Payroll and Benefits Explained: What Every Employer Needs to Know

Every company runs payroll. But the best employers use it as a system for distributing benefits that are attractive and built to enhance your employees’ lives. 

This guide discusses the link between payroll and benefits in more detail, including the difference between mandatory and optional benefits, and how they’re key to retaining talent in 2025.

How do payroll and benefits tie together?

Payroll and benefits are deeply interconnected components of employee compensation. We’re all familiar with payroll as the system that delivers an employee’s wages and handles payroll tax withholdings, but it’s also the mechanism employers use to manage and distribute certain benefits. 

For example, payroll systems calculate and deduct employee contributions to health insurance, retirement plans, and commuter programs, automating the financial side of benefits administration.

Payroll benefits required by law

U.S. employers are legally obligated to offer certain payroll-related benefits, most of which are tied directly to payroll systems for tracking and compliance. The following core HR payroll benefits are mandated by US law:

• Social Security and Medicare (FICA taxes): Employers must contribute to Federal Insurance Contributions Act (FICA), which funds Social Security and Medicare. You’re responsible for withholding the employee’s share and matching it as the employer.
• Unemployment insurance: Both federal and state laws require employers to pay into unemployment insurance programs, which provide temporary financial assistance to eligible workers who lose their jobs through no fault of their own.
• Workers’ compensation insurance: Most states require employers to carry workers’ compensation insurance, which covers medical costs and lost wages for employees injured on the job. Requirements and coverage vary by state.
• Family and medical leave (FMLA): Under the Family and Medical Leave Act (FMLA), eligible employees are entitled to up to 12 weeks of unpaid, job-protected leave for certain family or medical reasons. While it’s not a paid benefit, payroll systems often track leave usage and benefits continuation during time off.

Additional payroll compliance requirements 

While not strictly classified as benefits, certain wage-related obligations are also enforced through your payroll system and essential for compliance. These include: 

• Minimum wage: Employers must pay at least the federal minimum wage or the applicable state or local minimum, as required under the Fair Labor Standards Act (FLSA). 
• Overtime pay: Non-exempt employees must receive overtime pay at 1.5x their regular rate for any hours worked over 40 in a workweek. Payroll must calculate this correctly based on time tracking records.

Payroll benefits in other countries 

Outside of the U.S., other countries often face stricter legal requirements related to offering benefits. So, if you have a globally distributed team, take care to understand the payroll and benefits laws specific to each country where you operate. Here’s a quick snapshot of what’s required. 

• Canada: Employers must contribute to the Canada Pension Plan (CPP) and Employment Insurance (EI). Health coverage is primarily public, but some employers also provide supplemental health benefits.
• United Kingdom: Mandatory benefits include statutory sick pay, maternity and paternity leave, and workplace pension contributions under the country’s auto-enrolment scheme. Employees are also entitled to a minimum of 28 paid vacation days (including public holidays).
• Europe: Employers are generally required to provide contributions to public pension systems, universal healthcare, and unemployment insurance. Paid parental leave is far more generous, with countries like Sweden and Germany offering up to a year or more of job-protected leave. 

4 payroll benefits to strengthen your employer brand in 2025

Employers can attract and retain employees by going one step further than mandatory benefits and offer voluntary benefits that contribute to a positive work environment. Here are some of the most competitive benefits you can offer this year. 

Robust healthcare benefits

Healthcare continues to carry weight in how employees evaluate their workplace. 88% of employers consider health insurance one of the most important parts of their benefits strategy, due to rising medical costs, shifting demographics, and broader conversations about health equity are all shaping what people expect from their plans.

Case in point: menopause support. For the first time, SHRM’s 2024 Employee Benefits Survey asked employers whether they offer resources in this area. 17% confirmed they offer education or counseling, but only 2% offer leave tied directly to menopause symptoms, which means most companies are still treating it as a standard sick day issue.

There’s an opportunity here to lead. Expanding your healthcare offering, whether through targeted HR processes, flexible plans, or supplemental support helps more employees feel seen and supported in ways that matter to them.

Greater retirement funding 

For many workers, retirement feels more uncertain than ever with 64% of Americans more afraid of outliving their money than of dying. 

Employers can shift that narrative simply by educating their workers better about retirement planning. While 75% of U.S. workers have access to retirement plans, only 57% are actually enrolled. Whether it’s due to low wages, lack of education, or unclear plan design, that drop-off points to a missed opportunity.

Employers can also pay attention to how generous their match is, how simple the plans are to navigate, and whether you're investing in their long-term stability. Fidelity’s latest data shows the average 401(k) balance hovers around $132,300, not nearly enough for most people to retire on.

Caregiver support 

Childcare and eldercare are pressing issues for a growing number of employees, who’re looking for financial support that shows up in real, practical ways.

Paid caregiver leave is one solution, tracked and processed through payroll alongside other time-off policies. According to Care.com’s 2024 Future of Benefits Report, 56% of employers prioritize childcare, up from 46% in 2023; 50% are now focused on eldercare, compared to 43% the year before.

