Payroll Expense
Financials
Industry:
Sector Agnostic
Short Definition
Payroll Expense is the total cost a company incurs to compensate its employees for their work during a specific period.
It includes all forms of employee compensation — salaries, hourly wages, bonuses, commissions, employer-paid benefits, and payroll taxes — for non-production staff (i.e., employees not directly involved in delivering the product or service).
Payroll Expense excludes wages already captured in Cost of Goods Sold (COGS) for production or delivery employees.
It represents the operating cost of building, running, and scaling the organization — and is a key driver of burn rate, runway, and operating efficiency.
Short Definition
Payroll Expense is the total cost a company incurs to compensate its employees for their work during a specific period.
It includes all forms of employee compensation — salaries, hourly wages, bonuses, commissions, employer-paid benefits, and payroll taxes — for non-production staff (i.e., employees not directly involved in delivering the product or service).
Payroll Expense excludes wages already captured in Cost of Goods Sold (COGS) for production or delivery employees.
It represents the operating cost of building, running, and scaling the organization — and is a key driver of burn rate, runway, and operating efficiency.
Short Definition
Payroll Expense is the total cost a company incurs to compensate its employees for their work during a specific period.
It includes all forms of employee compensation — salaries, hourly wages, bonuses, commissions, employer-paid benefits, and payroll taxes — for non-production staff (i.e., employees not directly involved in delivering the product or service).
Payroll Expense excludes wages already captured in Cost of Goods Sold (COGS) for production or delivery employees.
It represents the operating cost of building, running, and scaling the organization — and is a key driver of burn rate, runway, and operating efficiency.
Why it matters for Investors
Runway driver: Payroll is usually the largest monthly burn item for startups; tracking it tightly reveals true cash runway.
Hiring signal: Rising payroll ahead of revenue can indicate scaling investment (good) or cost drift (bad).
Efficiency lens: Combined with ARR / FTE or Revenue per Employee, it shows how effectively human capital converts to growth.
Why it matters for Investors
Runway driver: Payroll is usually the largest monthly burn item for startups; tracking it tightly reveals true cash runway.
Hiring signal: Rising payroll ahead of revenue can indicate scaling investment (good) or cost drift (bad).
Efficiency lens: Combined with ARR / FTE or Revenue per Employee, it shows how effectively human capital converts to growth.
Why it matters for Investors
Runway driver: Payroll is usually the largest monthly burn item for startups; tracking it tightly reveals true cash runway.
Hiring signal: Rising payroll ahead of revenue can indicate scaling investment (good) or cost drift (bad).
Efficiency lens: Combined with ARR / FTE or Revenue per Employee, it shows how effectively human capital converts to growth.
Formula
Practical considerations:
Accrual-based: Record when earned, not when paid — include accrued vacation and bonuses.
Benefits scope: Health, retirement, stock-based compensation, and statutory employer taxes (e.g., FICA in the US, social security contributions in EU).
Exclude: Contractor or freelance payments (these fall under Professional Services).
Functional split: Allocate by department — R&D, Sales & Marketing, G&A — for margin analysis.
Cross-check: Reconcile against headcount × average compensation to validate reasonableness.
Formula
Practical considerations:
Accrual-based: Record when earned, not when paid — include accrued vacation and bonuses.
Benefits scope: Health, retirement, stock-based compensation, and statutory employer taxes (e.g., FICA in the US, social security contributions in EU).
Exclude: Contractor or freelance payments (these fall under Professional Services).
Functional split: Allocate by department — R&D, Sales & Marketing, G&A — for margin analysis.
Cross-check: Reconcile against headcount × average compensation to validate reasonableness.
Formula
Practical considerations:
Accrual-based: Record when earned, not when paid — include accrued vacation and bonuses.
Benefits scope: Health, retirement, stock-based compensation, and statutory employer taxes (e.g., FICA in the US, social security contributions in EU).
Exclude: Contractor or freelance payments (these fall under Professional Services).
Functional split: Allocate by department — R&D, Sales & Marketing, G&A — for margin analysis.
Cross-check: Reconcile against headcount × average compensation to validate reasonableness.
Worked Example
Line Item | Value | Notes |
|---|---|---|
Salaries & Wages | $1,000,000 | Fixed and variable pay for full-time staff |
Bonuses | $100,000 | Performance-based variable pay |
Commissions | $50,000 | Sales incentives |
Employer Benefits | $150,000 | Health, retirement, etc. |
Payroll Taxes | $80,000 | Employer-side contributions |
Payroll Expense (Monthly) = 1,000,000 + 100,000 + 50,000 + 150,000 + 80,000 = 1,380,000
Notes:
This would flow into Operating Expenses → G&A or S&M, depending on employee function.
