Cost of Payroll: Methods & Factors That Affect Payroll Cost

Paying employees timely and accurately is critical for your business. You need to get the payroll process right to avoid tax penalties and other consequences.

But this is easier said than done if you have a large number of workers and perhaps you employ them under different agreements, like full-time, hourly, and contractual. This makes managing payroll challenging and time-consuming.

This article will help you streamline the process. We’ll list the factors impacting the cost of payroll duties. We’ll also go over methods to process payroll more easily.

Table of Contents

How Payroll Works

Factors That Affect Payroll Cost

Methods to Run Payroll

Key Takeaways

Frequently Asked Questions

How Payroll Works

Processing payroll involves compensating employees for their work. It also includes several other aspects, like calculating taxes and benefits premiums. Many organizations outsource the job to payroll software or a payroll provider, especially if they have a large team.

Transferring money to employees is more complicated than it sounds. Here’s a step-by-step list of how to run payroll correctly:

• Determine payroll structure
• Gather employee information
• Set up your direct deposit
• Review worker timesheets
• Approve and submit payroll

You can optimize this process and ensure you follow state tax laws by staying consistent. The more you repeat the procedure, the less likely you are to make a mistake.

Factors That Affect Payroll Cost

You might have difficulty managing payroll because of the number of factors in play. These include the following:

Payroll Frequency

Suppose you’ve hired a payroll service to compensate your workers. You need to consider the pay frequency to determine how much it influences your cost of payroll.

Some online payroll services charge you for each payroll cycle. Others offer unlimited runs every month and include your off-cycle runs.

Be careful if you choose a payroll provider that charges for each payroll run, especially if you offer weekly paychecks. Your employees will be happier, but you’ll pay them more frequently. This increases the cost of payroll.

So, paying monthly might be the most affordable solution for your organization.

Paying twice a month (on the 15th and 30th) can be harder to administer because the periods often end in the middle of your workweek. The number of days in a single pay period is also inconsistent.

Number of Employees on Payroll

The total number of employees is another major factor in managing payroll.

Let’s again assume that you use payroll service providers to wire funds to your workers. They typically charge a fee per employee on your payroll. This fee normally ranges between $2 and $15. This system is more affordable for larger companies since they usually qualify for a volume discount.

Direct Deposit

In general, a monthly fee for a full-service payroll provider includes direct deposit to your workers’ bank accounts. It’s convenient because it eliminates the need to use paper checks.

As a result, there’s no risk of losing valuable information or of money not reaching your employees on time. Even if your team is on vacation or traveling, direct deposit will guarantee that they receive their paychecks.

This payroll service also lets you save money by opening direct deposits with your workers’ bank accounts. Setting it up may cost anywhere between $60 and $160, depending on account types and the number of workers.

Banks may also impose a monthly base fee per pay period and charge for individual employee payments. Small businesses and other companies can avoid this expense by setting up payroll direct deposits.

Employees in Multiple States

Payroll pricing can increase if your employees live in different states. The accounting system might be more complicated, which can make calculating payroll taxes harder.

If you have a dispersed workforce, ask your payroll company for support before purchasing their services. Standard packages might not give you the nuanced analysis necessary for residents of various states.

You could especially use some help with tax withholdings. In general, state and local taxes are withheld for the area where your team performs the work.

Take people living in Connecticut as an example. They’re full-time employees at your New York business, so you withhold your New York taxes. But if they work full-time at a Connecticut facility, you withhold your Connecticut taxes.

Tax Filing Services

Speaking of employer taxes, you need to pay different types of payroll taxes during each cycle. This includes state, local, and federal taxes.

You must also pay your share of Medicare and Social Security taxes for each full-time employee. That can make up around 7%-8% of a worker’s total wage.

There could be state unemployment tax requirements too. Check your local office to determine if your region is exempt from them.

Employee Benefits

If you’re a business owner who offers ample employee benefits, you need to consider them when managing payroll. They can be a significant additional cost.

Many payroll providers include these perks, either in higher tiers or basic packages. For instance, they can automatically calculate pay and deduct compensation insurance. Some services also join third parties to provide dental, vision, and other health insurance.

The provider will do most of the work for you, but you should still pay attention to healthcare and compensation spending. Otherwise, you risk overpaying through additional fees.

Adding or Dropping Employees

There are many tasks involved in proper payroll management. One of them is adding and terminating employees.

Whenever you change your payroll system, you also alter your tax data. So, payroll processing providers may charge fees when including or removing workers from the payroll.

