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How Much Do Payroll Services Cost for Small Businesses?

Date of Posting : June 18, 2024

Handling payroll is a crucial aspect of running a small business, but it can also be time-consuming and complex. Payroll services for small businesses can help alleviate this burden, ensuring accurate and timely payment of employees while maintaining compliance with relevant laws and regulations.

Outsourcing payroll services cost varies depending on factors such as the number of employees, frequency of pay runs, and additional features required. Choosing the right payroll service provider from reputable accounting firms in Texas and other states is essential for seamless payroll management tailored to your business’s unique needs.

What Are Payroll Costs?

Payroll costs are the total expenses associated with compensating employees for their work at your business. These costs encompass various components beyond just the base pay or salaries. 

Typical payroll costs include:

  1. Base pay (whether paid on an hourly, piece, salary, or other basis)
  2. Bonuses and commissions 
  3. Paid time off and other employee leave 
  4. Employer’s portion of payroll taxes 
  5. Employee benefits contributions 
  6. Workers’ compensation insurance 
  7. Payroll administration costs 

Payroll expenses are the costs associated with hiring employees and independent contractors. They include gross wages, which are the starting point for payroll, as well as net pay, which is the amount the worker receives after all payroll deductions and withholdings. Processing payroll requires collecting and managing data, and your payroll expenses may change frequently.

How Much Does Payroll Cost for Small Business?

Managing payroll is a critical task for small businesses, but it comes with costs that vary depending on the method you choose. Let’s break down the costs associated with different payroll options.

In-House Payroll

In-house payroll means handling all payroll tasks within your company. This might involve using software or even doing it manually. The costs include:

  • Software Fees: Payroll software can cost anywhere from $10 to $100 per month, depending on the features.
  • Employee Time: The time your staff spends on payroll tasks can add up. For a small business, this could mean several hours per week, which translates to labor costs.
  • Training and Updates: Regular training to stay updated with the latest tax laws and software updates can also incur costs.

Outsourced Payroll Services

Outsourcing payroll means hiring a company to manage your payroll tasks. This option can be more expensive but saves time and reduces errors. The costs typically include:

  • Base Fees: Most payroll service providers charge a base fee that ranges from $50 to $150 per month.
  • Per-Employee Fees: There is often an additional charge per employee, which can be $2 to $15 per employee per month.
  • Additional Services: Extra services such as tax filing, direct deposits, and year-end reporting can add to the cost, sometimes up to $50 extra per service.

Online Payroll Providers

Online payroll services are popular among small businesses due to their convenience and relatively lower cost. These services are usually cloud-based and offer a range of features. Costs include:

  • Subscription Fees: Monthly subscription fees typically range from $20 to $100, depending on the number of employees and the features you need.
  • Per-Employee Charges: Similar to outsourced services, there might be an additional charge per employee, often between $2 and $10 per month.
  • Additional Features: Some features, like direct deposits or integrated benefits administration, might come at an extra cost, usually a small monthly fee.

What Factors Influence Payroll Costs

Payroll Frequency

The frequency at which employees are paid can significantly impact payroll costs. Some payroll service providers charge for each payroll run, while others offer an unlimited number of monthly payroll runs. This means that businesses paying employees more frequently, such as weekly or biweekly, may incur higher costs compared to those paying monthly. Additionally, if a business has different pay schedules for salaried and hourly employees, it can further complicate and increase payroll costs.

Number of Employees

Payroll processing services typically charge a per-employee fee per month in addition to the recurring service costs. Businesses can expect to spend between $3 to $15 per employee per month with a payroll service provider. As the number of employees increases, the associated costs of calculating wages, preparing paychecks, filing taxes, and handling deductions also rise.

Features of Payroll Services

Investing in user-friendly payroll software with additional features like time tracking, expense management, and benefits administration can help streamline processes and reduce the need for manual intervention, potentially lowering overall payroll costs.

Additional Fees

Apart from base and per-employee fees, payroll providers may charge additional fees for specific services, such as tax filing, garnishments, and workers’ compensation management. These extra fees can add to the overall payroll costs for a small business.

Most Common Payroll Options to Consider

Manual Payroll Processing

Manual payroll means calculating and cutting employee paychecks without software or a payroll specialist’s help. Most business owners should leave the number crunching to software or an expert, but some small business owners prefer to run payroll by hand to save money. If your business has just a couple of employees and you’re intimately familiar with payroll tax rules, you might be a good candidate for running payroll manually. In any other scenario, you’re better off enlisting software’s help.

