- Is work always busy during specific days of the week or certain months of the year?
- Do certain positions work more overtime than others in your organization?
- Do you anticipate any event that will cause an increase in overtime, such as a product launch, a special event at the store, etc.?
For Employee Bonuses
You must include employee bonuses in your payroll budget.
If the bonuses are performance-based, take a look at last year’s metrics for guidance. Contrarily, if the bonuses are event-oriented, find out which employees will receive the bonus and place it in the corresponding month. Don’t forget to make a note of what the bonus is for.
In the case of annual bonuses paid across the board, estimate how much this will be for the year and set aside a part of the money to pay the bonus every month. This can either be a standard amount or a percentage of the company’s profit.
For Freelance/Contract/Temporary Employees
You should budget for all your contract employees and freelancers. But they would typically be in a different part of the budget than payroll. Your only consideration is the total amount you’ll pay per contract, along with any administrative costs in acquiring them, such as agency fees if you use a staffing agency to fill those roles.
For Employee Benefit Costs and Account For New or Open Positions
Employee benefits are the regular cost of maintaining employees and include health insurance premiums, 401(k), etc. You’ll have to check with your insurance and retirement service providers to get the most accurate charges for the upcoming year. Including administrative and other fees in the budget projection is also essential.
Next, think about the new positions you want to add. However, place their projected wages only in the month to plan on hiring the employee. For instance, if you plan to open a new location in May, you don’t need to budget all the employees for that location from January through April.
Be sure to prioritize your current employees, as it can come in handy if the budget doesn’t allow for all the hires you want. This will allow you to see which positions you can push to a later date.
Step 3: Add Every Expense Category
At this stage, you should have all the data fed into your payroll program. You can view your totals for every month as well as the entire year.
The idea here is to see payroll expense totals for every position and category, including gross wages, taxes, and benefits. You’ll need the totals for every month as well as the yearly sum for your budget.
Step 4: Review Your Payroll Budget
You have the numbers now—all that is left to determine whether they’re reasonable or not. Here’s how to go about this:
- Check information accuracy. Go through all of the numbers to check if you’ve made any mistakes. When possible, run your budget past department heads in case if they have more current information.
- Compare last year’s projected vs. actual expenditure. Learning from past mistakes is helpful to eliminate potential problems involving your current payroll. If you had problems with payroll in the previous year, do you think you’ll have similar issues with this year’s budget? If you miscalculated a specific area last time, double-check whether you did it right this year.
- Compare budget to projected earnings. Do you expect to make enough profit to cover all expenses, especially for new hires? How will you modify the budget or other areas of the budget to compensate if you can’t?
We highly recommend creating charts and graphs to understand the data flow. This will allow you to dig into the data quickly and reorganize areas in a manner that answers your questions best.
3 Top Benefits of Payroll Budget
From noting historical payroll actual to saving time and energy to effective financial management, payroll budgeting has several advantages. Let’s take a deeper look into them.
Improved Data Organization
Creating a payroll budget requires a user to capture their historical payroll actuals and other components of their planning model.
You can bring your payroll into your warehouse, store it in a single source, then access it from the same source. This can also give you access to a streamlined and automated budget in one place—something that can come in handy down the line. The fact that you get access to several data sources is also crucial.
Higher Transparency for Employees
Employees also benefit from accurate payroll budgeting.
Every employee views their paycheck as a reflective measure of individual value as an employee. It’s human psychology. It’s why they’ll appreciate having a clear review of their pay stubs, including overtime, union/non-union, shift differential, and other specific details related to their pay.
Better Management of Finances
Perhaps the most significant benefit of a payroll budget is how it equips you with the knowledge to facilitate better decision-making and finance management.
You can use the information to forecast and manage the finances of any department and the company as a whole. All the relevant information gets collected in one place, which, in turn, leaves little to no room for mistakes or human error. In turn, you get to save valuable time, energy, and money.
3 Biggest Challenges With Creating a Payroll Budget and How to Troubleshoot Them
Creating a payroll budget isn’t the easiest job you’ll do. But it’s certainly a job well worth your effort and time. Here are three common challenges that users face when preparing their budget, along with solutions to help you avoid them:
Factoring Time Off
It’s incredibly important to factor in paid time off or sick days to avoid errors when handling payroll. But the fact that payroll is already quite complicated and maybe pushed off due to holidays or sickness can quickly make things tricky.
To avoid this, you’ll need to have the work hours of all your employees at least three days in advance. If a paycheck will be late, make sure you inform the employees as soon as possible to help avoid any miscommunication.
Misclassification of Employees
Misclassifying people can be a nightmare when it comes to payroll. Many companies don’t realize that everyone who works for them isn’t always their employee—they might be freelancers or contractors. These groups have different sets of rules governing their payroll.
If your organization hires freelancers, temporary employees, or contractors, make sure these individuals aren’t classified as employees on your payroll. They won’t be eligible for the same benefits as your actual employees, and neither will you have to hold a part of their income for tax purposes. Double-check all your listed positions and ensure they’re classified correctly to avoid paying unnecessary fines.
Maintaining Confidentiality
All payroll records must be maintained and handled with confidentiality and should be stored in a secure environment. While this may look simple, in this era of technology, data and privacy concerns are ever-increasing.
You should not disclose any personal employee information without their permission and comply with a court order or government mandate. You can also use high-security payroll services—Gusto being an excellent example—to safeguard your sensitive assets.

Other Options for Creating a Payroll Budget
This post showed you how to create a payroll budget using Gusto, but that isn’t your only option.
If you have an equal number of employees and contractors on payroll, you can consider OnPay, which keeps track of both W-2 employees and 1099 contractors. Moreover, this service can run payroll in all 50 U.S. states at no additional cost.
If you prefer limiting your work tools, you can opt for ADP. This 2-in-1 solution offers excellent payroll and HR solutions. What’s more, the tool offers several benefits, such as automated employee time tracking, online payroll with tax calculation, and talent management (recruiting, hiring, and onboarding), to name a few.
Want a more in-depth look into the best payroll services? Here are our top five picks:
- Gusto – Best for overall ease of use
- Paychex – Best versatility
- ADP – Best for HR integration
- OnPay – Best for both employees and contractors
- Rippling – Best for payroll automation