What Does an HR Budget Entail?

Jennifer L'Estrange
March 10, 2023

Creating an HR budget for a small business typically looks a little different from larger organizations. For many of our clients, they don’t have one when they start with us; we work with them to prepare an HR budget that allows them to scale sustainably.

What is an HR Budget? 

An HR budgeting process includes all people-related costs that support your business. Most obviously, this includes payroll and related expenses, but it also includes things that you might not consider.  In this article, we walk you through the different components of an HR budget and what you should think about when planning yours.

The Importance of Having an HR Budget 

If you have employees, you already have an HR budget, whether you think you do or not. The question is, are you managing it? For most of our clients, the HR budget is the single largest expense on the P&L. It’s important to proactively manage those expenses so the business scales and costs don’t run amok in the process. There’s an expression, “growing broke” which happens when expenses outpace sales over an extended period of time. So, while revenue continues to grow, expenses grow faster. If it’s not corrected, it can literally kill the business.

Key Elements of an HR Budget 

Depending on the size of your organization and the type of business you are building, an HR budget can include any or all of the following categories.


If you’re considering using agency recruiting as part of your organizational growth strategy, budget 20% of the employee base salary for each position you hire through them. An alternative to using an agency is recruiting process outsourcing, where your vendor partner charges a fixed fee per month for sourcing and recruiting services. This approach makes sense for organizations that are hiring multiple similar roles or scaling quickly and need to actively manage costs. Lastly, hire an internal or “corporate” recruiter. If you’re planning on sourcing talent internally, your budget should include salary, bonus and benefit costs, plus costs for any supporting software (see below) and advertising costs for job posts.


Arguably the most significant part of the HR budget, this section includes ALL compensation, including increases and bonuses during the year. Review headcount estimates as a first step, looking at each area of the business to determine how many positions you will need over the course of the year. We will usually use a general budget number to estimate annual base salary, pegged at 90% of the midpoint on the salary band for the role, prorated for new hires based on when you expect them to start. Once the headcount is set, gross it up for payroll taxes and benefits. We use 20-25% for budgeting purposes. If you don’t offer group healthcare benefits, 15% is enough here to account for payroll taxes as well as bonuses and other forms of variable compensation. If you don’t have established salary structures or are struggling with the workforce planning required to project headcount requirements, reach out to find out how our HR support services can help.

Training and Development

Budget employee learning and development as a cost per headcount as well as the time for employees to attend training. If you focus on on-the-job training for your people, factor that into utilization rates – the time your people are delivering work to move the business forward expressed as a percentage of the total time worked. Appropriate management of utilization rates is particularly important for service businesses, so consider this carefully in your overall workforce planning and budgeting.

Health and Wellness Initiatives

Smaller businesses may not include benefits and wellness in their budget at first. Healthcare benefits, while not required for organizations under 50 in the United States, are highly desired by employees and can have a positive impact on your ability to attract and retain the right people for your organization. Healthcare benefits can be expensive for small businesses and, once they are in place, are pretty much there to stay. So, consider carefully and review options. Professional Employment Organizations (PEO) specialize in providing benefits to small businesses at affordable prices, but it does create a shared employment relationship which can hamstring you when making difficult organizational decisions. 

If you offer group health or other insurance benefits, make sure you incorporate it into the gross up percentage applied to base compensation (see above). If you are considering adding health insurance benefits and you are a small business, bear in mind two things: once you put them in, it’s almost impossible to go back and the costs go up year over year. If you have selected a PEO as a cost efficient option for benefits, expect the cost increase in year 2 or 3 to be substantial.

For companies that are looking to differentiate themselves, there are a host of wellness options available, many of which don’t cost a lot of money. Flexible scheduling, disability insurance programs, telemedicine, employee assistance programs, and subsidized childcare services are all examples of additional programs that can be implemented to support your employees. The best wellness programs are the ones that are in line with your company values and meet the needs of your people. 

Workers Compensation

All businesses, regardless of size, are required to carry workers compensation insurance. The cost will depend on the type of business, but it’s really important to work with a broker who understands the job type codes and works with you to ensure your business is set up the right way and at the right price. Usually, we budget for workers comp either as a part of the % gross up in base compensation or it’s a separate line item based on the actual insurance quote.

Retirement Benefits

Similar to healthcare, retirement benefits are sometimes, but not always, offered in small businesses. From a budgeting perspective, include both administrative costs and employer contributions as a percent of total wages. For privately held companies, there can also be significant tax efficiencies for business owners through deferred profit sharing. Every company is different, so work with a financial advisor or retirement plan administrator to determine what works for your business. For what it’s worth, we use Ubiquity and while it took some getting used to from a customer service standpoint, it’s incredibly cost effective, the portal is easy to use, and integrates with a number of payroll systems (though not the big ones we all know – and who would prefer to sell you their 401k services…)


Compliance can range from EEO training – required in some states, recommended for all – to budgeting for employment law support with training and workplace investigations. At a bare minimum, make sure you have labor posters posted, physically or virtually for every state where you have employees. We recommend, and use, the subscription service from Labor Law Center.

HR Technology and Tools 

While not all businesses are ready to implement (or can afford) a full HRIS, all businesses will require some technology. Payroll and HR administration or employee self-service for payroll usually come first, followed by an applicant tracking system for recruiting. Next is usually a system for managing employee and business expenses. There are good cloud-based options for online learning in addition to full fledged learning management systems, which typically come into play when the business has reached a certain size and maturity level.

Outsourced HR Support 

Outsourced HR or recruiting can be a cost effective alternative to internal resources. External partners are typically faster to implement and can be scaled up or down according to business needs. If you’re considering your HR needs and are wondering whether you’ll be able to attract and retain the right talent for your fast-growing business, temporary or permanent outsourcing may be a good option. Contact us to explore your options.

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