Payroll is about more than calculating an employee’s total wages. Although distributing salaries is the core of
payroll processing, payroll services typically include a wide range of features. From software subscriptions and compliance management to administrative support, these additional services often contribute to the total cost.
Understanding the services behind payroll expenses is the first step to proper budgeting and choosing the right payroll solution. Whether leaders outsource or manage payroll in-house, having a clear picture of the total payroll services cost helps leaders make more informed and strategic decisions.
What are payroll service costs?
Payroll service costs are the fees a business pays to use payroll software or outsource payroll processing to a third-party vendor. These costs cover the tools and expertise needed to ensure employees are paid promptly while maintaining compliance with tax and regulatory agencies.
Payroll service costs aren't the same as payroll costs themselves. While payroll costs include employee wages, employer-paid taxes, and
benefits, payroll services specifically focus on the systems or vendors that manage and administer those payments.
What’s included in payroll service costs?
Businesses can use a software program to manage payroll in-house or outsource to a third-party team. In the first case, companies typically buy a subscription to use the software service, while third-party vendors might charge a cost of payroll per employee.
Whether businesses opt for a payroll services software or a
full-service provider, the fees for these products often cover a bundled set of features. Here’s a breakdown of what’s commonly included:
Direct deposit and payment distribution. Most payroll services support direct deposit, allowing businesses to electronically transfer wages to employee bank accounts. Some providers may charge for this service, especially for expedited transfers or off-cycle payments. Options for issuing paper checks, including printing and mailing, may also carry additional costs.
Compliance support. Beyond automated tax filing, many payroll providers offer tools and expert guidance to help businesses comply with labor laws and tax regulations. This can include alerts about regulatory changes, access to HR compliance resources, and assistance with audits or wage garnishments.
Employee self-service portals. Some options offer access to self-service portals, which give employees a database to securely access forms like their pay stubs, W-2s, and 1099s. Offering this accessible online space reduces the administrative burden on HR and gives employees an easy way to find important information independently.
How much does payroll cost? Calculating payroll costs for businesses
To get a clear picture of what payroll services cost a business, leaders need to assess both their needs and the available pricing models. A simple way to begin this process is by understanding the total payroll burden, which is how much payroll actually costs.
As a rule of thumb, total payroll costs — including wages, taxes, benefits, and payroll services — are generally
1.25 to 1.4 times an employee's
base salary. For example, if an average
employee salary is $50,000, the total payroll cost per employee could range from $62,500 to $70,000 annually. Payroll service costs are just one component of that total, and they can vary significantly based on company size, the complexity of its payroll, and whether it’s handled in-house or outsourced to a third-party provider.
Factors influencing payroll services costs
Several elements influence the cost of payroll services, and not all companies require the same features. Here are a few common factors to help businesses better predict costs and negotiate with providers:
Number of employees
Many payroll providers charge either per employee or in pricing tiers. In general, more employees means higher total costs, but there are potential savings with bigger workforces. Some providers offer volume discounts where businesses pay less per employee.
Payroll frequency
How often businesses run payroll (weekly,
biweekly, or semimonthly) can also influence costs. Some providers charge per payroll run, which means more frequent paydays result in higher overall costs. Others offer unlimited payroll runs under a flat monthly fee, which may be more cost-effective for businesses with frequent payment schedules.
Complexity of benefits administration
Companies offering a broader range of
employee benefits often face more administrative complexity. Some payroll services offer integrated systems for benefits administration as an add-on, which can raise the overall cost.
Operation across states or countries
Operating in multiple states or countries adds layers of complexity due to varying tax laws, labor regulations, and compliance requirements. Providers that support multi-jurisdiction payroll often charge more to account for the increased compliance burden and specialized expertise required.
Compliance requirements
Specific industries have unique compliance requirements to account for — for example, construction with
certified payroll or healthcare with
shift differentials. Businesses in any of these highly regulated sectors, or those with specialized reporting needs, may require more expensive payroll solutions with tailor-made services.
Payroll pricing models
When evaluating payroll service providers, companies will encounter several common pricing structures. Understanding how these models work makes it easier to compare vendors and choose a solution that aligns with both operational needs and budget.
Base fee plus per-employee fee. This widely used pricing model combines a fixed monthly or per-payroll base fee with a variable per-employee charge. For example, a $50 per month base plus $5 per employee equals a $200 monthly total for 30 employees.
Per-employee per month (PEPM). Regardless of how often a company runs payroll, a provider that charges PEPM charges a flat fee per employee each month. If PEPM is at $12 per employee, the monthly cost for a team of 30 is $360.
Fixed monthly pricing. Some providers offer a flat-rate monthly fee that covers a defined set of payroll services, often for businesses below a certain employee threshold. While this model is the easiest to calculate and the most predictable, it might not be suitable for companies with fluctuating employee counts or those expecting rapid growth.
Frequency-based pricing (per payroll run). This model charges a fee each time businesses process payroll. The more frequently companies run their payroll, the more expensive their payroll services are when these fees apply.
Strategies for managing payroll services costs
Controlling payroll services costs shouldn't come at the expense of efficiency or compliance. Here’s how to find the right balance between essential features and cost-effectiveness:
Evaluate outsourcing versus in-house processing. Outsourcing might be the more efficient strategy for smaller businesses with limited payroll capacity. On the other hand, larger organizations with established internal teams may find that managing payroll in-house provides greater control and long-term cost savings, especially when using software that integrates with other internal systems. Assess whether the additional cost of a third-party provider offsets administrative burdens and potential compliance issues.
Audit employee classifications and tax status. Misclassifying employees could lead to penalties and reprocessing costs. Regular audits can help keep payroll accurate and compliant for tax liabilities and other compliance requirements.
Regularly review benefit usage and adjust offerings. Benefits can significantly impact total payroll costs, especially when they’re underutilized. Regularly evaluate how frequently employees use various benefits and how those offerings compare to industry benchmarks. Adjusting or streamlining benefits packages based on usage data and employee feedback can reduce unnecessary expenses while still meeting workforce needs.
Choose a scalable solution. For companies expecting significant growth, opt for payroll providers that offer scalable plans and features. When businesses can upgrade on an as-needed basis, they adjust expenses over time and avoid the disruptive process of switching providers later on.
Complement payroll with greater financial flexibility
Choosing the right payroll service is a crucial step in shaping the overall
employee experience. An accurate and fast payroll process not only builds trust but also supports financial stability, which can have a meaningful impact on
talent retention and
morale.
However, even with timely and accurate pay, employees may feel financial stress, especially if unexpected expenses arise between paydays. To address this,
EarnIn offers a suite of
financial wellness tools, including
Earned Wage Access (EWA) where employees can get up to $150/day, with a max of $750 per pay period
in minutes, starting at $3.99 per transfer.
Employees also have the option to access their money at no cost in 1-3 business days.
Tips are always optional.
Paired with tools like
Credit Monitoring,
which helps employees track their credit scores, and
Balance Shield which helps protect against overdrafts, EarnIn helps employees build better financial habits. With no payroll integration required and no cost for employers, EarnIn is an easy benefit to offer.
Request a demo and see how
EarnIn can support employee wellness.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
This Blog was sponsored by EarnIn. While the author received compensation, the information shared is grounded in independent research and intended to provide helpful and accurate guidance to readers.
EarnIn is a financial technology company not a bank. Banking Services are provided by our bank partners on certain products other than Cash Out.
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