One of the most important business processes you’ll want to get a handle on when running a small business is understanding how to calculate payroll. While there are some online calculators you can use to help manage your payroll processes, having a thorough understanding of how to calculate accurate payroll and tax withholding is vital to your company’s success.
Why Would You Need To Calculate Average Monthly Payroll?
Business owners and small business managers should have a thorough understanding of payroll calculations. Knowing your company’s average monthly payroll is important for several reasons:
Applying For Government Relief Programs:
- In response to the COVID-19 pandemic, the US government introduced several relief programs, including the Paycheck Protection Program and second draw PPP loan, which provided forgivable funding to small businesses to help cover weekly payrolls. The PPP loan amount was based on the company’s average monthly payroll costs. While the time frame of the PPP loan application has now expired, there are some companies still fighting for loan forgiveness
- Payroll taxes are a significant expense for businesses, and accurate calculation of these taxes requires knowledge of the company’s payroll costs. Employers are required to pay a percentage of their payroll costs as taxes, including Social Security, Medicare, and federal and state unemployment taxes.
Budgeting And Financial Planning:
- Knowing the average monthly payroll can help businesses plan their cash flow and budget for expenses. This can help businesses avoid cash shortages and ensure they have enough funds to pay their employees.
- Knowing the company’s average monthly payroll can also help businesses ensure that they are compensating their employees fairly and in line with industry standards.
Overall, knowing your company’s average monthly payroll is crucial for financial planning, tax compliance, and access to government relief programs.
How To Calculate Average Monthly Payroll Using A Worksheet
To calculate your business’s average monthly payroll, you will need to follow these steps:
- Determine the time period: Decide on a particular pay period for which you want to calculate the average monthly payroll. This can be a year, quarter, or any other period that is relevant for your business.
- Collect payroll information: Gather all the payroll information for the time period you selected, including wages, salaries, bonuses, commissions, and any other compensation paid to employees. Every employee counts in this calculation, including full-time employees, part-time employees, and temporary or contract workers.
- Exclude certain amounts: Certain amounts should be excluded from the calculation of average monthly payroll, such as compensation paid to employees who reside outside the United States, independent contractors, and any compensation over an average salary of $100,000 per employee.
- Calculate the total payroll: Add up all the compensation paid to employees during the selected time period.
- Divide by the number of months: Divide the total payroll by the number of months in the time period. For example, if you are calculating the average monthly payroll for a year, divide the total payroll by 12.
What Is The Formula For Calculating Average Monthly Payroll?
Average Monthly Payroll = Total Payroll / Number of Months
Once you have calculated your business’s average monthly payroll, you can use it to determine your eligibility for government relief programs, calculate payroll taxes, and plan for employee compensation and other expenses.
What Eligible Costs Are Included In This Calculation?
When calculating the average monthly payroll for a business, several eligible payroll costs can be included, such as:
- Salary and wages: This includes the gross salary or hourly wages paid to all employees, including full-time, part-time, and temporary workers.
- Tips and commissions: This includes any tips or commissions paid to employees, such as sales commissions, performance bonuses, or other incentives.
- Benefits: This includes the employer’s contribution to employee benefits such as health insurance, retirement plans, and other employee benefits.
- State and local taxes: This includes state and local taxes paid on employee compensation, such as state unemployment insurance taxes, state disability insurance taxes, and state and local income taxes withheld from employee paychecks.
- Employer-paid payroll taxes: This includes the employer’s share of payroll taxes, such as Social Security and Medicare taxes, and federal and state unemployment taxes.
What Payroll Costs Are Excluded In This Calculation?
When calculating the average monthly payroll for a business, there are some payroll costs that are excluded from the calculation. Here are some of the payroll costs that are typically excluded:
- Compensation above a certain threshold: For some government relief programs and loan applications, the amount of payroll costs that can be included in the calculation is limited to a certain amount per employee. For example, for the Paycheck Protection Program (PPP), compensation is capped at $100,000 per employee per year. Any amount of compensation over this threshold is excluded from the calculation.
- Compensation to employees located outside of the United States: Payroll costs for employees who work outside of the United States are typically excluded from the calculation of average monthly payroll. This is because these employees may not be subject to the same tax and labor laws as employees who work in the United States.
- Federal employment taxes: Payroll taxes paid by the employer, such as Social Security and Medicare taxes, are included in the calculation of average monthly payroll. However, federal income tax withheld from employees’ paychecks is not included in the calculation.
