What Payroll Costs a Small Business — Software, a Service, or Your Accountant — and the Per-Employee Math

Payroll's price is easy to quote and hard to compare, because the same monthly fee buys very different amounts of responsibility. The pricing model, across the market: a monthly base fee (the platform or service charge) plus a per-employee-per-month fee, with tiers that add features — direct deposit, tax filing and deposits, year-end W-2s and 1099s, state registrations, time tracking, benefits administration, HR tools, and multi-state support — and with the per-employee fee scaling the cost more than the base for businesses beyond a handful of staff. The three shapes. Self-service software: the business owner or bookkeeper enters hours, approves the run, and the software computes withholding, pays employees by direct deposit, and — at the tiers that include it — files and deposits federal and state payroll taxes and produces W-2s; published prices sit at a modest monthly base plus a modest per-employee fee for basic tiers, rising for full tax filing and multi-state; a ten-employee business pays a low-four-figure annual software bill at the full-filing tier, and the owner does the entering, the approving, the new-hire setup, the state registrations, and the answering of notices. Full-service payroll provider: a dedicated provider (or the software's premium tier with a service layer) runs the payroll from time data the business submits, handles new-hire reporting, state registrations, garnishments, tax deposits and filings, year-end forms, and — the feature that matters — takes responsibility for filing accuracy and penalties caused by its errors; priced at a higher base and per-employee fee, the annual cost for a ten-employee business runs in the low-to-mid four figures, with the service absorbing the administrative hours and the compliance risk. Accountant-run payroll: the bookkeeping or accounting firm runs payroll inside its monthly package (the bookkeeping-cost guide) — using software behind the scenes, entering or importing hours, approving runs, handling filings and year-end forms, and — the coordination advantage — booking the payroll entries into the general ledger, reconciling payroll liabilities, and handling the owner's compensation strategy (reasonable salary for an S corporation, bonus timing, retirement plan contributions) as part of the same relationship; priced as an add-on to the bookkeeping fee scaled by headcount, the accountant-run option is typically the most expensive of the three in cash terms and the cheapest in total once the owner's hours, the bookkeeping coordination, and the compliance responsibility are counted. What the cheap option leaves you doing: entering and approving every run (with the deadline discipline that implies), registering with each state where employees work (and each locality with its own tax — the multi-state and city-tax guides), setting up each new hire correctly (W-4, state forms, new-hire reporting, I-9 outside the software), answering the notices (state unemployment rate notices, mismatched deposits, the IRS letter about a late 941), reconciling payroll to the books (or paying the bookkeeper to), handling year-end (W-2s, 1099s for contractors — the contractor-classification guides), and carrying the penalty risk for late deposits (the failure-to-deposit penalties escalate quickly, and the trust-fund recovery penalty makes the owner personally liable for unremitted withholding). The per-employee math, honestly: at three employees the software's per-employee fees are trivial and the base dominates — self-service is cheap in cash and expensive only in the owner's time; at ten, the per-employee fees are the larger component and the administrative hours are real — the service or the accountant starts to win on total cost; at twenty-five, the business has enough payroll complexity (multiple states, benefits, turnover) that the full-service or accountant-run option is the default and the question is which. The hidden costs that move the comparison: the owner's time (an hour a pay period at the owner's hourly value); state registration and unemployment-rate management (a task the owner does badly and the service does routinely); benefits administration (health, retirement — the software tiers that include it cost more, and the accountant's package may not); contractor payments and 1099s (some software includes them, some charges per form); and the year-end (W-2 filing, the annual reconciliation, the state annual returns). What to compare: total annual cost for your headcount at the tier that includes tax filing and deposits (never compare a basic tier to a full-service one); who carries the penalty risk for filing errors; who handles state registrations and notices; how the payroll reaches the general ledger; and whether owner-compensation planning is part of the relationship. The employer tax cost that payroll pricing doesn't include: the employer's share of Social Security and Medicare (7.65% up to the wage base), federal and state unemployment tax, workers' compensation, and any benefits — the payroll system's fee is a small line next to the taxes it computes, and a business budgeting payroll costs budgets those first. Fairlight's payroll pricing, as an add-on to monthly bookkeeping, is on the pricing page; the market model above is how every provider builds the number.

