No matter what type of business you are, small or large, start-up or decades in business, you’re required to run payroll, calculate, pay and file taxes and maintain your associated records for a set period of time. So how to choose a payroll service? First let's see how most companies process their payroll with one of the following types of payroll services:
- Managing payroll in-house with software
- Hiring a professional employer organization(PEO)
- Outsourcing to a payroll service solution and human resource provider
Many companies find these choices confusing and have a difficult time wading through the sales clutter on why one payroll service solution is better than another. Ultimately, most people want to know what is the most effective way to do full-service payroll services and how much does it cost? Well, not to disappoint you, but it varies dramatically!
Managing Payroll Services In-House with Software
Most small and medium-sized companies think payroll service processing in-house is a major cost-saving. The fact is this will not save you time or money running payroll. Like any of the methods we write about, there is always time associated with running payroll but doing it in-house can be one of the most time-consuming payroll processes.
To understand this payroll cost you must turn your attention to time tracking- the amount of time it takes and the rate of pay the person doing the payroll services earns, plus their benefits and the company’s tax burden associated with these wages is the first step. The second step, the one most often overlooked, is the opportunity cost to run payroll. Most people in charge of payroll services are small business owners or staff in one’s accounting department. The time spent dealing with payroll services is non-revenue producing and revenue generated, billed, or collected during the time spent doing payroll services should be part of this calculation.
In addition to this, there are significant costs and risks associated with having payroll service solutions in-house that most do not consider. According to the IRS, 40% of medium and small-sized businesses are fined for failing to adhere to tax laws such as deposit withholdings, miscalculating taxes, or submitting incorrect filings (even using the best payroll software). These penalties and fines can quickly put someone out of business. Other costs include:
- Cost of payroll service solution/software subscription or updates
- Bank fees for money movement
- Check stock and printer fees
- Fines at the state and federal level for poor tax filing
Hiring a PEO
Hiring a Professional Employer Organization, PEO for short is the right option for some payroll needs but you should know it is the most expensive option for a payroll provider. When you hire a PEO as a payroll service they become the employer of record for your staff or they’re a co-employer and this requires you to sign a long-term contract locking you into the most expensive payroll service.
As for how expensive this payroll solution can be, again like most pricing in the payroll service solutions industry it can vary depending on your payroll service needs. PEO’s typically charge a percentage of your total payroll ranging between 2% and 10%. Some PEOs, depending on the state you are in, also continue charging taxes once wage base limits for those taxes have been reached.
Additionally, the PEO is making a commission off providing benefits and workers’ compensation insurance on top of the other fees they charge. The larger your organization, or more importantly, the larger your payroll, the more you will pay.
Outsourcing to a Payroll Software and HR Provider
Partnering with payroll and human resources software providers will vary wildly based upon the size of the provider and the number of employees on the payroll service.
Payroll firms typically view businesses in one of two or three categories:
Small business payroll service solution: 1 to 49 employee firms
For most payroll companies, pricing is based upon payroll frequency and the number of employees. There are additional charges for add-on services such as time and attendance, HR, employee self-service, W-2s/1099s, and delivery to mention a few. Most small businesses payroll providers charge in this manner no matter the size of the business, while DIY online payroll firms such as Gusto or Quickbooks Online will offer a base fee per month plus a per employee per month fee (“PEPM”). They may include direct deposit services.
Mid-sized business payroll service solution: ≥ 50 employees
Payroll software for medium sized business is priced as Per Employee Per Month (“PEPM”) and will include various levels of PEPM pricing based upon the products and services your business requires. The more services needed the higher the PEPM fee. Many of the larger firms will charge hefty one-time set-up/onboarding fees. Normally, the PEPM fees are all-inclusive and there are no additional fees. Some software may be cloud-based, while others might require a local installation of the accounting software.
Enterprise business payroll service solution: ≥ 500 employees
Enterprise payroll services and pricing is very similar to mid-sized business pricing except not all firms will be able to handle enterprise-level accounts. Onboarding fees are very expensive and it will take months to go through a conversion. When it comes to enterprise payroll solutions, there are national and publicly traded corporations, regional firms, and local mom-and-pop payroll providers. Finding the right fit for your firm when outsourcing to a payroll and HR provider is important because you may be taking a risk and not realizing it.
National Firm Payroll Service Solution
- Wide range of products and services
- Financially sound
- Poor customer Service
- Some are online-only with no assigned payroll representative
- Slow to get any issues resolved
Regional/Mid-Size Payroll Service Solution
- Wide range of products and services
- Larger staff with more disciplines
- Offices in more than one time zone
- Financially sound
- Strong personal service
- Quicker to understand your business and help resolve issues
- Easier to help growing businesses scale
Mom and Pop Types of Payroll Service Solution
- Limited range of products and services
- Small firms are not always as financially sound
- Strong personal service
- A limited number of employees often opens up significant risks for a single point of failure
- If they impound your taxes, you could be taking a big risk
- They have trouble helping growing businesses scale
What Type of Payroll Service Solution is Right for You?
The right way to achieve the best payroll success for your business is for you to define. If you choose to outsource your payroll software and payroll services, the right choice will depend on the size of your company and the types of payroll services and payroll software you need. Whether doing the company's payroll in-house, via a PEO, or through a payroll software and HR management provider, your cost is going to vary.
A medium or small-sized business will not get the personalized attention if they try to work with a national provider. On the other hand, a small business owner or large businesses are typically not a good fit for a mom-and-pop small payroll management provider. This is true for just payroll software providers too. Best payroll service for small company will include elements tailored for that particular business. For all businesses, pricing will vary based upon the payroll products and features your business requires, the number of employees you have, and how often you pay your staff. The best payroll for small companies will also be the one that provides dedicated help.
The bottom line is not all payroll processing companies are the same and there is more to choosing a payroll service solution than just price. Inexpensive payroll service solutions or free payroll inherently come with risks you may not be aware of and the payroll solution features you are evaluating should be able to demonstrate a return on investment and have the ability to grow with your business. The best payroll solutions will help you customize the services according to your business.
Hope you figured out the payroll costs for small business
To learn more about managing payroll services as a business owner, visit our blog.