Using Payroll Software

Unless you were a payroll administrator in a previous life, payroll software is a small business owner’s best bet at running payroll accurately and without breaking the bank. Even if your business has just one employee, consider the advantages and disadvantages of payroll software. As you add employees, it becomes less justifiable to run payroll by hand. Payroll solutions are set up to handle garnishment and other complicated payroll matters. When you have questions, customer support can help you to make payroll on time.

Hiring Payroll Services

If your staff is small, stable, and salaried, and if your tax obligations remain constant, you may have no trouble processing payroll internally. However, if your company payroll fluctuates per pay period, or you’re concerned about compliance with labor regulations, it might make more sense to outsource this important job. Both software and payroll services help eliminate errors by automatically calculating employee withholding and the employer’s payroll tax obligations. In addition to printing and delivering checks, basic services typically include calculating employee pay, withholding and taxes, providing automatic signatures and direct deposit, employer tax payments and filings, as well as processing Forms W-2 and Forms 1099, benefits administration, tracking paid time off, sick days and overtime, filing required reports with federal, state and local governments, and HR forms management.

Cost Breakdown of Payroll Services

Setup fees

Payroll providers may charge a one-time setup or implementation fee to cover tasks like adding employees to the system. This can range from a small fee to several hundred dollars.

Monthly base fees

Most providers charge a recurring base fee, typically between $25 and $150 per month, depending on the service level. This base fee covers the core payroll processing services.

Per-employee charges

In addition to base fees, there is usually a per-employee charge each pay period or month. This can range from $3 to $15 per employee. The per-employee fee accounts for calculating wages, taxes, and deductions for each staff member.

Additional service

Providers often charge extra for additional services like tax filing across multiple states, direct deposit, printed checks, year-end tax forms (W-2/1099), and reporting. These add-on fees can quickly increase overall payroll costs, so review what’s included in base pricing.

How to Choose the Right Payroll Service for Your Small Business?

In-House vs Outsourcing

In-house payroll involves managing payroll functions internally by hiring a payroll expert or team, typically bookkeepers, accountants, or HR personnel. While it offers full control and customization, it can be time-consuming, with estimates of around 5 hours spent every pay period. Additionally, it carries higher risks of errors and non-compliance, with businesses receiving nearly three times as many fines.

Outsourced payroll services involve partnering with a provider to manage administrative and compliance payroll tasks. This option offers expertise, compliance assurance, time and resource savings, and scalability but may result in a loss of direct control and dependency on the service provider.

Evaluating Payroll Service Providers

When evaluating payroll service providers, consider the size of your company, assess your budget, evaluate compliance and security policies, check the provider’s accuracy, and consider how much time you and your team have to process payroll. Additionally, ensure the provider has experience working with businesses similar to yours or in your industry.

Inquire about the true cost, including any additional fees for services like tax filing or direct deposit. Assess the level of customer support and how tax issues are handled. Timing is crucial when switching providers, with the ideal time being at the start of a new year or quarter. Inquire about security measures and background checks for employees.

Wrapping up

Managing payroll for a small business can be a complex and time-consuming task, but outsourcing to a reliable payroll service provider can help alleviate this burden. Ultimately, the key to successful payroll management lies in finding the right balance between cost and functionality. Whether opting for in-house processing, payroll software, or a fully outsourced service, businesses should prioritize accuracy, compliance, and scalability to ensure a seamless payroll experience for both the organization and its employees. 

Frequently Asked Questions

  1. What is the typical cost of payroll services for a small business?

The annual cost of payroll services for small businesses typically ranges between $200 to $250 per employee. This expense varies depending on the business size, the number of employees, and the required level of service.

  1. Are payroll services a good investment for small businesses?

Yes, payroll services are generally a wise investment for small businesses. They ensure accuracy in payments and tax compliance, which is crucial for both employee satisfaction and legal reasons. While businesses with only one or two contractors might manage manually, growing businesses benefit significantly from the efficiency and compliance that payroll services offer.

  1. How should a small business calculate its payroll?

To calculate payroll, a small business should start by collecting employee work hours. For hourly employees, add up the hourly wages and any overtime. For salaried employees, divide the annual salary by the number of pay periods. After calculating the gross wages, deduct applicable taxes and contributions to find the net pay.