An organization’s HR budget is the financial plan that outlines the expenses required to manage and support its workforce. While employees are likely to be your organization’s greatest asset, they can also be the most significant investment. This means it makes sense to consider the bottom line when building a team.
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What you’ll learn
What you’ll learn
Updated: April 2, 2025
Key takeaways
- Understand the key components of an HR budget
- Learn the budgeting process for an annual HR budget
- Explore ways to calculate HR costs
What if you are new to HR budgeting and wondering where to begin? In this how-to, we’ll walk you through what goes into it, the calculations to use, and what else to consider when putting together a budget plan.
Key components of an HR budget
In a nutshell, an HR budget accounts for all of your organization’s workforce-related expenses, from pay schedules to benefits administration. To get a better handle on HR budget planning, we spoke with Michael Franco, an organizational development consultant who has advised clients from resource-conscious startups to Fortune 500 companies.
In your experience, what should be included in an HR budget?
“A well-rounded HR budget should account for more than the costs of benefits, compliance, and HR technologies.Companies should include items like onboarding swag, professional development, wellness programs, and even engagement initiatives such as contests.”
— Michael Franco, People Operations & HR Business Partner
It’s also important to account for all the “usual suspects” when it comes to human capital management, which means any planning costs should include:
- Talent acquisition: Investments associated with recruitment, the hiring process, employee onboarding, and more
- Employee training and development: Costs of internal professional development, such as certification courses or additional schooling
- Compensation and benefits: Costs associated with salaries, wages, bonuses, commissions, benefits, and other types of perks.
- Technology investments: Costs including HR technology, recruitment technology, and other subscriptions necessary to support HR teams
Each of these “people-first financials” is hard to ignore when building a budgeting strategy so that your HR team has the tools for the day-to-day admin tasks, as well as getting the attention of top job candidates. This is especially important if you’re offering employee benefits. It’s almost a given that this will mean an uptick in the overall cost of your workforce.
Moving on, let’s discuss more about putting the dollars and cents together for a company’s HR efforts.
Budgeting process in HR
You never want to miss payroll or be unable to afford the benefits you have promised employees. That’s a major breach of your employees’ trust and can even lead to legal consequences. It is one of the main reasons you’ll want a “people and culture spending plan” in place that adequately covers all the department’s costs. Fortunately, the budgeting process is straightforward for most employers.
Creating a comprehensive budget plan
A comprehensive budget accounts for all the key components we have listed above. You may have financial forecasts for the upcoming year, but how do you make a budget without knowing exactly how much money the organization will have available? There are a few common number-crunching strategies that HR departments use:
- Incremental budgeting: This method makes small adjustments to the previous year’s HR budget based on anticipated changes or new objectives
- Zero-based budgeting: This method creates a new budget for the upcoming year and allocates specific sums for each expense you expect to have throughout the year. It can help allocate resources, identify inefficiencies, and provide flexibility if the annual budget doesn’t go quite as planned
- Flexible budgeting: This method is designed to be adjusted throughout the year. It’s most commonly utilized by new businesses especially vulnerable to market changes as well as seasonal businesses which incur many variable yearly costs.
The right method for your organization really depends on your specific situation. When organizing your HR budget, accessibility and clarity are key for stakeholder review and cross-departmental collaboration. We asked Michael Franco about the most effective ways to manage the financial details so everyone can stay on the same page.
How do you format an HR budget?
“HR budget formats largely depend on the size of the company. Smaller companies often use structured spreadsheets with senior leadership directly involved. Larger companies will use financial software or a human resources information system (HRIS) and require partnerships with the finance and operations teams. Large and small company budgets should be broken down into key categories to ensure that spending aligns with the overall budget and the company’s goals.”
Monitoring budget performance
Setting a budget is just the first step. As you progress through the year, it’s essential to pay close attention to your HR budget. It may quickly become apparent that you haven’t budgeted enough for the HR team. Perhaps the business outperforms expectations and can afford to offer a new benefit or hire new team members to support sustained growth. Monitoring the budget throughout the year will help inform any necessary changes and give you valuable data to support your budget calculations for the following year.
Adjusting budgets for economic changes
Payroll, benefits, and employee training tend to be significant costs. If your business isn’t performing as planned, you may have to make budget adjustments. Make sure you balance those budgetary changes with employee satisfaction. Nobody wants to lose their job, so keep track of where you may have some wiggle room in the budget and where to make sacrifices to avoid layoffs.
Sticking to a budget is difficult, especially when you create a single annual budget and must monitor it throughout the year. New businesses that are still learning their market should be open-minded and willing to adjust budgets based on economic factors.
Next, let’s find out more about the figures businesses should pay attention to.
Calculating the HR budget
Calculating an HR budget is fairly straightforward. The hard part is forecasting the right numbers to support added costs that weren’t included the previous year. A basic formula for an HR budget is:
- Employee compensation + payroll taxes + training costs + recruitment costs = HR budget
That looks simple, but that’s really all a budget is: adding the expenses you expect to have to determine how much you’re willing to spend. Considering that HR is a crucial department to your organization’s success, it’s a good idea to be generous when predicting costs. It’s better to allocate more money for hiring and professional development than not enough.
Once more, to get a ballpark on where the numbers may go, we tapped Michael Franco for his expertise in working with businesses.
From previous planning, how much is a typical HR budget for a small business?
“Speaking solely to small businesses, I have seen annual budgets of $1,800 to $4,500 per employee. This would include things such as HR Tech, payroll and benefits admin, company offsites, and employee development programs. This range varies based on company priorities. If a company is scaling, it may want to spend more of its budget on job postings or sourcing tools. If a company is building a culture, it may invest an additional budget in training and team building. Each scenario will be unique.”
— Michael Franco, People Operations & HR Business Partner
Having an HR budget has benefits for employers and employees
It takes time to assess historical data and forecast finances to build an HR budget. However, an HR management tool can help you automate this entire process. Using your existing workforce and historical data, you can establish performance metrics and key performance indicators (KPIs) to analyze your HR budget throughout the year. This can help reduce turnover costs, improve employee retention, and keep your budget on track.
Ready to implement a better HR budget strategy? Check out OnPay’s comprehensive HR tools and see how they can help you create and manage an effective HR budget for your company.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.