What is Payroll?

What is Payroll?

Payroll is the process of a business paying its employees as compensation for hours worked. It includes distributing money in the form of checks or direct deposit to the company’s personnel. Payroll is not exclusively paying employees on a month to month basis (or however often the payments occur), but it also includes keeping records of the payments and paying taxes of behalf of the employee’s wages. Typically, payroll is handled by the accounting department or human resources department in a business, but if the business is smaller, an associate or the owner directly manages payroll.

Payroll can get complicated. Companies must keep track of payroll, taxes withheld, bonuses, overtime, sick days, and vacation time. Because payroll is impacted by multiple variables, typically companies hire another company that streamlines the process. These companies must perform accounting and record keeping day to day activities as well as set aside money for Medicare, social security, and other unemployment taxes.

Payroll in Real Estate

In real estate, payroll is one of the most significant costs as far as operating expenses are concerned. Payroll constitutes anywhere from 30 - 40% of the expenses paid in real estate projects, specifically multifamily ventures. Payroll should always be included in financial models in order to accurately demonstrate the total operating expenses in a model. If payroll is not included, this could skew the NOI and as an effect, the gross sales proceeds would be overstated.

How to Model Payroll

There are many ways in real estate to model payroll. Sometimes companies like to detail every single employee position in the company and have a very granular version of payroll included into the model. Typically, most companies model payroll on a per unit annual basis. This is how payroll is modeled at Top Shelf Models. Depending on the size of the project, location, demographic, and other factors, payroll could be anywhere from $650 - $1,800 per unit annually. Before finalizing any financial underwriting, one should check the payroll plan for employees against the market salaries in the same location as the project to make sure your assumptions are in line.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions regarding discounted cashflows or if he can help you with your modeling needs.