If the company has 100 FTEs, Payroll Expense per FTE = 13,800.
Worked Example
Line Item | Value | Notes |
|---|---|---|
Salaries & Wages | $1,000,000 | Fixed and variable pay for full-time staff |
Bonuses | $100,000 | Performance-based variable pay |
Commissions | $50,000 | Sales incentives |
Employer Benefits | $150,000 | Health, retirement, etc. |
Payroll Taxes | $80,000 | Employer-side contributions |
Payroll Expense (Monthly) = 1,000,000 + 100,000 + 50,000 + 150,000 + 80,000 = 1,380,000
Notes:
This would flow into Operating Expenses → G&A or S&M, depending on employee function.
If the company has 100 FTEs, Payroll Expense per FTE = 13,800.
Worked Example
Line Item | Value | Notes |
|---|---|---|
Salaries & Wages | $1,000,000 | Fixed and variable pay for full-time staff |
Bonuses | $100,000 | Performance-based variable pay |
Commissions | $50,000 | Sales incentives |
Employer Benefits | $150,000 | Health, retirement, etc. |
Payroll Taxes | $80,000 | Employer-side contributions |
Payroll Expense (Monthly) = 1,000,000 + 100,000 + 50,000 + 150,000 + 80,000 = 1,380,000
Notes:
This would flow into Operating Expenses → G&A or S&M, depending on employee function.
If the company has 100 FTEs, Payroll Expense per FTE = 13,800.
Best Practices
Tag by department: Track payroll by function (e.g., R&D, S&M, G&A) to assess where hiring drives returns.
Normalize stock comp: Separate recurring cash cost from equity-based compensation for clearer burn analysis.
Monitor efficiency: Pair with ARR/FTE or Revenue/FTE to benchmark productivity.
Runway planning: Model headcount growth scenarios against burn and revenue forecasts.
Automate reconciliation: Tie HRIS data to accounting for real-time payroll accuracy.
Best Practices
Tag by department: Track payroll by function (e.g., R&D, S&M, G&A) to assess where hiring drives returns.
Normalize stock comp: Separate recurring cash cost from equity-based compensation for clearer burn analysis.
Monitor efficiency: Pair with ARR/FTE or Revenue/FTE to benchmark productivity.
Runway planning: Model headcount growth scenarios against burn and revenue forecasts.
Automate reconciliation: Tie HRIS data to accounting for real-time payroll accuracy.
Best Practices
Tag by department: Track payroll by function (e.g., R&D, S&M, G&A) to assess where hiring drives returns.
Normalize stock comp: Separate recurring cash cost from equity-based compensation for clearer burn analysis.
Monitor efficiency: Pair with ARR/FTE or Revenue/FTE to benchmark productivity.
Runway planning: Model headcount growth scenarios against burn and revenue forecasts.
Automate reconciliation: Tie HRIS data to accounting for real-time payroll accuracy.
FAQs
What exactly is included in Payroll Expense?
All the costs your company pays to employ people — base salaries, hourly wages, commissions, bonuses, benefits (like health insurance or retirement plans), and employer-side payroll taxes. Think of it as the full cost of having employees on staff, not just their take-home pay.What’s the difference between “wages” and “salaries”?
Salaries are fixed amounts paid on a regular schedule (e.g., $100,000 per year for a software engineer). Wages are variable — paid hourly or daily, often for operational or support staff. Both are part of Payroll Expense, but accounting systems track them separately.Does Payroll Expense include contractors or freelancers?
No. Independent contractors, agencies, and consultants aren’t employees — their costs go under Professional Services or External Labor. Only people officially on your company’s payroll (e.g., W-2 in the US) are included.Can Payroll Expense ever go down?
Yes. Payroll can decrease if you: Reduce headcount (layoffs or attrition), Cut salaries, bonuses, or benefits, Freeze hiring or replace full-time roles with contractors It’s rare for a growing startup, but happens during cost-control phases or downturns.Is stock-based compensation part of Payroll Expense?
Yes — under GAAP/IFRS, the fair-value cost of stock or options granted to employees is recognized as part of compensation expense (even though it’s non-cash).Why separate “production” vs. “non-production” payroll?