- Sick leave and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA): Under the FFCRA, eligible employers can receive a credit for wages paid to employees who take leave related to COVID-19. Wages paid for this purpose are excluded from the calculation of average monthly payroll, as they are eligible for a tax credit.
It is important to note that the specific payroll costs that are excluded may vary depending on the program or loan for which the average monthly payroll is being calculated. Businesses should carefully review the eligibility requirements and guidance for each program or loan to determine which payroll costs are eligible for inclusion when calculating the average monthly payroll.
How Average Monthly Payroll Can Affect A Loan Application
The average monthly payroll can impact a loan application in several ways beyond the PPP forgiveness application program. Here are a few examples:
- For certain loans, such as small business loans, the lender may have minimum or maximum average monthly payroll requirements for eligibility. Lenders may also use the average monthly payroll to assess the business’s ability to repay the loan.
- The loan amount for some loans may be determined by the business’s average monthly payroll. For example, if a lender requires a minimum average monthly payroll of $50,000 for a loan amount of up to $500,000, a business with an average monthly payroll of $60,000 would be eligible for a larger loan amount than a business with an average monthly payroll of $45,000. The maximum loan amount will be determined based on average monthly payroll.
- The average monthly payroll can also impact the terms of the loan, such as the interest rate or repayment period. Lenders may offer more favorable terms for businesses with a higher average monthly payroll, as they may be considered less risky borrowers.
- A business’s average monthly payroll can also impact loan approval rates. Lenders may be more likely to approve loans for businesses with a steady or increasing average monthly payroll, as it indicates financial stability and the ability to repay the loan.
In summary, the average monthly payroll can impact loan eligibility, loan amount, loan terms, and loan approval rates beyond the PPP program. It is important for businesses to accurately calculate and document their payroll costs to ensure they are maximizing their eligibility for loans and other forms of financing.
How To Properly Calculate Employee Payroll
In order to get accurate figures on average monthly payroll calculations, it is important you calculate each employee’s payroll for the covered period correctly. Here is a general process for calculating employee payroll:
- Determine the pay period: The first step in calculating employee payroll is to determine the pay period, which is typically weekly, bi-weekly, semi-monthly, or monthly.
- Gather employee information: Collect the necessary information for each employee, including their hourly rate or salary, hours worked, and any overtime or special pay rates. You should also gather any relevant tax information, such as their W-4 form and state and federal tax withholdings.
- Calculate gross pay: Gross pay is the total amount of pay an employee earns before any taxes or deductions are taken out. To calculate gross pay, multiply the employee’s hourly rate by the number of hours worked, including any overtime or special pay rates.
- Calculate taxes and deductions: Subtract any taxes and deductions from the employee’s gross pay to determine their net pay. This includes federal and state income taxes, Social Security and Medicare taxes, and any other applicable deductions, such as health insurance premiums or retirement contributions.
- Process payroll: Once you have calculated the gross pay, taxes, and deductions for each employee, you can process payroll. This involves creating paychecks or electronic payments for each employee and distributing them on the designated pay date.
- Record and report payroll: Keep accurate records of each employee’s pay and taxes throughout the year. You will need this information for tax reporting and other purposes, such as applying for loans or benefits programs.
It is important to use a reliable payroll software or service to ensure accuracy and compliance with tax laws and regulations. Additionally, businesses should regularly review their payroll process to ensure that it is efficient, accurate, and compliant with all applicable laws and regulations.
Keep Payroll Protected And Confidential
When calculating payroll using a computer program or worksheet, it is important to keep the information confidential. The federal government requires the employee’s social security number and other personal information to be on file when reporting taxable income. Information like annual salary, take-home pay, and past pay stubs should also be kept confidential.
Make sure you protect this information by keeping all documents on a password protected computer. You can also add complex passwords to individual worksheets and PDF files to ensure unwanted users cannot access those documents.
Learn More About Payroll For Your Small Business
If you’re a small business owner or manage a small business, it is essential that you stay up to date on payroll requirements for your team. Check out our blog for more guides and how-to’s on some of the most important aspects of payroll.
Our latest blog, Are Salaried Employees Entitled To Overtime Pay?, outlines the specifics surrounding compensation rules with salaried employees and what exemptions you need to be aware of.