Increased personalization 

Employees come to work with different priorities and definitions of what support looks like. A parent with young children, a remote developer in a rural area, and a mid-career manager focused on professional growth may all value entirely different benefits. 

Lifestyle spending accounts (LSAs) are an effective way to deliver that flexibility and personalization. Employers offer a set allowance, distributed through payroll processing, that employees can use across categories like wellness, learning, lifestyle, or home office setups, depending on what fits their lives.

Benepass’s 2025 Benchmarking Guide shows that 63% of employers offering customizable benefits now use broad LSAs that span multiple categories. These programs are seeing strong traction, with a median utilization rate of 87%, far higher than more rigid, single-purpose perks.

How to design the perfect payroll benefits package

Creating an effective payroll benefits package is about aligning your offering with what your employees need and will actually use. Here's a step-by-step guide to build a benefits package that supports your workforce. 

1. Define clear objectives and budget 

Before selecting specific benefits for your employees, clarify what you aim to achieve by offering them a benefits package. For example, do you want to increase retention or strengthen your employer brand? Perhaps you want to boost your benefits utilization rate because your current offering isn’t popular among your workers? 

Once you’ve clarified your North Star, collaborate with your finance department to determine the average cost of benefits you can afford. This process involves reviewing your current expenses and forecasting any upcoming costs to give you a better idea of affordability—after all, few employers are in a position to offer all the benefits. To shape your decision, consider factors like company size, industry standards, and employee needs. 

2. Understand your workforce’s needs

A strong benefits package should reflect the people it’s built for. Before finalizing anything, take time to understand what your employees actually want. That means asking the right questions and listening carefully to the answers.

You can gather feedback through surveys, anonymous polls, or small-group discussions, whichever method makes sense for your team size and setup. Don’t assume you already know what matters most. A mix of ages, career stages, and lifestyles often means priorities vary widely. 

Here are some helpful questions to include in your research:

• Which current benefits do you use the most?
• Are there any you’ve never used or don’t fully understand?
• What’s one benefit you wish we offered?
• How well do your current benefits support your health, finances, or work-life balance?
• If you could personalize your benefits, what would that look like?

3. Align benefits with company culture and values 

Your benefits package should feel like a natural extension of your company’s identity and reinforce the kind of workplace you’re building.

Here are a few quick examples of value-aligned payroll benefits:

• A mission-driven nonprofit might offer paid time off for volunteering
• A remote-first tech company could cover home office setups or coworking space memberships
• A startup that prizes agility might let employees design custom perk bundles instead of offering a rigid plan

The goal is to make your benefits feel meaningful and connected to the bigger picture of why people choose to work with you.

4. Design a flexible and inclusive benefits package

A flexible benefits model gives people more choice in how you support them. Personalization could mean a stipend employees can spend across categories like wellness, learning, or lifestyle. Or it could look like a cafeteria-style plan where they pick and choose from a menu of options based on what matters to them.

Flexibility also shows up in how you deliver employee benefits. For example, remote workers might appreciate digital-first solutions, or benefits they can use in their locality. The key is to build something that meets people where they are, not where you assume they should be.

5. Ensure legal compliance and regularly review offerings 

Benefits come with rules attached. Employment laws change, so what was compliant last year might be outdated today. Before processing payroll, make it a habit to check in regularly with legal or HR advisors to stay aligned with local, state, and federal requirements.

These check-ins are also a chance to evaluate how well your benefits are working. Are people using them? Are they still relevant? If not, it might be time to refresh your offering. What worked for a team of 20 may not hold up when you’ve grown to 200.

6. Communicate benefits effectively 

You could have the best payroll benefits package in the world, but if your employees don’t know about it, or how to use it, your offering won’t land. The answer? You need to spread the word using clear, jargon-free messaging. Here are a few ways to get the word out:

• Add a benefits hub or FAQ section to your internal wiki or HR platform
• Run short explainer sessions or drop-in Q&As
• Share regular Slack or email reminders, especially when deadlines approach
• Use short videos or visual guides to break down complex options
• Ask managers to bring up benefits during check-ins or team meetings

7. Gather feedback and measure satisfaction

Once your benefits are up and running, keep an eye on how they’re performing. Do you have happy employees who are actually using what you’re offering? You can track their satisfaction in a few ways:

• Review enrollment and usage data
• Monitor which benefits are generating questions or confusion
• Check in during performance reviews or exit interviews
• Watch for patterns in retention or engagement metrics

Over time, these insights allow you to fine-tune your offering so it stays relevant and appreciated.

Delegate your payroll benefits to Benepass

Benepass is a people-first platform designed to simplify benefits administration for your in-house teams, while providing employees with the flexibility and support they need. 

We offer a wide range of payroll benefits (both pre- and post-tax) that will delight your employees throughout their time with you. Our lifestyle spending account is our most popular option, empowering your team members to choose the most meaningful selection of benefits that suits their lives. 

Ready to give your payroll benefits a boost? Book a free Benepass demo today or contact sales@getbenepass.com to connect with a benefits specialist.