How Much Does a Payroll Service Cost for a Small Business?

It's not uncommon for small business owners to do as much as they can themselves, payroll included. While that can work at first, many find that the time taken away from core operations and stress related to noncompliance, payroll errors, and potential IRS penalties eventually outweigh the initial cost savings. That's when they begin to wonder how much a payroll service costs for their small business and which one to choose.

Small business owners about to make their first hire, and owners already running payroll looking for alternatives, should use this guide for base pricing, DIY vs. software vs. outsourced considerations, and add-on costs.

How Much Does a Small Business Payroll Service Cost?

Several factors will determine payroll costs for your small business. Many payroll providers charge a monthly service base fee ranging from $20 to $200. You will also be charged a fee per employee each pay period and may be charged extra for:

• Multi-state employee payroll processing

• State and federal payroll tax filings

• Software and subscriptions

• Extras beyond base service

Consider hiring a payroll specialist if you prefer to have payroll duties handled professionally in-house. The salary for a payroll specialist varies by region, averaging roughly $64,000 to $65,000 a year.

It's important to understand the distinction between payroll costs and total labor costs. The direct cash expense to pay employees and process their wages, including gross pay, taxes, and service fees from payroll providers, is your payroll cost. Total labor costs include payroll and indirect costs like benefits, training, insurance, and overhead.

Payroll Pricing Models Compared

This easy-to-scan comparison will help you determine which model is right for your small business.

What Do Payroll Services Handle?

Payroll providers will typically offer base services that achieve your primary goal of remaining compliant with applicable state and federal authorities while paying employees accurately and on time. They may also offer payroll extras to a narrower group of clients who require more specialized services.

Payroll Basics

In addition to compliance and paying your employees on time, your payroll company should be able to provide basic services, including:

• Payroll record retention

• Tax withholdings

• Fund distribution

• Report and remit payroll tax payments

If your small business requires more specialized payroll services, inquire about specific payroll extras they provide and whether they would be willing to customize your service plan.

Payroll Extras

Extra payroll services are usually offered for an additional fee. Like basic payroll services, the precise cost depends on several factors, including the number of employees to be processed.

Payroll extras your small business may need include:

• 401(k) match

• Automatic check signatures

• Paper check printing and delivery

• Direct deposit option

• State and federal tax filing

• Tax form processing

• Tax penalty protection

• Garnishments

• Time tracking

• Worker’s comp

• Benefit administration (health insurance, retirement plan support)

Payroll Cost Factors

Your payroll costs will depend on several factors and requirements. In addition to service fees, you will likely pay a per-employee fee and a fee each time payroll is processed. If your business runs payroll weekly, you may be able to reduce costs by switching to a biweekly payroll schedule.

Payroll frequency can affect your annual per-employee cost if your provider charges a flat fee per pay run rather than a flat monthly fee per employee. For example, if the provider charges a base fee plus $5.00 per pay run for each employee, weekly payroll would cost $260 per employee per year, biweekly would cost $130, and semimonthly would cost $120.

Multi-state employee payroll processing, state and federal payroll tax filings (including FICA), registrations, and additional payroll services all contribute to your costs. While these cost considerations can feel like a lot, there are formulas available to help you generate a reliable payroll cost estimate.

How to Estimate Your Payroll Service Costs

Estimating payroll service costs will give you an idea of how much you would budget for the month or year. Use this formula to estimate yours:

• (Monthly fee) + (number of employees) x (per-employee fee) x (pay periods per month)

For example, $100 monthly fee + five employees x $10 fee per employee x two payment periods per month = $200 per month, or $2,400 per year in standard payroll costs. This estimate excludes extra payroll services that will increase your monthly costs, including:

• Year-end W-2 or 1099 form processing

• Multi-state filings

• Benefits management and administration, including 401(k) and health insurance

• Tax penalty protection or compliance add-ons

• Multi-state filings

Understanding your payroll business needs today while accounting for continued growth is essential.

Are Payroll Services Worth It?