Methods to Run Payroll

There are several methods for running payroll.

Hire a Professional

One of the most common ways of running payroll is to hire a payroll service provider. The most significant benefit of payroll outsourcing is that it saves small business owners a lot of time.

Think about it—handling your payroll is no walk in the park. Your department has to consider many factors when calculating your workers’ compensation, including:

• Benefit deductions
• Garnishments
• Terminations
• New hires
• Changes to state and federal regulations

Doing these yourself every pay period while keeping your payroll cost down is challenging. Small business owners who attempt this often spend hours preparing and filling out forms.

The easiest solution is to outsource payroll to a professional. This unburdens you from time-consuming tasks that require absolute precision. It also gives your HR department more time to focus on core functions and money-making activities.

A professional payroll service provider generally delivers more than basic calculations. Most use technology to reduce laborious duties and make your workday more engaging.

Here are the central capabilities of an in-person or online service provider:

• Automatic processing – Payroll providers can automatically pay employees. The payment options are flexible. For example, you can choose from payment cards, direct deposits, or paychecks.
• Tax withholding – An online service provider helps small businesses follow the law. They withhold all deductions and pay wages on time.
• Filing taxes automatically – After they pay employees, professionals can file taxes on your behalf. They can also help with forms and year-end reports.
• Compliance expertise – A payroll service provider is up to date with the latest regulations. They notify customers about changes to tax and wage laws that influence small businesses and other types of companies.
• Payroll reports – Payroll services can help the owner stay on top of payroll costs by reporting on crucial areas of this activity. The analysis includes taxes withheld, hours worked, and wages paid.
• HR support – Reputable payroll providers answer questions from HR teams 24/7.

Manage Payroll Yourself

Many small business owners keep their payroll processing in-house. It gives them more control over the process. They want to hand over the reins to an outsider because they wish to get a better understanding of the procedure.

But they often worry about data loss, so they restrict access to sensitive data. They don’t allow third parties to handle employee social security numbers, banking information, and salaries.

These are valid concerns.

But the disadvantages of processing payroll yourself typically outweigh the advantages. The job is extremely time-consuming, as it can easily take you more than 5 hours per week to calculate your payroll. This amounts to more than 300 hours every year.

If you can’t keep up, you risk not paying your employees and filing taxes on time. This can result in hefty fees and penalties. It also bogs down your HR team with unnecessary responsibilities.

For this reason, running your own payroll is a poor decision.  

Use Automated Payroll Software

If you want to decrease the cost of payroll, payroll software might be your best option. This cloud-based or on-premise program manages, automates, and maintains employee payments. It can help you stay compliant with financial regulations and optimize your business.

When integrating with a payroll solution, look for secure and reputable software. These guarantee your data is safe. The platforms have robust features to protect vital employee information:

• Mailing addresses
• Social Security numbers
• Dates of birth
• Bank account details

A high-quality program prevents anyone outside your organization from accessing this data.

Another great thing about payroll software is that most solutions don’t require tech-savvy users. So, you can delegate payroll activities to employees. This lowers the cost of payroll since you don’t have to hire professionals.

You also get great accuracy. The chances of making a mistake are slim to none because you’re automating the process. The software features in-depth validation procedures and checks to enter each number correctly.

Finally, missing crucial tax updates doesn’t happen when you set up payroll software. Most platforms alert you about updates in real-time to ensure you’re in the loop.

Key Takeaways

Payroll management goes beyond transferring funds to your employees. There are many activities involved and an even larger number of factors impacting your payroll cost. The list includes pay frequency, how many employees you have, and several other aspects.

Running your payroll on your own is ill-advised because you can easily make an error. Hire professional payroll services to optimize your payroll process. Alternatively, you can integrate payroll software to make the procedure effective and foolproof.

FAQ on Payroll Cost

How Do You Calculate Payroll Costs?

Calculating payroll costs manually is prone to error, as the process involves many factors. You need to determine your workers’ gross pay and subtract state and federal deductions to get the net pay. The calculation includes regular hours, overtime, Medicare withholding, and Social Security deductions.

Can I Do Payroll Myself?

You can do payroll yourself, but the risk-to-reward ratio is extremely low. The process takes time, and you can easily make a mistake if you’re not careful. The consequences can be dire, ranging from fines to massive tax penalties.

Should I Hire a Payroll Service?

Hiring a payroll service is an excellent decision. It outsources a key administrative task to seasoned professionals. This enables you to focus on strategic activities that help grow your company.

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