Payroll Costs: A Comprehensive Breakdown And Tips To Reduce
Payroll costs refer to all expenses related to compensating the people working for your business, including what you pay them and what it costs to pay them.
Most businesses spend up to 30% of their revenue on payroll costs, making it most companies' single largest expense.
Here's everything you need to know about payroll costs and 5 specific recommendations to trim the fat (such as implementing payroll software or outsourcing the function).
What Types Of Payroll Costs Are There?
Payroll costs are broken down into direct and indirect costs and vary between full-time employees, contractors, and wage earners.
Here's a closer look at each of the costs you'll encounter.
Direct payroll costs
Direct payroll costs refer to the monetary compensation and additional benefits you give directly to your workers. These make up the biggest chunk of your payroll costs.
Direct payroll costs include:
Salaries
Salaries are ongoing, fixed amounts you pay to employees regardless of the number of hours they work. Salaries are paid on a regular pay period (i.e. biweekly).
Hourly wages
Hourly wages are variable amounts paid to employees based on the number of hours they work. The hourly wage itself is typically a fixed rate and paid on a regular pay period.
Contractor payments
Contractor payments are amounts paid to non-employees (i.e. freelancers or agencies) for fulfilling a contractual obligation towards your company. For example, payment for outsourced bookkeeping help from a freelance accountant.
Benefits
Benefits refer to the non-monetary items you offer your employees, such as health insurance, paid time off, and wellness programs. Some types of employee benefits are mandatory to provide; others are optionally used to attract and retain talent.
Bonuses
Bonuses refer to additional financial compensation given to an employee, beyond what is contractually owed and expected. Payment of bonuses is at the full discretion of the employer. This is usually a type of performance-based compensation.
Indirect payroll costs
Indirect payroll costs refer to the extra payroll expenses you incur by having workers, they’re not sent to the workers themselves.
Indirect payroll costs include:
Payroll taxes
Payroll taxes are the percentage of your employees' wages you owe the government, which are determined at a national and state level.
Administrative costs
Administrative expenses encompass the various costs involved in running payroll, facilitating payments, ensuring pay equity, and delivering benefits to your employees.
This includes the cost of administering payroll, tax filing, sending direct deposits, and even the cost of paper checks (if you're part of the 3.6% of businesses that still do that).
What Do Payroll Services Cost?
The cost of payroll software and services can vary widely depending on several factors, including company size, number of employees, features required, and whether the service is domestic or global.
Small businesses
In the US, a small business with 25 employees can expect to pay between $6 and $12 per employee each month for its payroll services.
Most payroll vendors charge a base monthly fee ranging from $20 to $180, plus per-employee fees of $4 to $20 per month.
For example, a company might pay a $60 base fee plus $10 per employee, totaling $310 per month. More advanced features—like benefits administration, time tracking, or tax filing—may increase costs, especially for businesses with complex needs or operating across multiple states.
Some payroll services, such as Gusto, allow new businesses to set up payroll processing for free and then activate a paid plan when they begin running payroll.
Larger businesses
A medium to large business with 100 to 500 employees can expect to pay between $5 and $15 per employee each month for payroll services.
Most vendors also charge a base monthly fee ranging from $100 to $1,000, depending on the complexity of the payroll, number of locations, compliance needs, and add-ons like time tracking or benefits administration.
For instance, a company with 200 employees might pay a $250 base fee plus $10 per employee, totaling $2,250 per month. Businesses operating in multiple states or countries often incur additional charges for tax filings, compliance, or integration with third-party systems.
Some enterprise-focused payroll platforms, like ADP Workforce Now or Paychex Flex, offer custom pricing, robust integrations, and optional HR modules.
Others, like Papaya Global or Deel, support international payroll, with costs starting around $20 to $100+ per employee globally, depending on the country and services required.
Free payroll services
Small businesses with very few employees, or those willing to manage parts of the payroll process manually, can explore free payroll tools.
These platforms often let users calculate federal and state tax withholdings, generate pay stubs, and issue payments via paper checks or direct deposit.
However, many free plans come with limitations. For example, Payroll4Free supports up to 10 employees at no cost (though fees apply for tax filing or direct deposit via their bank).
On the other hand, HR.my, a cloud-based open-source platform, offers free payroll and HR tools with no employee cap.
However, the tradeoff for using free solutions is often limited customer support, minimal automation, and manual tax filing.
Outsourced payroll services (PEOs or EORs)
For small to mid-sized businesses seeking comprehensive HR and payroll solutions, working with a professional employer organization (PEO) or employer of record (EOR) can be an efficient and scalable option.
Both models offer outsourced HR support, including payroll processing, tax compliance, benefits administration, and employee onboarding—but they serve different needs.
A PEO enters a co-employment relationship, where the business maintains day-to-day control while the PEO handles HR and compliance responsibilities.
In contrast, an EOR becomes the legal employer of your workers, making it an ideal solution for hiring in new states or countries without setting up a local entity. This is especially useful for global expansion, remote workforces, or fast hiring in unfamiliar jurisdictions.
PEOs like Justworks, TriNet, and ADP TotalSource typically cost $150–$200+ per employee per
month, while EOR platforms such as Deel, Remote, and Papaya Global charge $200–$1,000+ per employee depending on the country and services provided.
While both models offer substantial administrative relief and compliance support, trade-offs include higher costs, less flexibility in choosing benefit providers, and, in the case of PEOs, shared liability for certain legal issues.
