What percentage of revenue should go to payroll by industry?

Understanding how much of your revenue should be allocated to payroll can be a key part of keeping your business healthy and sustainable in the long term. It's not just about deciding what percentage of budget should be salaries and paying your employees—it's about striking the right balance between compensating your team fairly and maintaining healthy profit margins.

In this guide, we'll delve into how to calculate payroll as a percentage of revenue, explore benchmarks for different industries, and offer some strategies you can put into play to optimize your payroll expenses. Let’s dive in.

What is payroll as a percentage of revenue?

Payroll as a percentage of revenue is a financial metric that shows what portion of your company's revenue is spent on employee compensation. This includes not just salaries and wages, but also benefits, taxes, and other related costs. Calculating this ratio can help businesses:

• Assess their financial efficiency: Understand how effectively revenue is converted into profit after covering payroll expenses
• Benchmark themselves against industry standards: Compare your payroll spending with industry norms to identify potential over or under-investment in human resources
• Inform their strategic decisions: Make informed choices about hiring, compensation structures, and resource allocation

By keeping an eye on your payroll costs as a percentage of revenue, you can make sure your business is investing appropriately in its workforce—without compromising its financial stability.

What percentage of revenue should be spent on payroll?

What percentage should payroll be for a small business versus an enterprise organization? For a healthcare organization versus a marketing agency or a manufacturing company? The short answer: It depends.

For small to mid-sized businesses across various industries, a general guideline is that payroll should account for 15% to 30% of gross revenue. However, this is a broad range, and the ideal percentage can vary significantly based on factors like:

• Industry norms. For example, labor-intensive industries may naturally have higher payroll percentages.
• Business models. Companies offering high-value services might have higher payroll costs due to specialized talent.
• Growth stages. Startups may allocate more to payroll as they invest in building their teams.
• Average business expense percentages. Some businesses are able to run lean, with little overhead, while others simply require more expenses than others. Higher-than-average expenses can impact the cash available to allocate to payroll which affects the salary-to-revenue ratio by industry.

Every business is different, so take these and other factors into account and adjust your expectations accordingly.

Payroll as a percentage of revenue by industry

Different industries have unique operational demands and labor costs. Here's a general guideline for ideal payroll percentages across various sectors:

How to calculate payroll percentage: 4 steps

Calculating your payroll as a percentage of revenue is straightforward. Here's how to do it:

Step 1: Add total payroll costs (salaries, wages, benefits)

Add up all payroll expenses, including:

• Salaries and wages (gross pay before any taxes or deductions)
• Employee benefits, including health insurance, retirement contributions, paid time off, and any other perks
• Payroll taxes (the employer’s share of Social Security, Medicare, unemployment taxes, and any other state or local taxes according to your jurisdiction)
• Bonuses, commissions, and any other additional compensation
• Other payroll expenses, like overtime pay, allowances, or stipends

Step 2: Determine your total revenue

Calculate your total gross revenue for the same period.

Step 3: Divide the total payroll costs by the total revenue

Divide the total payroll costs by the total revenue to get a decimal.

Step 4: Multiply by 100 to get the payroll percentage

Multiply the decimal result by 100 to get the payroll percentage.

Example: 

If your total payroll costs for the year are $500,000, and your total revenue for the year is $2,000,000:

Total payroll costs / Total revenue = Decimal x 100 = Payroll as a percentage (%) of revenue

$500,000 / $2,000,000 = 0.25 x 100 = 25%

Your payroll is 25% of your total revenue.

What makes up payroll costs?

Understanding the different components of your business’ payroll costs can help you identify areas for improvement and optimization. Some of those key elements include:

Minimum wages

Minimum wage is the legally mandated lowest amount you can pay your employees. It affects the base cost of labor, especially for entry-level or unskilled positions.

Employee benefits plans

Employee benefits plans include health insurance, retirement plans, life insurance, paid time off, and other perks. Offering benefits can help enhance employee satisfaction, morale, and retention, but increases overall payroll costs.