Opinions differ among small business owners on whether payroll service providers justify the costs. Newer owners with fewer resources typically prefer to handle payroll themselves, while more established owners prefer to use a service.

Many established business owners initially handled payroll to reduce costs, typically as a short-term benefit. However, the threat of errors that can trigger compliance issues and penalties, as well as the outsized amount of time spent per pay period, are among the top reasons businesses switch to professional payroll support.

Payroll services help businesses:

• Avoid IRS penalties and late filing fees, which affect nearly half of small businesses, with fines ranging from a few hundred dollars to over $1,000.

• Ensure employees are paid accurately and on time to increase retention and boost morale.

• Stay compliant with complex, changing state and federal payroll tax laws.

• Gain peace of mind, so that owners can focus on their bottom line, not hours of payroll paperwork.

• Reduce the risk of exposure and liability due to misclassification or incorrect tax withholding.

• Promote long-term return on investment (ROI) with fewer fines, lower administrative costs, and more efficient operations.

Outsourcing Payroll vs. Payroll Software vs. In-House Payroll Employee

Your involvement and compliance risks should be factored into the payroll option you choose for your small business.

Hidden and Add-On Costs to Watch For

While running your own payroll presents numerous challenges, there are hidden costs and add-on fees you should be aware of before working with a service. Base subscription prices don't always reflect the total expense, so it's a best practice to regularly monitor for seemingly hidden and add-on payroll costs once you begin collaborating with a service.

• Year-end W-2 or 1099 form processing

• Multi-state filings

• Paper check delivery or direct deposit fees

• Off-cycle or correction payroll runs

• Tax penalty protection or compliance add-ons

• Benefits administration, including 401(k) match

FAQs about Payroll Service Costs

How much does payroll cost for a business with 5 employees?

Costs vary depending on the payroll option you choose. For example, total monthly costs typically range from $40 to $100+ for standard software tiers. This amount combines a monthly base fee with an additional charge per worker (usually ranging from $4 to $10). Extra features, such as multi-state tax filing, can increase this total.

Is payroll software cheaper than a full-service payroll provider?

Yes, payroll software is usually cheaper because you handle tax filings yourself. Full-service providers cost more because they automate compliance and tax submissions. However, software can become more expensive if errors lead to tax penalties.

What's typically included in a payroll service's base fee?

The base fee can cover access to core software and standard wage calculations. It often includes direct deposit processing and basic customer support. Full-service tiers also bundle automated federal and state tax filing into this fee.

How much does an in-house payroll specialist cost compared to outsourcing?

An in-house payroll specialist averages roughly $64,000 to $65,000 a year before benefits and taxes are factored in. Outsourcing software or payroll services costs a fraction of that amount annually. Small businesses save significantly by outsourcing routine administrative work that their in-house specialist would otherwise handle.

Can I switch payroll frequency to lower my costs?

Switching to a less frequent schedule, such as monthly rather than weekly, reduces processing actions. Fewer payroll runs can lower vendor transaction fees. However, check your state's laws before switching because many jurisdictions mandate specific minimum pay frequencies.

Are payroll service fees tax-deductible?

Yes, fees paid to third-party payroll providers count as ordinary and necessary business expenses. You can deduct these administrative operational costs on your business tax return. Payroll service fees are treated separately from employee wages.

What hidden fees should I watch for when comparing payroll providers?

Watch out for setup fees, year-end W-2 delivery charges, and extra costs for off-cycle runs. Some vendors also charge extra for multi-state tax registrations or garnishment processing. Always ask for a complete breakdown of costs, no matter how obscure, before signing a contract.

Choosing the Right Payroll Setup for Your Budget

Whether you're about to make your first hire or already have employees, now you have a better idea of what each payroll option costs, along with your required level of participation. Doing it yourself costs the least in terms of money but requires more of your time and increases your risk exposure, whereas hiring an in-house specialist usually has the opposite effect. Full-service virtual payroll is usually an appealing middle ground, where you benefit from professional expertise without the significant overhead.

If you're ready for payroll that works for your small business, removing the complexity while minimizing risks, explore 1-800Accountant's year-round payroll service.