Payroll expense is the sum you pay to employees for their labor, as well as associated expenses such as employee benefits and state and federal payroll taxes. In many industries, payroll expense is the biggest expense category, so it is critical for businesses to manage payroll expenditures shrewdly. Successful management of payroll expense depends on your ability to pare your workforce to avoid redundancies while simultaneously rewarding your employees sufficiently to motivate them.

Gross Wages

Gross wages represent the part of your payroll expense that you pay to employees who are paid an hourly wage. To calculate gross wages, multiply the number of hours that each employee worked during the payroll period -- up to 40 hours per week -- by that employee's hourly wage. Multiply hours worked in excess of 40 hours per week by one and a half times the hourly wage.


Salaries represent the payroll expense that you pay to employees who earn the same amount of money during each payroll period, regardless of the number of hours they work. While paying employees on a salaried basis may seem like a convenient way for employers to save money on overtime wages, asking too much of salaried employees can alienate them, giving them incentive to move on and look for new jobs.

Payroll Taxes

Payroll taxes are the amounts that your business must pay to state and federal agencies based on gross payroll figures. Employers must make contributions to employees' Social Security and Medicare funds in the combined amount of 7.65 percent of gross wages as of 2012. In addition, most states require employers to pay industrial insurance and unemployment insurance, and the federal government requires employers to pay an unemployment insurance tax as well. Although the federal tax deposits you make includes the amounts you withhold from employee paychecks as well as your employer's contribution, tax withholdings are not part of your payroll expenses because they have already been included as part of gross wages.


Business also accrue payroll expenses in the form of employee benefits. If you contribute to your employees' health care plans or make contributions to their retirement funds, then these payments are part of overall expenditures on your workforce or payroll expense. When calculating your payroll expense, don't include amounts that you take out of employee paychecks, even if you remit these amounts to third parties such as health insurance providers. These amounts have already been included in your employees' gross wages. Only include the amounts that your business pays to supplement these withholdings.