Key takeaways

• The model: a monthly base plus a per-employee fee, with tiers adding tax filing and deposits, year-end forms, multi-state, benefits, and HR features — compare only at the tier that includes filing.
• Three shapes: self-service software (cheap in cash, expensive in owner hours, penalty risk stays with you); full-service provider (higher fee, the administration and filing responsibility move to the provider); accountant-run inside bookkeeping (the highest cash fee, the lowest total once coordination, the owner's time, and compensation planning are counted).
• The per-employee math: software wins at three employees, the service or accountant starts winning at ten, and at twenty-five the question is which of the two.
• What cheap leaves you doing: every run, every state registration, every new hire, every notice, the reconciliation, the year-end — and the deposit-penalty and trust-fund exposure.
• Hidden costs: owner time, state unemployment-rate management, benefits administration, 1099s, and year-end filings — priced into the comparison or discovered in the notice.
• The fee is small next to the taxes: the employer's 7.65%, unemployment taxes, workers' comp, and benefits are the payroll budget; the system's fee is the line that computes them.

Comparing payroll quotes

Headcount and states. The tier that includes tax filing and deposits (nothing below it). Total annual cost at that tier. Who carries filing-error penalties. Who handles registrations, new hires, and notices. How payroll reaches the books. Whether the owner's compensation is planned or just processed. Five providers priced on that list are comparable; five priced on "monthly fee" are not.

Worked example

A ten-employee landscaping company in two states compares three options. Self-service software at the full-filing tier: a low-four-figure annual fee; the owner spends an hour every two weeks entering hours and approving, registered the second state himself (three phone calls and a form he got wrong once), and answered two state notices last year; his bookkeeper spends time each month reconciling the payroll entries the software didn't post correctly. Full-service provider: a mid-four-figure annual fee; the provider runs the payroll from his time-tracking export, handles both states' registrations and rate notices, files everything, and carries the penalty risk for its own errors; his bookkeeper still reconciles. Accountant-run inside his bookkeeping package: a higher add-on to the monthly bookkeeping fee, in the mid-to-high four figures annually; the firm runs the payroll, posts and reconciles it in the same close, handles both states, and — the item the other two didn't offer — resets his S corporation salary to a defensible reasonable-compensation figure and times his year-end bonus against the payroll-tax wage base, saving more in self-employment-equivalent tax than the entire payroll fee. On cash, the software was cheapest; on total cost including his hours and the compensation planning, the accountant-run option won, and the full-service provider sat between them as the right answer for a business that already had a separate bookkeeper it liked.

Official sources

The IRS explains that "employers generally must withhold federal income tax from employees' wages" and "must withhold Social Security and Medicare taxes from employees' wages and pay the employer share of these taxes," and that FUTA tax is reported and paid separately, on Forms 941, 940, and W-2. — Internal Revenue Service, Understanding employment taxes, https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes

The Bureau of Labor Statistics reports the median annual wage for bookkeeping, accounting, and auditing clerks and the duties of the occupation in its Occupational Outlook Handbook. — U.S. Bureau of Labor Statistics, Bookkeeping, Accounting, and Auditing Clerks, https://www.bls.gov/ooh/office-and-administrative-support/bookkeeping-accounting-and-auditing-clerks.htm

Practitioner note

Payroll quotes are comparable only at the tier that files the taxes, and the comparison is total cost, not the monthly fee: the owner's hours, the state registrations, the notices, the reconciliation, and the deposit-penalty risk all sit somewhere, and the cheap option puts them on the owner's desk. We run payroll inside the bookkeeping package because the general-ledger coordination and the owner-compensation planning — the reasonable salary, the bonus timing — are worth more than the fee difference, and because the trust-fund penalty is personal.

See also: For related pricing, see what a small business spends on accounting each year.

Next step

Fairlight handles payroll inside a monthly bookkeeping package — runs, multi-state registrations and filings, year-end forms, general-ledger reconciliation, and owner-compensation planning. See pricing or book a call.