How Much Do Payroll Companies Charge?

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How much do payroll companies charge? We’ll get to this in a short while, but first, a brief background on why this industry is thriving. According to the U.S. Bureau of Labor Statistics, employer costs for employee compensation averaged $35.28 per hour worked in June 2017. And this excludes the derivative costs or processing payroll, such as, HR personnel, payroll software and regulatory compliance.

Moreover, preparing payroll goes beyond wage calculation; the whole gamut of employee compensation must be calculated, including commissions, bonuses, taxes and deductions, where applicable.

The whole payroll process can overwhelm a small business with a large staff and eat up its time and resources that could have otherwise been allocated to revenue-making areas like sales, marketing and networking. In fact, the National Small Business Association reported that 40% of U.S. small businesses spent 80+ hours yearly for federal taxes, the bulk of which relates to payroll. More so, an overworked, understaffed or ill-trained HR is vulnerable to payroll errors, which brings with it stiff federal and state penalties.

So it won’t come as a surprise why businesses are turning to payroll companies. They reap these benefits:

  1. Save time
  2. Reduce risk
  3. Reduce costs
  4. Leverage expertise

Source: National Small Business Association

In this article, we’ll go beyond answering: How much do payroll companies charge? We’ll also break down the costs and explain how you will be charged. For more info on what are the components of payroll software check our other guide.

1. Basic Payroll Outsourcing Costs

Most payroll companies offer a basic package with monthly or per paycheck charges. The fee can range between $20 and $200 per month depending on factors like frequency of payroll, volume, tax requirements and service bundles. Some providers also charge a separate per-paycheck fee around $1-$2.

A basic package typically includes paycheck processing, direct deposit and standard tax filing. An online portal for employers and employees may be thrown in to help them check the calculation breakdown or as an archive for their wage history. The online site can replace the need for paystubs.

Take not that payroll companies usually offer discounts to companies with larger employee pool or if you avail yourself of their other services like tax assistance or dedicated support. A small business with ten or less employees may be better off doing things in-house, relying on any of these top 20 payroll software solutions to streamline or automate the process.

2. Software fees

If the payroll company requires system access you may be charged with one-time license fee, setup fee, maintenance costs and upgrades. Be mindful of these potential hidden fees and always ask the provider for transparency.

It is not to say you don’t need a payroll system. Not only does it help you monitor salaries and their cost breakdown, but it may feature analytics that lets you generate insights such as per capita vs. total payroll costs over various time periods. You can leverage these insights in your budget planning and for other strategic decisions.

If you already have a payroll system but decide to outsource the process anyway, avoid a package with a system bundle. Otherwise, you end up paying for duplicate items.

3. Additional fees

Some payroll companies may only offer paycheck processing in their basic package. In such case, they are likely to charge for add-on services, including direct deposits, check preparation and employee data entry. Also, emergency changes or updates to paychecks usually carry an extra charge. Most likely, you will need these extra features to optimize payroll outsourcing and entirely free you from in-house payroll headaches. If your budget is tight, a payroll company that offers scalable add-ons and pricing terms should be at the top of your list.

4. Payroll Tax Service Cost

Most payroll companies have tax filing in their basic plan, but most charge separately for tax service. This includes year-end tax preparation, such as W-2 printing, mailing and reporting. Charges may also apply to quarterly or monthly payroll tax preparations on top of annual tax processing . The cost can go as high as $40 and above per employee for every transaction.

Other factors that may jack up payroll tax service fees include pre-tax arrangement with your employees, complexity of tax duties, multiple state requirements and if you have employees in other countries. Again, check these potential hidden fees before getting a provider for long-term cost-efficiency. There will be instances that the presence of multi-layer fees can cause you runaway costs, and in such case won’t merit outsourcing.

5. Payroll Schedule

This item will impact on your answer to: How much do payroll companies charge? The more frequently you pay your employees, the more charges you will incur. To cut on costs, some companies would assign a monthly payroll schedule, but check if your state allows monthly payday. For example,  Alaska, Kansas, Nevada and North Dakota allow it, while Connecticut and New Hampshire mandate weekly payday alone. The rest mix and match weekly, bimonthly and monthly schedules.

6. Paycheck Delivery

Some companies still adhere to the traditional process of having paychecks distributed to employees instead of direct deposits. If you require this service the payroll company may apply special fees outside of standard ground courier. The fees depend on various factors such as type of delivery, location, courier provider and state regulations. Take note, too, that paycheck delivery cost is directly proportional to your payroll frequency. Furthermore, next-day deliveries are expected to come with a surcharge.

7. Miscellaneous Payroll Outsourcing Costs

Always read the fine print when tapping payroll companies. There may be other costs lumped under “miscellaneous” or buried in the terms. Here are common small charges that, when piled up, may cost you an arm and leg:

  1. Revision fee may apply to correct wage errors caused by you; for example, you fail to update the provider of a pay increase or resigned employee.
  2. Setup fee for your new account.
  3. Fee for updating employee database like adding or removing employees from the list.
  4. Annual fees charged at every end of fiscal year for tax filing and reporting.
  5. Fee for on-demand payroll report.
  6. Your number of employees goes lower than the baseline for discounted rates.

Knowing exactly the costs of payroll outsourcing gives you tight control over this major operational expenditure. The items we have discussed above are the common costs associated with payroll companies, but by no means they are the only costs, or that you will be charged with all of these. Armed with this knowledge, you can negotiate with a provider for a better deal or avoid hidden charges that we warned you about.

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