Bonuses and additional compensation

Additional, non-salary compensation can come in the form of performance bonuses, commissions, and profit-sharing. These can help motivate employees and increase business productivity, but they also add variable costs to your payroll.

Taxes

Another expense to be aware of is the employer’s share of payroll taxes, which includes Social Security and Medicare, as well as any state or local taxes employers are required to pay in your jurisdiction. These are mandatory expenses that can significantly add to payroll costs.

Expenses and allowances

Other various business expenses can include reimbursements for travel, meals, equipment, and uniforms, as well as training and development costs—an important investment in employee education and skill development that helps enhance business productivity, but requires upfront spending. And don’t forget about overtime pay. Additional pay for hours worked beyond the standard workweek can add up on top of employees’ standard wages and salaries, leading to higher costs if not properly scheduled or managed.

By analyzing these and other components of payroll costs, businesses can identify areas to control their spending without negatively impacting employee morale or productivity.

5 strategies to reduce payroll percentage

Reducing payroll percentage doesn't necessarily mean cutting jobs or salaries. Here are five strategies to streamline payroll expenses while maintaining business productivity:

1. Automating payroll

Implement payroll software to automate calculations, tax withholdings, and filings. This can help you reduce errors, save time, and lower your administrative costs.

2. Optimizing staff schedules

Use data analysis (or HR analytics software, if you have it) to align your staffing levels with peak business hours. This helps ensure you aren’t overstaffed during slower periods, which reduces unnecessary labor costs.

3. Outsourcing non-core roles

Hire external firms for roles like IT support, accounting, or marketing. This way, your business can access specialized skills without paying for the overhead of full-time salaries and benefits where it doesn’t necessarily need to.

4. Leveraging technology 

Wherever possible, lean into technology solutions like AI chatbots for customer service while still ensuring high-quality support. For companies providing physical goods or services,  automated machinery can be used in production. These options can increase efficiency and reduce your company’s reliance on manual labor, further cutting down on labor costs.

5. Cross-training employees

Train your employees to perform multiple roles or tasks. This gives your teams greater flexibility and allows you to operate more efficiently with fewer employees.

Simplify payroll percentage management with Rippling 

Rippling offers full-service payroll so powerful it can run itself, allowing you to do more with less money, less headcount, and less time. And all with a 100% error-free guarantee.

With Rippling, you can: 

• Pay employees and contractors in the same platform
•  Manage time and attendance natively 
• Run unlimited off-cycle pay runs at no extra cost 
• Set up multiple pay schedules, pay rates, and pay types in just a few clicks 
• Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that are automatically paid out every pay period, monthly, or at whatever interval you choose
• Automatically calculate prorated pay runs for new or promoted employees 
• Manage all currency conversions, including payroll adjustments 
• Automatically calculate overtime for every country 
• Make changes after submitting payroll

Payroll as a percentage of revenue FAQs

What is a good payroll-to-revenue ratio?

A “good” ratio varies by industry. Generally, you can look at payroll-to-revenue ratio by industry in two ways:

• Service industries tend to have higher ratios (40% to 60%) due to their reliance on skilled labor.
• Retail and manufacturing industries tend to have lower ratios (15% to 30%) because of product sales and automation.

However, for any business, it’s crucial to compare your ratio with industry benchmarks and consider factors like business size, location, and growth stage.

What percentage of production should payroll be?

In production-focused industries, businesses should aim for a payroll percentage between 15% and 30%, but should consider factors like automation levels, production efficiency, and supply chain cost, which can all influence the ideal percentage for individual businesses. Optimizing production processes and investing in technology can help manage payroll expenses relative to production output.

Can payroll automation tools reduce payroll costs?

Yes. Payroll automation can significantly reduce payroll costs by:

• Eliminating manual errors, reducing costly mistakes in calculations and compliance
• Saving time by freeing up HR and accounting teams to focus on strategic work
• Enhancing compliance and helping avoid potentially costly penalties from tax and labor law violations
• Providing analytics and insights to make informed decisions about staffing and compensation

This blog is based on information available to Rippling as of October 14, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.