When owners think about staffing, the question is usually "can I afford one more person?" It's the right instinct. But there's a sharper version: is your team the right size for the revenue it produces? Two ratios answer that, and both come straight off your financials. One looks at cost. The other looks at output. Together, they tell you if you're overstaffed, stretched too thin, or right where you should be.
This is the number most people mean by "payroll ratio." The formula:
Payroll percentage = Total payroll / Total revenue
Total payroll is wages, salaries, bonuses, commissions, payroll taxes, and benefits. The most common mistake is leaving out the taxes and benefits, which understates what your team actually costs (MetricHQ). Be consistent about what you include so your trend stays comparable month to month.
As a general guideline, payroll runs 15% to 30% of revenue for most small to mid-sized businesses, and a figure above 30% is often a sign that labor is starting to eat into profit (Rippling; PayPro). The word "often" is doing real work there, because the healthy range depends heavily on your industry.
|
Industry |
Typical payroll as % of revenue |
|
Retail |
10% to 20% |
|
Manufacturing |
15% to 30% |
|
Technology / SaaS |
20% to 30% |
|
Restaurants / food service |
25% to 35% |
|
Professional services (consulting, legal, accounting) |
40% to 50% |
|
Healthcare |
40% to 50% |
The takeaway is not to chase a single number. It's to know your industry's range, know where you fall in it, and watch which direction you're trending.
If your business uses Gusto, your payroll summary report breaks out wages, taxes, and benefits by pay period. Those three lines, added together, give you your total payroll figure. [Add Gusto screenshot here]
Ranges blended from Rippling, QuotaPath, MetricHQ, and ShiftFlow. Labor-intensive businesses sit high; product- and asset-heavy businesses sit low.
Where the payroll percentage measures cost, revenue per employee measures productivity. The formula:
Revenue per employee = Total revenue / Number of employees
The cross-industry average was about $350,000 in 2024 (Companysights). But that average blends a software firm doing $800,000 per head with a staffing business doing $120,000, so it tells you very little on its own (McCracken). The useful move is to compare against your own industry. For context, small professional services firms have averaged around $208,824 in revenue per employee, private software companies around $129,724, and retail and hospitality often land under $100,000 (Voted Number One 2026 report; SaaS Capital; HR Bench).
Track this over time. If you add people and revenue per employee holds steady or climbs, the team is scaling efficiently. If it drops and stays down, you've added cost faster than output.
Both ratios depend on counting payroll correctly, and the salary is only the starting point. A widely used estimate from MIT's Joseph Hadzima puts the true cost of an employee at 1.25 to 1.4 times their base salary, once you add the employer share of payroll taxes (7.65% for Social Security and Medicare), unemployment taxes, workers' compensation, and benefits (Connecteam; TrueTools). The Bureau of Labor Statistics reports that benefits alone average about 31% of total compensation for private-sector workers (Zogby).
In plain terms, a $60,000 hire usually costs the business closer to $75,000 to $84,000 a year. Budget for the loaded number, not the salary line, or your payroll percentage will run higher than you planned.
Say a service business does $1,200,000 in annual revenue with eight employees, and total payroll (fully loaded) comes to $480,000.
Now say the owner wants to add a ninth person at a $70,000 salary, roughly $90,000 fully loaded. Payroll jumps to $570,000, or about 48% of current revenue, and revenue per employee drops to $133,000 if revenue doesn't move.
That isn't automatically a bad call. If the new hire is expected to bring in more than $90,000 of additional revenue, both numbers recover. The point is that the two ratios turn "can I afford this?" into a question you can actually answer with numbers.
California's labor costs climb on a schedule, which makes your payroll percentage creep up even if you never add a person.
The statewide minimum wage rose to $16.90 per hour on January 1, 2026, up from $16.50 (California Department of Finance, via Davis Wright Tremaine). Some sectors are higher: fast food workers at large chains earn at least $20 per hour under AB 1228, and healthcare worker minimums range from $18.63 to $24 depending on the facility (Hanson Bridgett). Many cities set their own rates above the state floor, so the wage you owe depends on where the work is physically done (Pacific Payroll Group).
California also pays overtime on a daily basis, after eight hours in a day, not only after 40 in a week, which raises the cost of long shifts in ways employers in other states don't face. The practical effect is that your payroll percentage can rise on its own each year. Build the scheduled increases into your forecast rather than reacting to them after they hit.
If you answered no to two or more, your payroll may be drifting without you seeing it. That's worth a closer look before your next hire.
Both ratios come off two reports you already have: your profit and loss statement and your payroll summary. If you'd like to know your payroll percentage and revenue per employee, benchmarked against your industry, your accountant can pull them from your financials and walk through whether your next hire pencils out.
Internal Note - Sources