Payroll services cost: A guide to choosing cost-effective solutions

Any business with employees can attest to the importance of payroll. Even with an amazing product or service and a stellar team, an organization that struggles to issue paychecks on time will face challenges with engagement, morale, and, eventually, turnover. Properly compensated employees are happy employees, and ensuring that payroll runs smoothly plays a key role in meeting that goal.

For businesses that find the administrative burden of payroll overwhelming or distracting, solutions exist. From online payroll systems able to calculate payroll, manage tax filing, and pay employer taxes to third-party payroll providers that allow you to outsource the entire payroll function, there’s a tool or service for every business.

What are payroll outsourcing services?

When your business outsources payroll services, it hires a third-party provider to handle many or all aspects of payroll administration. Rather than calculating wages, deducting taxes, and monitoring compliance in-house, the business assigns this responsibility to a specialist payroll provider.

While hiring a payroll company does come at a cost, it can also mean considerable savings. By outsourcing payroll, you eliminate the need for a dedicated employee with specialist knowledge on staff, as well as costs associated with purchasing payroll software or dedicated hardware. Outsourcing payroll services can also reduce the risk of fines and penalties for compliance errors.  

How much does payroll cost?

To determine whether outsourcing payroll to a payroll provider makes sense for your organization, you’ll need to understand how much these services cost. While exact amounts will vary depending on the specific services you require, the size of your business, and your geographic location, you can expect to pay at least $40 per month and $5 per employee over the year.

3 cost structures of payroll services 

Payroll companies use several different pricing models, ranging from a straightforward flat fee to a per-employee-per-month structure with additional fees for custom features.  

Per frequency

The most common way for payroll services companies to price their services is by payrun. For businesses with a steady headcount and a regular pay period that doesn’t require off-cycle payruns, this pricing structure offers both stability and savings. 

Example: Family Co. is a mid-sized family business operating in a single state with a steady headcount of 75 employees. The company runs payroll once a month and does not pay commissions or bonuses to any of its workers. A per frequency model ensures that Family Co. pays only for payruns the business needs.

Per employee per month

Similar to the per frequency pricing structure, a per employee per month (PEPM) model includes a base monthly fee, plus a separate fee for each employee. In a PEPM pricing structure, on the other hand, your business can run as many pay cycles as desired per pay period.

Example: Sales Agency employs a large team of sales reps and account managers, all of whom receive their monthly compensation in two parts. One payrun covers their base pay, the other covers their bonuses and commissions. The company also experiences high levels of turnover. A per employee per month pricing structure helps control the costs associated with multiple monthly payruns and saves money when Sales Agency’s headcount drops.

Fixed pricing

Other payroll providers charge a fixed annual fee based on the size of your business or the value of your payroll. If your organization has a stable headcount, this pricing structure may prove cheaper per employee, and you’ll also benefit from predictability when budgeting.

 Example: Widgets, LLC has recently grown from 50 employees to almost 75, and the people operations team would like to outsource payroll administration. Their preferred payroll services provider charges a flat fee of $5,000 per year for businesses with fewer than 100 employees. This fixed pricing structure allows Widgets to continue to expand without increasing its payroll costs.

5 factors that impact payroll services cost

Beyond pricing structure, other factors can impact your total payroll cost. Before selecting a payroll provider, you’ll want to consider factors such as how frequently your organization requires payruns, the location of your business, and even your industry.

1. Number of employees

If you opt for a per-employee pricing model, the size of your organization will directly correlate to the cost of your service provider. Larger companies can benefit from flat annual fees, while smaller businesses and those with fluctuating headcount may find a per-employee, per-month model more cost-effective.

2. Pay frequency

If your organization regularly runs payroll multiple times per month for commissions, bonuses, or other compensation, a flat monthly fee may prove more cost-effective than a per-pay cycle pricing structure.

3. Location

Payroll tax regulations and filing requirements vary from state to state. The larger and more complex your organization, the more time and effort required to effectively monitor compliance and deduct payroll taxes.

4. Customization

A small business operating in a single state won’t have the same needs as an enterprise with offices in multiple countries. A straightforward payroll software might suffice for the former, but the latter will likely require a bespoke selection of services and dedicated support from a payroll services provider. 

5. Direct deposit

If you offer employees a choice between direct deposit and a paper check, you may incur an additional fee to cover the cost of printing and stuffing envelopes. 

Pro alternative: 4 Tips to choose the best payroll services software

If outsourcing payroll administration to a payroll company doesn’t make sense for your business, but you still need help managing payroll and compliance, payroll software may be the solution.

Payroll software won’t take payroll administration entirely off your plate in the way that a payroll company would, but it can significantly reduce the administrative burden. Most cloud-based online payroll solutions integrate with other HR and accounting software tools and can help you to automate much of the work associated with payruns and paying payroll taxes. 

Businesses have plenty of options ranging from basic payroll administration software to human capital management tools with built-in payroll automations. Consider the steps below to choose the best solution for your business.

1. Understand your business needs 

If your business uses a straightforward pay structure with predictable pay runs and only operates in one location, a basic payroll software should meet your needs. A larger enterprise with multiple states or a variable compensation schedule will likely need something slightly more complex and flexible. 

2. Compare pricing structures and fees 

Once you understand which features your business needs, you’ll have a better idea of which software offers the most compelling combination of features. You’ll also start your buying journey by eliminating solutions that include bells and whistles that don’t align with your payroll and compliance processes.  

3. Look for software that offers comprehensive automation

The more automations and integrations your payroll software supports, the closer your experience will be to outsourcing payroll to a third-party company. A payroll software solution that integrates natively with your accounting software, for example, and that runs event-based automations to complete and file your Form 941 as soon as you complete your payroll calculations removes much of the busywork from your payroll process. 

Rippling: cost-effective payroll for your business 

As a comprehensive HR, IT, and finance solution, Rippling streamlines and standardizes multiple HR functions, including payroll, across your operations. Rippling Payroll supports automation of the payroll administration process, from calculating withholdings to completing required federal tax forms to managing monthly deposits.  

Customized workflows combine with over 600 native integrations to remove friction from payroll and other processes, while advanced reporting offers granular insights that decision-makers need. 

For employees, Rippling’s dedicated self-service portal provides direct access to pay stubs, benefits information, and important tax forms, like W-2s or 1099s. 

FAQs on payroll services cost

What is the average cost of a payroll service?

The average cost of a payroll company will vary depending on the size of your business and the specific features or services you need. Generally speaking, you can expect prices to start at $40 per month in administrative costs and $5 per employee. 

Can I do payroll myself?

Yes, businesses can handle payroll administration in-house with the help of specialized payroll software solutions. Payroll software with powerful automations can remove much of the administrative busywork from running payroll, while specialized software minimizes the risk of human error when calculating wages and deductions.

Is it cheaper to outsource payroll?

Whether it’s cheaper to outsource payroll to a payroll service provider or handle it in-house depends on a number of factors. The size of your business and the frequency of your payruns will have a significant impact on the cost of outsourcing, as well as the complexity of the services you need.

How do small businesses manage payroll?

Small businesses manage payroll in several ways. Many take advantage of payroll software to manage payroll administration in-house without the need for a dedicated expert employee. Other small businesses prefer to outsource this function altogether. In these cases, the business works with a payroll service provider to handle all aspects of payroll, including compliance and tax filings.

This blog is based on information available to Rippling as of August 21, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.