When you think of payroll costs, you probably think mainly about wages. But there are numerous additional payroll costs associated with running a small business, too.
Understanding total payroll cost can help you get a better hold on your finances, avoid costly tax problems, deliver a better employee experience, and of course finance your business for the long haul. Fortunately, a clear understanding of these small company payroll costs will go a long way.
From employee forms to income and employer taxes to IRS deposits, the right software will help you streamline these numerous processes. Below, we discuss payroll software that can help you stay on top of payroll details so you can focus on everything else!
How much should payroll cost?
Determining how much payroll should cost can vary depending on the business. Consider the following to help you understand total payroll costs:
Employee salaries: Typically, after payroll processing fees and taxes, payroll is 1.25 to 1.4 times what money actually goes to the person.
Taxes: The total federal payroll tax rate is 15.3%, with the employee covering half and the employer covering half. To break it down a little further: as an employer, you’re responsible for paying 6.2% in social security and 1.45% in Medicare.
Beyond the above categories, you might have additional expenses each pay period. For example, state taxes may also apply.
How do you calculate payroll costs?
You can determine your total payroll cost per-employee by adding up indirect and direct costs. This could include:
- Gross wages
- Overtime
- Benefits
- Commission
- Bonuses
- Taxes
- Payroll software costs or other admin fees
Again, the above categories can have various costs depending on your business, as well as the state you’re in.
Payroll software cost: how much to budget.
Payroll software can help you streamline payroll and free you up to focus on driving your business forward. Plus, payroll software can often be a lot cheaper than payroll outsourcing costs.
Depending on your business and the type of support you need, payroll software cost varies. Let’s break it down based on support.
No software
Without any software, you’re obviously avoiding monthly or annual payroll software costs. But you’re also accruing costs elsewhere.
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- Payroll outsourcing services: The cheapest payroll services can range anywhere from $25-200 each month, going up based on your team size and requirements.
- Time: Manually processing payroll, especially without experience, can take you hours per employee each pay period. That’s time you’re paying yourself for—or time being eaten up in ways that could be spent bringing in money instead.
- Risk: Manually running payroll also runs the risk of costly errors. In fact, a single payroll mistake costs $291 on average.
Payroll is a time-consuming process. Unless you’re an accounting guru by night—and even then—the no software route can take a toll.
Entry-level software
Entry-level payroll software is typically suited for small businesses with few employees. As a result, it’s often fairly cheap to start. (Think $2 or so, per user each month.)
Oftentimes, entry-level payroll software gets around the small monthly charge by incorporating additional charges:
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- Location: Additional locations often require an upgrade, or in some cases, another subscription entirely.
- Number of users: As your company grows, the price of the software typically grows with it.
- Tax support: Additional tax support, such as end-of-year filing, often requires an upgrade.
- HR support: If you need added HR support, this is often an add-on, or a higher tier plan.
For most small businesses, entry-level software is a great fit. If you have multiple locations or require additional business support, a higher-tier plan that incorporates other management features could be the ticket.
Enterprise software
Enterprise software is often the most expensive from a per-month standpoint, but includes features that make it worth it for many businesses.
Enterprise payroll software often includes things like:
- Quick access to HR support
- Advanced tax filing features
- Onboarding tools
- Integrations with accounting software
- Advanced security and compliance features
Keep in mind enterprise software is often based on custom pricing, which can vary depending on the size of your company. But, this isn’t always the case. For instance, Homebase offers an all-in-one tier that supports unlimited employees for $80 per-location.
Payroll pricing: a non-exhaustive guide of 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.
Salaries
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.
Freelancer/contractor costs
Don’t forget to include the wages of any freelancer or contractors you’re using, whether a one-off engagement or ongoing. But keep in mind this expense won’t include any of the tax or benefit withholdings.
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.
Bonuses
Both recurring and one-time bonuses add to payroll expenses and should be factored into overall costs.
Commissions
Similar to bonuses, include any kind of commissions when factoring total payroll cost.
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 and HR-related costs incurred from payroll processing can add up, whether you manage payroll internally or use a third-party service.
Administrative 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.
The cost of payroll services
As we briefly touched on earlier, you can handle payroll sans software or support. But these costs can add up quickly. Be sure to include them in your calculations if you use these services.
In-house bookkeeping
Payroll and its nuances need dedicated experts to successfully handle things. You can hire a bookkeeper—someone who can handle your payroll process—but you’re looking at about $75,000 a year if they are an employee on staff. And again, their wages would include benefits and all the aforementioned costs that come with employees.
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. When you outsource bookkeeping, you’re also putting the control of your pay in someone else’s hands, rather than keeping it in-house.
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.
Streamlining payroll
There’s no getting around payroll. Even if you’re flying solo, you still have to pay yourself. But you don’t have to worry about payroll cost or the time it takes if you have the right platform.
Payroll with Homebase is a breeze. With Homebase, you can:
- Send auto clock in and out reminders
- Automatically track hours, breaks, overtime, and PTO
- Set auto-payroll and stop stressing entirely
- Find time to focus on your business and doing what you love
With a free trial, what do you have to lose? See how you can get on a roll with Homebase payroll today.
Small business payroll cost FAQs.
How much does payroll cost per employee?
Typically, payroll costs roughly 1.25-1.4 times a person’s wages. On top of this, you also have to factor in your portion of FICA taxes, which come out to 6.2% for social security and 1.45% for Medicare.
What costs are included in payroll?
Payroll includes both direct and indirect costs. This includes:
- Wages/Salaries
- Freelancers/contractors
- Benefits
- Bonuses/commissions
- Taxes
- Administrative costs
Can you do payroll yourself?
You can do payroll yourself. However, it’s time consuming, resource intensive, and carries with it a risk of making costly errors. In most cases, not having payroll software means having an in-house bookkeeper or third-party.
Is payroll an expense?
Payroll is an expense, as it’s a cost related to your business. This means payroll should be included in any expense reports.
Who does payroll in a company?
Payroll is often handled by the finance department, or administrative or HR professionals.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