Still, for growing businesses—especially those navigating complex regulatory environments—PEOs and EORs provide a high-value path to scale HR and payroll functions with confidence and reduced risk.
Factors That Impact Payroll Costs
Several key factors influence the cost of payroll, and understanding these can help you choose the most cost-effective and appropriate solution for your business. Here's a breakdown of the most important ones:
1. Employee total compensation
- The primary component of payroll costs is the salaries, wages, and other forms of remuneration paid to employees. Higher base salaries or hourly rates result in increased payroll expenses.
2. Technology and payroll systems
- The cost of payroll processing software or services can affect overall payroll expenses. Investing in efficient payroll systems may have upfront costs but can save money in the long run.
- Some providers offer tiered pricing or volume discounts for larger teams. It’s always worth negotiating for discounts!
3. Payroll frequency
- Weekly, biweekly, or semimonthly payrolls may cost more than monthly ones.
- Some platforms charge per payroll run, while others offer unlimited runs.
4. Features and service level
- Basic services (calculating wages, issuing pay stubs) are cheaper.
- Add-ons like tax filing, benefits administration, time tracking, and onboarding tools increase the price.
- Full-service providers cost more but reduce manual work.
5. Tax filing and compliance
- Handling federal, state, and local tax filings adds cost.
- Multi-state or international payroll increases complexity—and pricing.
6. Support type and availability
- Services with live support, dedicated account managers, or 24/7 assistance typically cost more than self-serve or email-only support.
7. Employee classification
- Managing both employees and contractors can affect costs, especially if different filing forms (e.g., W-2 vs. 1099) are involved.
9. Geography
- Global payroll or remote hires in multiple states or countries require localized compliance, increasing both base and per-employee costs.
10. PEO or EOR Use
- If you outsource payroll through a PEO or EOR, expect a significantly higher per-employee price due to the legal and administrative responsibilities they assume.
11. Customization and reporting
- Advanced features like custom reporting, analytics dashboards, or audit trails often come with premium plans.
How To Save Money On Payroll
Here are effective strategies for saving money on payroll processing without sacrificing accuracy or compliance:
1. Choose a provider that matches your size and needs
Avoid overpaying for features you don’t need by doing your due diligence when choosing a payroll software or service. Our article on how to choose HR software is a good starting point here.
2. Bundle services
Many providers offer discounted bundles that include payroll, benefits, HR tools, and tax filing. Bundling with a single provider can reduce overall costs and eliminate the need for separate systems.
3. Limit payroll runs
If your provider charges per payroll run, run a monthly pay schedule to reduce the frequency—and cost—of processing.
4. Use self-service features
Encourage employees to use self-service portals to access pay stubs, update personal info, and manage direct deposits. This reduces administrative overhead and may qualify you for lower pricing with some vendors.
5. File taxes yourself (if you’re comfortable)
Some low-cost payroll providers offer a basic plan where you calculate payroll, but file taxes manually. This can save money if you're confident in handling compliance.
6. Avoid unnecessary add-ons
Audit your current payroll service to identify unused features (e.g., advanced reports, extra integrations, recruitment tools). Downgrade to a plan that matches your actual usage.
7. Negotiate with providers
If you’re scaling or bringing more employees onto the platform, ask for volume discounts or multi-year contract deals. Some providers are flexible, especially during renewal.
8. Use free trials or startup offers
Take advantage of free trials, waived setup fees, or new-business incentives when switching providers. This gives you time to test tools before committing financially.
9. Reevaluate annually
As your company grows or shrinks, so do your payroll needs. Review your plan yearly to ensure you're not overpaying and switch providers if a better value emerges.
How To Calculate Payroll Costs?
Follow these steps to calculate how much your payroll is going to cost:
1. Start with gross wages
Add up the total wages for all employees:
- Salaries
- Hourly pay × hours worked
- Overtime
- Bonuses, commissions, tips
Example:
10 employees × $4,000/month = $40,000 gross payroll
2. Add employer payroll taxes
Calculate your share of mandatory taxes:
- Social Security: 6.2% of wages (up to wage base)
- Medicare: 1.45% of all wages
- Federal Unemployment (FUTA): 0.6%–6% on first $7,000
- State Unemployment (SUTA): Varies by state
Typical total: 8%–10% of gross wages
Example:
$40,000 × 9% = $3,600 employer taxes
3. Include benefits and insurance costs
Factor in the cost of:
- Health, dental, vision insurance
- Retirement plan contributions (e.g., 401(k) match)
- Life insurance or disability coverage
- Employee wellness perks
Example:
$400/employee/month × 10 employees = $4,000/month
4. Account for payroll software or service fees
Add the monthly cost of your payroll provider:
- Base fee + per-employee fee
Example:
$40 base + ($6 × 10 employees) = $100/month
5. Add other employer costs
Optional but common items:
- PTO (paid time off) accrual costs
- Workers’ compensation insurance
- Training, onboarding, and HR compliance support
- Taxes for fringe benefits (e.g., company car, bonuses)
Final formula
Total Payroll Cost = Gross Wages + Employer Taxes + Benefits + Payroll Provider Fees + Other Employer Costs
Sample total:
- Gross Wages: $40,000
- Employer Taxes (9%): $3,600
- Benefits: $4,000
- Software Fees: $100
Total Payroll Cost = $47,700/month
Next Steps for Payroll Management
Small business owners and operators typically don't have enough time to tackle payroll themselves. By finding a good payroll system or payroll service provider, you can save money while you improve your operations.
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