How Much Should You Be Paying in Payroll Service Fees?

Posted by on December 20, 2012 in Small Business Efficiency [ 0 Comments ]

How Much Should You Be Paying in Payroll Service FeesPayroll is the most commonly outsourced business function, and there are many good reasons why. For one thing, withholding and other IRS rules change frequently, and payroll services make it a point to stay on top of all the rules. If you’ve ever done payroll in-house and had to pay a fat penalty to the IRS for a withholding mistake, you know well the value of outsourcing this task to a trusted payroll provider.

Another reason businesses outsource payroll is cost efficiency. Doing payroll takes a significant investment of time, and many small businesses save money by outsourcing payroll, as opposed to doing it in-house. Furthermore, outsourcing frees up many valuable hours that can then be devoted to core business functions. A reputable payroll provider can be one of the best investments a small business can make.

How Much Should You Expect to Pay?

When you outsource payroll, you’re not only outsourcing the calculation of wages and printing of checks, but also possibly:

  • Distribution of checks
  • Direct deposit
  • Tax withholding
  • Reporting to the IRS
  • W-2 filing

Small businesses can find outsourced payroll packages for as little as $50 per month. Expect to pay anywhere from $0.80 to $2.00 per check per pay period for basic payroll services. If you also add payroll services like direct deposit, 401(k) handling and tax filing, you can expect to pay $4 to $9 per pay period. In 2010, the average cost to outsource payroll was around $3 per check. If you run a small to medium-sized business, expect to pay around $100 per employee per year to outsource payroll, including direct deposit and W-2 filing.

How Fees Are Structured

Costs for outsourcing payroll tend to favor economies of scale. In other words, the cost per check for a 10-employee business will be a bit higher than it would be for a 50-employee business. Generally, you will pay an account setup fee, and there may be a monthly flat fee for the service. You’ll pay a certain cost per check, which will depend on which services you avail yourself of, like direct deposit. You can get services ranging from basic calculation of wages and withholding plus check printing and distribution all the way up to administration of benefits like 401(k) contributions and employee insurance and flexible savings account contributions. Generally there is a per-check or a per-month fee for these additional services.

Ways to Save on Outsourced Payroll Costs

As with most services, you have to shop around to get the best price on the specific services you want. Check into the cost of payroll services from a half-dozen or so providers, and compare per-check costs, account setup costs, monthly fees, and services. You shouldn’t necessarily go with the lowest bid. You may think you’re getting a great deal, only to have hidden charges sprung upon you after you sign your contract. Always read your payroll service contract carefully before signing. In fact, it’s a good idea to get a business attorney to look it over for you and point out any potential problems.

Choose a payroll services provider that has been in business long enough to build a track record, and ask for references. Find out how many clients the provider has, and exactly which services they offer. Find out the exact procedure for calling in payroll, and find out what their disaster preparedness plans are. The chances of a natural disaster affecting your payroll provider are slim, but you need to know they’ll be ready in any event. Finally, ask a potential provider if they offer a free trial. Many do.


A 2011 report by PriceWaterhouseCoopers stated that “organizations managing payroll…in-house using premise-based or hosted HR software solutions spend on average 18% more administering these functions than organizations that outsource these functions.” Today, over a quarter of a million businesses in the U.S. outsource payroll functions. By choosing a reputable payroll services provider, you can insulate your business against problems with the IRS, save time, save money, and show your employees you care enough to make sure payroll is done properly.

Photo Credit: Betsssssy

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