The True Cost of Employees: Average Payroll Costs for Small Businesses

Managing payroll is a crucial aspect of running a small business, and understanding the true cost of payroll is essential for financial planning and decision-making. From wages and benefits to taxes and other expenses, payroll costs can significantly impact a company’s bottom line. And with all kinds of payroll solutions out there with options for full-service payroll or online payroll services, it can be tricky to know where the costs add up, and where you can save a penny.

In this article, we’ll delve into the average payroll costs that small businesses incur, exploring the various factors that contribute to these expenses.

Average costs of payroll

Okay, the title of this section may be a little bit misleading as there’s not just one average cost of payroll. Payroll costs can vary significantly depending on the size of the business, the industry, and the location. Costs associated with payroll can also include employee wages or salaries, payroll taxes, benefits contributions (such as healthcare and retirement plans), workers’ compensation insurance, payroll software, accounting software, or outsourcing fees, and any additional payroll-related expenses such as payroll processing fees or legal compliance costs.

With that being said, let’s break this down into three parts.

1. Average Cost of Employees

Adding new hires to your payroll goes beyond just the agreed-upon wage or salary. According to the U.S. Small Business Administration (SBA), as a general rule, the cost of employees typically ranges from 1.25 to 1.4 times the salary, depending on certain variables. The SBA explains that if you decide to offer a salary of $35,000, the total costs associated with employing that individual could range from $43,750 to $49,000.

So what’s costing so much? Recruitment expenses, training costs, uniforms, and protective gear are just a few examples of some employment-related additional costs that may be challenging to quantify. There are also mandatory added costs that include significant payroll tax obligations, such as the employer share of the Federal Insurance Contributions Act. Moreover, insurance coverage for employees, such as workers’ compensation, along with any additional insurance required for their specific job responsibilities, can contribute to the overall cost.

2. Average Cost of In-House Payroll

It’s a common misconception that running payroll internally may initially seem like the more cost-effective choice, but depending on your specific needs, it can quickly become more expensive compared to outsourcing payroll services.

While there may not be a known average of doing payroll in-house, given the various elements that would factor into the price, one thing to consider is whether handling payroll will be a full-time responsibility within your business. It could be you’re managing it yourself, or you have a Human Resources (HR) employee handling it full-time. Because if it is a full-time responsibility, than we’re right back to our discussion about the average cost of an employee. Additionally, you should factor in the potential cost of utilizing software that compliments the payroll process, such as time tracking software, to streamline the payroll process and enhance payroll efficiency.

3. Average Cost of Payroll Services

Payroll services and software pricing can range anywhere from $59 per month and $6 per employee per month (PEPM) for basic payroll, to $99 per month and $10 PEPM for additional add-ons. For more intricate or specialized services, it may be necessary to schedule a consultation in order to obtain an accurate price quote.

It’s important to consider what is going into these prices, as pricing for such services is typically determined based on a per-employee fee, making the size of your business a significant factor in calculating the overall expense.

Small business payroll costs FAQs

If we weren’t able to answer any questions you may have had above, here are some FAQs about payroll costs for small businesses.

What are some tips for reducing payroll costs?

There are a number of ways to reduce payroll costs, including outsourcing certain tasks, automating processes, and using technology to streamline operations. But here’s a longer list of ways you can reduce payroll costs:

