Payroll Cost For Small Businesses Explained

Payroll Cost For Small Businesses Explained

Running a small business isn’t easy, especially when you have employees that need to get paid. If your payroll and accounting systems aren’t up to par, things can get complicated very quickly. The last thing you want is to run into tax problems or incorrectly pay your workers when you are doing payroll.

Payroll cost varies depending on the type of system you use and whether you outsource these activities to a payroll company, or if you are paying an employee to process payroll in-house. First, consider the tasks involved in running payroll:

  • Employee forms
  • Hours worked
  • Overtime costs
  • Payroll and income taxes
  • Employer taxes
  • IRS deposits
  • Payroll service

Understanding Types of Payroll Expenses

Payroll expenses encompass a wide array of costs, beyond just the salaries and wages paid to employees. There are two categories to consider: direct and indirect payroll costs.

Direct Payroll Costs

Hourly Wages

Hourly workers are compensated based on a rate per hour worked. Federal and state laws, along with the Fair Labor Standards Act, dictate that certain employees must be paid overtime. The overtime rate usually falls between 1.5 and 2 times the hourly rate, depending on the state and the number of hours worked.


Some employees receive a fixed income per pay period, irrespective of the number of hours worked. While most salaried employees are exempt from overtime pay, there are exceptions that require attention.

Employee Benefits

In calculating payroll costs, include only the employer’s contribution to employee benefits, not the total cost of the benefits. These benefits may consist of health, dental, vision, life, and disability insurance, as well as paid time off, retirement plans, and post-retirement health insurance.


Both recurring and one-time bonuses add to payroll expenses and should be factored into overall costs.

Indirect Payroll Costs

Payroll Taxes

Employers are responsible for paying several types of taxes based on the gross pay of their employees. These include Medicare and Social Security taxes, known as FICA taxes, which amount to 6.75% of the employee’s gross income. Additionally, employers must pay federal and state unemployment taxes. The federal unemployment tax rate is 6% on the first $7,000 of an employee’s gross income per year, although the total amount can vary by state.

Administrative Costs

Administrative costs incurred from payroll processing can add up, regardless of whether you manage payroll internally or use a third-party service. The processes involve calculating gross and net pay, tax withholdings, completing and sending tax forms, as well as pay delivery. Employers should also maintain labor and payroll records as mandated by law to avoid penalties.

Average Costs of Payroll

Whether a business is using an in-house employee or a service, there are costs associated with running a smooth payroll. When using a payroll service solution, there are typically base monthly fees, fees for each employee that is on the payroll (costs of calculating payroll taxes, deposits, and cutting the check), and employer-paid taxes. 

Many payroll providers have fixed package pricing with a base fee that varies from $30 to over $150 a month, in addition to the cost of each employee, which could run from $2 to $15.

Depending on the type of payroll solution used, there are additional costs that may come up, unless it is a part of the initial package. These costs include:

  • 401k distribution
  • Tracking employee time
  • Workers’ compensation
  • Direct deposit, state and federal tax filings
  • Check delivery
  • Processing year-end payroll and tax forms

Payroll costs often increase with the frequency in which employees are paid. Every pay period, there are costs for checks to be sent out, whether they are paper checks or electronic. If the cost of doing this per person is $2 each pay period and the total number of employees you pay bi-weekly is 20, that is $4 per month (some months $6). If employees are paid weekly, that cost is now at least $8 per month. Multiply that by 20 employees and the cost is $80 or $160 per month. When you look at it from that perspective, it comes as no surprise that so many have looked for alternatives after TSheets pricing increased, even though they were already Quickbooks users.

Direct deposit is a convenient employer and employee benefit, but it is an additional cost. Setting up the direct deposit and other variables add to monthly costs, in addition to any direct deposits of employer fees.

One of the biggest payroll costs for employers is having different locations and states. Each state has its own local tax laws, which makes things tricky to navigate. When using a payroll provider, things may be a little easier, but the payroll expenses could exponentially increase.

Most Common Payroll Options to Consider

You can also consider doing it yourself, but you may not realize just how time-consuming it is tothe work and time that goes into making ensure everyone’s deductions are correct, payroll is disseminated on time, and the taxes are accurate. It’s not as easy as it may sound. 

In-House Bookkeeping

Payroll and its nuances need dedicated experts to successfully handle things. You can hire a bookkeeper, which is someone who can handle your payroll process, but you’re looking at about $75,000 a year if they are an employee on staff. 

Outsourced Bookkeeping

You can outsource a professional bookkeeper. However, the outsourcing costs may outweigh the advantages because of overhead costs that compare to that of a dedicated payroll solutions service.

Online Payroll Providers

An online payroll service provider solves the problem of knowing the tax laws, making the correct deductions, and handling all payments, filings, and other payroll items you may not have realized you needed. This may actually be the most cost-effective option that can help small business owners stay in compliance and scale as needed.

Automated Payroll Software

When considering the overall payroll costs, time, and manpower needed, think about the tasks, the number of employees you have, and the type of service you will need. Payroll software like Homebase makes things easier with its payroll system for hourly teams

With an employee app that makes information accessible at the click of a button and a painless process that easily converts timesheets into hours and wages, everything can be processed on time with no hassle.

Manually inputting timesheets can leave room for error. With an automated payroll system like Homebase, employees electronically clock in and out, so their breaks, overtime, time off, and accumulated time lives in one place. Any payroll or changes to their tax information can be confidentially changed online by the employee.

At a reasonable price, it’s easy to make payroll for your business work for you. Sign up for Homebase today and see how effortless payroll can be.

Small Business Payroll Cost FAQs

How Much Does Payroll Cost Per Employee?

Most payroll providers have a base fee from $30 to $150 dollars per month that increases by $2 to $15 per employee. There are additional costs to add on depending on how regularly you pay employees and whether you are using basic payroll services or a full-service payroll provider. 

What Costs Are Included in Payroll?

Payroll costs encompass wages and payroll taxes, as well as bonuses and paid leave. There can also be extra costs associated with paycheck delivery, time tracking and 401k contributions. 

Can You Do Payroll Yourself?

If you can’t afford in-house bookkeeping and outsourcing payroll is off the table, you can do payroll yourself. You would have to calculate your employees’ gross pay and deductible taxes to find their net pay for the period. This does however come with great risk, as mistakes can lead to false payments and even involvement of the IRS.