For financial clarity. Production payroll (factory, delivery, or operations tied directly to goods sold) sits in Cost of Goods Sold (COGS). Non-production payroll (engineering, marketing, admin, etc.) sits in Operating Expenses. This helps investors see your true gross margin versus overhead.How does Payroll Expense affect cash flow and runway?
Payroll is the biggest driver of monthly operating burn. Changes in payroll directly move your Cash Flow from Operations (CFO) and determine how many months of runway you have before raising again.
FAQs
What exactly is included in Payroll Expense?
All the costs your company pays to employ people — base salaries, hourly wages, commissions, bonuses, benefits (like health insurance or retirement plans), and employer-side payroll taxes. Think of it as the full cost of having employees on staff, not just their take-home pay.What’s the difference between “wages” and “salaries”?
Salaries are fixed amounts paid on a regular schedule (e.g., $100,000 per year for a software engineer). Wages are variable — paid hourly or daily, often for operational or support staff. Both are part of Payroll Expense, but accounting systems track them separately.Does Payroll Expense include contractors or freelancers?
No. Independent contractors, agencies, and consultants aren’t employees — their costs go under Professional Services or External Labor. Only people officially on your company’s payroll (e.g., W-2 in the US) are included.Can Payroll Expense ever go down?
Yes. Payroll can decrease if you: Reduce headcount (layoffs or attrition), Cut salaries, bonuses, or benefits, Freeze hiring or replace full-time roles with contractors It’s rare for a growing startup, but happens during cost-control phases or downturns.Is stock-based compensation part of Payroll Expense?
Yes — under GAAP/IFRS, the fair-value cost of stock or options granted to employees is recognized as part of compensation expense (even though it’s non-cash).Why separate “production” vs. “non-production” payroll?
For financial clarity. Production payroll (factory, delivery, or operations tied directly to goods sold) sits in Cost of Goods Sold (COGS). Non-production payroll (engineering, marketing, admin, etc.) sits in Operating Expenses. This helps investors see your true gross margin versus overhead.How does Payroll Expense affect cash flow and runway?
Payroll is the biggest driver of monthly operating burn. Changes in payroll directly move your Cash Flow from Operations (CFO) and determine how many months of runway you have before raising again.
FAQs
What exactly is included in Payroll Expense?
All the costs your company pays to employ people — base salaries, hourly wages, commissions, bonuses, benefits (like health insurance or retirement plans), and employer-side payroll taxes. Think of it as the full cost of having employees on staff, not just their take-home pay.What’s the difference between “wages” and “salaries”?
Salaries are fixed amounts paid on a regular schedule (e.g., $100,000 per year for a software engineer). Wages are variable — paid hourly or daily, often for operational or support staff. Both are part of Payroll Expense, but accounting systems track them separately.Does Payroll Expense include contractors or freelancers?
No. Independent contractors, agencies, and consultants aren’t employees — their costs go under Professional Services or External Labor. Only people officially on your company’s payroll (e.g., W-2 in the US) are included.Can Payroll Expense ever go down?
Yes. Payroll can decrease if you: Reduce headcount (layoffs or attrition), Cut salaries, bonuses, or benefits, Freeze hiring or replace full-time roles with contractors It’s rare for a growing startup, but happens during cost-control phases or downturns.Is stock-based compensation part of Payroll Expense?
Yes — under GAAP/IFRS, the fair-value cost of stock or options granted to employees is recognized as part of compensation expense (even though it’s non-cash).Why separate “production” vs. “non-production” payroll?
For financial clarity. Production payroll (factory, delivery, or operations tied directly to goods sold) sits in Cost of Goods Sold (COGS). Non-production payroll (engineering, marketing, admin, etc.) sits in Operating Expenses. This helps investors see your true gross margin versus overhead.How does Payroll Expense affect cash flow and runway?
Payroll is the biggest driver of monthly operating burn. Changes in payroll directly move your Cash Flow from Operations (CFO) and determine how many months of runway you have before raising again.
Related Metrics
Commonly mistaken for:
Professional Services Expense (external contractors)
Labor Cost Percentage (A ratio, not a dollar amount)
Related Metrics
Commonly mistaken for:
Professional Services Expense (external contractors)
Labor Cost Percentage (A ratio, not a dollar amount)
Related Metrics
Commonly mistaken for:
Professional Services Expense (external contractors)
Labor Cost Percentage (A ratio, not a dollar amount)
Source of:
Index