6 Min. Read

How Much Should I Pay My Employees?

January 9, 2024

Determining how much to pay your employees requires research, estimating the return on investment and negotiating effectively. While it’s important to pay competitive salaries to retain employees, it’s also vital not to overspend on talent and deplete your budget.

While determining employee compensation or salary range, employers should consider various factors including wage and hour laws, inflation, the mobility of the workforce and credibility.

What this article covers:

How Do I Pay My Employees’ Salary?
What Percentage of Revenue Should Be Spent on Salaries?
How Much Do I Withhold from My Employee’s Paycheck?
How Much Should I Reimburse My Employee for Mileage?

How Do I Pay My Employees’ Salary?

The goal for an employer is to attract good talent and pay them fairly. It shows that you value your employees and motivated them. Here are the steps to paying your employees appropriately while staying within your budget.

Create a Detailed Job Description

Before you can determine how much to pay an employee, you must start by creating a detailed job description of the role that you’re hiring for. Include details such as duties, skills and experience required. The job description is not an indicator of the pay range, but it’ll give you an overview of the average pay when you start researching.

Check Average Pay Rates

The average pay rate varies across industries and different regions. Using keywords from your job description, you can search for average pay rates at the Salary.com, PayScale, BLS.gov or Glassdoor.

Look for low, average and high pay rates for a job. This helps you determine a pay range and provides the flexibility to offer higher wages to highly skilled and more experienced candidates.

Consider Your Budget

One of the most important factors while determining employee compensation is your operating budget. However, to hire the best and the most qualified talent, it’s normal for businesses to spend between 40 to 80 percent of their gross revenue on employee compensation, which includes both salary and benefits.

Apart from your budget, you also need to consider your return on investment. Estimate how much you expect a new employee to make your business, determine what return on investment you want from the employee and then calculating the employee’s salary.

Understand the Wage Laws

The Fair Labor Standards Act (FLSA) is a federal law that sets minimum wage and overtime pay standards for full-time and part-time employees in the private sector and in federal, state, and local governments.

The current federal minimum wage is $7.25 per hour. In addition to this, many individual states set their own minimum wage. Employees are entitled to the higher of the two minimum wages. To know more about the minimum wage laws in each state, check the Department of Labor website.

It’s important to consider that the market rates are often much higher than the minimum wage pay rates. If you want to attract top-performing talent and compete with high-paying employers, you cannot pay the minimum wage rate.

Account for Fringe Benefits

Along with the base salary, employers also offer benefits such as health insurance, life insurance or a retirement plan which you need to take into account. Their cost can equal 20 or 30 percent of an employee’s salary or wages.

There are some required benefits such as social security taxes, workers’ compensation, leave benefits and unemployment insurance that businesses need to pay. Optional benefits include group health plans and retirement benefits.

Employers need to consider the experience level, education, skills and even the location to determine a comparable compensation for their employees. You also need to decide how you want to pay the employee, hourly wages or an annual salary.

Usually, employees with specialized training whose knowledge and skills are vital to the role are paid an annual salary while jobs, where it’s vital for employees to spend time on-site, are paid hourly wages.

What Percentage of Revenue Should Be Spent on Salaries?

Based on your industry, you may spend nearly forty to eighty percent of your gross revenue on salaries and benefits. According to the Society for Human Resource Management, the salaries can account for eighteen to fifty-two percent of a business’ operating budget.

To calculate the gross revenue to payroll percentage, divide the revenues by the total payroll. Multiply this by 100 to convert the result into a percentage.

For example, if your gross annual revenue is $100,000 and you spend $20,000 on the payroll for the year, your percentage of gross revenue to payroll is $100,000/$20,000 = 0.20, or 20 percent.

The percentage of gross revenue that you spend on employee salaries can vary dramatically by industry. For example, the labor costs in a retail store are much higher than an automated semiconductor plant. Service-based businesses may have labor costs as high as fifty percent of their gross revenue. For most businesses, however, a fifteen to thirty percent of gross revenue is ideal.

How Much Do I Withhold from My Employee’s Paycheck?

The amount withheld from an employee’s paycheck depends on the payroll period, the marital status of the employee, the number of allowances claimed, the gross pay for the period and any other amount that the employee may specify. To calculate how much you need to withhold from your employee’s paycheck, refer to IRS Publication 15-A.

You can also use the withholding calculator provided by IRS.

Along with the withholding table from IRS, you’ll need the gross pay of the employee for the pay period, the employee’s most recent Form W-4, completed by the employee, FICA tax withholding percentages for the current year and the maximum Social Security withholding amount for the current year.

How Much Should I Reimburse My Employee for Mileage?

The rate provided by the IRS for mileage reimbursement for is 54.5 cents per mile in 2018. The rate is a guideline is calculated based on average wear and tear and the gas prices.

This rate allows employers to give a fair rate to employees who drive their own personal vehicles for work. The rate is also used by employees to deduct mileage on their taxes if the employer fails to reimburse them.

Once you’ve determined the salaries determined, you need to regularly revisit them to ensure that you provide fair pay and reward performance. You also need to keep up with the rate of inflation. Adjusting to the changing demands and remaining flexible will help you retain your top employees and continue to attract talented employees.