Evaluate your staffing needs: Review your current workforce and assess whether you have the right number of employees for the workload. Avoid unnecessary hiring and ensure that you have an efficient team structure.
Go digital: You may be able to save on printing fees when it comes to paper checks. Switching to direct deposit could be a way to add more money to your pocket.
Outsource payroll functions: Consider outsourcing your payroll to a professional payroll service provider. Outsourcing can be cost-effective as it eliminates the need for in-house payroll staff and reduces the associated overhead costs.
Review employee classification: Ensure that your employees are properly classified as either exempt or non-exempt according to labor laws. Misclassification can lead to unnecessary overtime costs or potential legal issues.
Optimize employee scheduling: Create efficient employee schedules that align with business needs. Avoid overstaffing during slow periods and utilize part-time or seasonal workers when necessary to control labor costs.
Monitor and control overtime: Implement strategies to manage overtime costs effectively. This can include using flexible work schedules, cross-training employees, or hiring additional staff during peak periods.
Evaluate benefit plans: Assess your employee benefit plans to ensure they are cost-effective and aligned with your budget. Consider negotiating better rates with insurance providers or exploring alternative benefit options.
Stay compliant with labor laws: Stay up-to-date with labor regulations and compliance requirements to avoid costly penalties or legal issues related to payroll practices.
Train employees on time management: Provide training to employees on effective time management practices to improve productivity and minimize unnecessary idle time.
Conduct regular expense reviews: Regularly review your business expenses, including payroll-related costs, to identify areas where you can reduce unnecessary spending or find cost-saving opportunities.

And don’t forget that you can negotiate better rates with vendors and find ways to reduce monthly fees.

Can you do payroll yourself?

If you’re self-employed, you may be wondering if you can do your own payroll. The answer is yes – you can do your own payroll, but there are a few things you need to know.

Educate yourself on payroll processes: Take the time to understand the fundamentals of payroll, including tax obligations, employee classification, deductions, pay periods, and record-keeping requirements. Familiarize yourself with relevant federal, state, and local regulations to ensure compliance.
Stay updated on tax laws: Payroll tax laws can change regularly, so stay informed about any updates or modifications to ensure accurate withholding and filing. Consider consulting with a tax professional or utilizing online resources provided by tax authorities for guidance.
Maintain accurate records: Keep organized records of employee information, timesheets, pay stubs, tax forms, and any other relevant payroll documents. This will assist in tracking employee compensation, deductions, and tax obligations. Accurate record-keeping is crucial for audits and ensuring compliance.
Create a payroll calendar: Establish a consistent payroll schedule to ensure timely payments to employees and keep it on a calendar. Keep the calendar in a place where it’s clear to employees so they are aware of when to expect their wages.
Calculate payroll accurately: Double-check calculations for gross wages, tax withholdings, deductions, and net pay to avoid errors and ensure employees are paid correctly. Take into account any additional factors such as overtime, bonuses, or commission.
File and remit payroll taxes on time: Be aware of your tax filing deadlines and ensure timely submission of payroll tax forms to the appropriate tax agencies. This includes federal taxes (e.g., Form 941), state taxes, and any local or municipal taxes.
Stay organized with deadlines: Keep track of important deadlines for tax filings, tax payments, and reporting requirements. Missing deadlines can result in penalties and interest charges.
Seek professional assistance if needed: If managing payroll becomes overwhelming or time-consuming, consider consulting with a payroll professional or outsourcing certain aspects of payroll processing to a trusted payroll service provider.
Stay informed about payroll best practices: Stay updated on industry trends and best practices related to payroll management. Attend webinars, and seminars, or join professional networks to gain insights from experts and exchange knowledge with peers.

What if I don’t want to do payroll myself?

Luckily, there are several payroll companies in the market that are more than happy and ready to take on the burden of payroll. It’s why they’re in business.

Online payroll providers

There is a growing number of online payroll providers that can help small businesses take care of their payroll needs. These providers can help you process payroll, pay employees, and file taxes. They can also provide you with tools and resources to help you manage your payroll.

Automated payroll software

Automated payroll software is a computer program that records and calculates employee paychecks. It can also handle tax payments, deductions, and other payroll-related tasks. Automated payroll software can save business owners time and money by streamlining the payroll process into an integrative payroll system.

Before you go

Understanding the true cost of employees is crucial for small businesses. By analyzing average payroll costs and considering various payroll options, businesses can make informed decisions about how to manage their payroll more efficiently. With the right tools and resources, businesses can save time and money while also ensuring compliance with relevant laws and regulations.

Let PrimePay Help

Discover how PrimePay’s payroll software and payroll service solutions can alleviate the burden of payroll for small businesses. Streamline your payroll processes and focus on what matters most – growing your business. Take the first step towards stress-free payroll management today!

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