At first glance, many might think payroll is simply moving money from a company’s account to an employee via a paycheck or direct deposit. But there are many other costs involved, such as paying for taxes, benefits, and accounting software. Time and money must also be spent to ensure payroll is properly processed, submitted, and recorded. If you’re wondering, “How much does payroll cost?” this guide offers insights to better help you estimate expenses.
Factors That Affect Payroll Costs
Beyond wages, there are numerous costs to consider when estimating the amount of money your company will spend on payroll. Taxes are often the biggest factor, as these must be properly deducted, filed, and paid to the IRS and state tax agencies. Employers will also have to match FICA (Social Security and Medicare) taxes.
Benefits also factor into the payroll costs. For example, a company may match retirement contributions or pay for a portion of employee insurance policies.
However, of all these elements, one of the most overlooked is that of payroll administration. These expenses typically involve payroll software, hiring professionals to process payroll, maintaining relevant records, and paying any fines or penalties that may result from compliance issues.
Payroll Software Costs
There is a vast range of payroll software options available, each of which carries different price tags. If you’re a smaller business with just a few employees, you may only need to subscribe to a basic software program for an amount between $20 and $100 a month. However, the larger your business is and the more comprehensive your needs are, the higher your payroll cost will be.
Often, more comprehensive software service provider programs will start at around $100 a month, with an average additional price of $9 per employee.
Payroll Service Provider Fees
While you can always hire an internal accounting specialist to process payroll, it’s often much more affordable to recruit the services of a third-party payroll service provider. For a reasonable fee, these external providers will regularly process payroll to ensure employees receive correct salaries on time, taxes are paid on time, benefits are calculated, and records are kept. This approach can also help you avoid software licensing fees.
Estimating a third-party payroll service cost can be tough, as providers can follow various pricing structures. In general, the monthly fee for these services can range from $25 to $100, with additional costs of $2 to $15 per employee. The higher end of the spectrum is reserved for organizations that offer additional HR services—such as benefits administration.
Employer Payroll Taxes
Another tricky aspect of payroll expenses is taxes. When paychecks are prepared, the employee’s federal and state taxes must be deducted according to the information they provided on their W-4 form. While these funds technically are subtracted from the employee’s wages, the company is still responsible for filing and submitting them to the appropriate tax agencies.
FICA taxes, which include Medicare and Social Security, are split between the employer and employee. As such, a company includes half of these taxes when they’re figuring out how much payroll costs.
Having a solid payroll process should eliminate the risk of tax penalties and fees, but it’s still important for a company to have funds reserved to cover these costs should they arise.
Employee Benefits and Their Impact on Payroll Costs
Employee benefits can refer to a wide range of extra perks that a company offers its team members. And each of these benefits can have a unique impact on the question: How much does payroll cost?
Insurance policies tend to have the highest cost but will depend on how much the company covers. Most employees will be drawn to employers that pay for approximately 70% to 80% of medical, dental, and vision plan premiums. This amount isn’t always the easiest to calculate, as employees may elect different plans, some of which may be more expensive. Additionally, some may add dependents to policies, which can push the cost upward.
Retirement plans are another major benefit cost to consider. If a company matches 401(k) contributions up to a certain amount, they will have to deduct more from their payroll funds. While some employees may elect not to make any contributions, others may max out their contributions to increase the employer’s financial burden.
Vacation time, or paid time off (PTO), can also influence payroll expenses. While these amounts can technically be factored into the employee’s salary, the benefit can tangentially impact incoming revenue. Specifically, when a company pays PTO to an employee, salary is being provided but immediate work is not being completed, which may impact short-term productivity and its related earnings.
Business owners should also not forget to consider less common benefits when adding up expenses in a payroll cost calculator. Some examples of these benefits include paid volunteer time, student loan repayment assistant, and wellness programs.
Payroll Costs for Different Business Sizes
As a general rule of thumb, the larger a business, the higher the payroll costs. After all, the employer will be funding more salaries, taxes, and benefits. The cost also increases due to the fact that most payroll service providers and software programs will charge per employee on top of a base rate.
The size of the business may also impact the indirect costs of regulatory compliance. For example, when organizations grow, the regulations they must follow tend to get more complex. Navigating the risks of these regulations and making sure the company complies typically requires more in-depth payroll services, which can result in higher administrative costs.
Additional Payroll Expenses
Payroll expenses are never set in stone, as there are always additional circumstances that can fluctuate. Before you calculate how much does payroll cost, consider unexpected expenses that could send you over any internal estimates.
While base wages and salaries are usually easy to predict, it’s also important to prepare for overtime wages—especially during busy seasons when hours are longer or the company is short-staffed. And if sales are increasing, more revenue will be coming in, but employee commissions and bonuses may also be higher than usual.
Employees may also request to be reimbursed for work-related expenses—such as fuel, travel, and food. Or, if a team member is injured on the job, worker’s compensation insurance can also impact payroll costs as the company has to cover a portion of lost wages.
How To Minimize Payroll Costs
While it may seem like there’s always something to add to the cost of payroll, there are also plenty of ways to reduce the overall expense. As mentioned above, automating processes with software or saving on staffing with outsourced payroll services can significantly reduce internal payroll administration costs. Using a third-party payroll provider is also highly recommended, as they follow strict practices to prevent inaccuracies and mistakes, which minimizes the risk of penalties and fines.
When cash flow is strict, it’s also wise to still make sure employees are paid on time. Depending on the state, companies can incur significant fines for not paying on time. Rather than risking high fines, consider the best payroll loans and lenders to see if borrowing at a fair interest rate and provide a reasonable short-term solution for covering these costs.
Strategically preparing benefits packages can also help improve the bottom line. Cutting benefits is usually not a great idea, as doing so can make it more difficult to retain or attract employees who value those offerings. Instead, your company might work with a benefits administrator who can prepare packages where insurance providers offer reduced premiums.
If a significant portion of payroll is paying overtime, consider using scheduling software. This software can automate hourly employee schedules so that everyone is working a balanced amount of hours without excessive overtime. These programs also help ensure that employees are getting a fair share of work hours.
Final Thoughts
If your business employs others, payroll is just part of the game. But you don’t have to sweat payroll costs. With help from trusted professionals—such as third-party HR administrators and payroll service providers—your company can have a solid plan in place, stay compliant, and minimize costs. In the long run, these services will also help you save time and free up resources, allowing you to focus on growing the business and helping it thrive.