Are you worried about payroll outsourcing fees eating into your profit margins? Have you lost sleep thinking about the rising payroll services pricing every cycle? If yes, you’re not alone in wanting a grip over payroll pricing while benefiting from a good payroll process for your firm. Many businesses opt for outsourcing their payroll processes, as studies have shown that businesses can save almost 18% annually through outsourcing their payroll processing. But what is included in payroll costs? What are the hidden charges companies often overlook, and how do firms reduce their cost of payroll per employee? We delve into this topic in this article.
Payroll Pricing Models
There are many payroll pricing models available, offered by various payroll providers. Chiefly, there are four pricing models, and each of them makes sense for a particular type of business. While there are pros and cons for each payroll model, the decision to opt for a specific model depends largely on the business size, industry, and maturity level. We discuss the four main types of payroll cost models below.
Flat Fee Model
In this model, there are fixed payroll service charges or a flat fee covering a fixed range or number of employees or payroll cycles every month. This is the simplest model and makes budgeting easy, as the monthly costs are fixed. The payroll services covered are generally all-inclusive of the basic requirements.
Per Employee Per Month (PEPM) Model
In this model, there is a base fixed price, which is generally smaller than in a flat-fee model, and a fixed cost of payroll per employee. For example, the payroll services pricing could be: $30 base fee + $10 per employee. This model is highly adjustable, allowing you to estimate your costs based on changes in headcount. This is suited best for growing teams.
Payroll Cycle Model
In this model, the provider charges you for every cycle of payroll processing plus an additional charge per employee. This model is suitable for any business with fluctuating personnel, such as an accounting firm that hires more people during tax season, or a retail showroom that hires more salespeople during festive seasons, etc. This model ensures you only pay for the resources you need, avoiding idle payroll costs during off-peak periods.
Hybrid Models
Hybrid models are various combinations of the above three models. These offer great flexibility and are ideal for companies wanting multiple services under one contract.
The following table can be a ready reckoner for comparing the different payroll pricing models:
| Model | Pros | Cons | Best suited for |
|---|---|---|---|
| Flat Fee Model | Predictable pricing, easy budgeting | Chances of overpaying if the headcount drops | Firms with a stable employee count and fixed pay cycles |
| PEPM Model | Highly scalable | Costs can quickly shoot up if teams grow rapidly; important to track | Small businesses that are projecting steady growth (not a fixed number of staff) |
| Payroll Cycle Model | Highly cost-effective for infrequent payroll cycles | Expensive for frequent payroll runs like weekly or bi-weekly | Seasonal businesses |
| Hybrid Models | Flexible, customisable, option to bundle services | May be complex, not suited for small businesses | Firms that require many services in one contract |
Factors Affecting Payroll Pricing
While selecting a payroll outsourcing partner, companies should look at the following factors and choose what is best for them. Since the benefits and drawbacks of each model are different and vary with the type of business, a careful examination of the following factors will help make an informed decision and reduce the overall payroll outsourcing fees.
Business Size and Number of Employees
Since most payroll pricing models base their fee on the number of employees or a range of the number of employees, the costs typically vary with the headcount and hence the organisation size.
Service Scope of the Payroll Package
Another important factor is the scope of service offered under the payroll processing package. A basic payroll package would generally include the calculation of wages or salaries, tax calculation and deduction, and paying the employees through direct deposit or cheques. But many organisations require more services, such as:
- Multiple pay rates management for the same employee
- Complex tax filings
- Unlimited or frequent payroll runs
- Tax compliance assistance
- Year-end tax forms and reporting
- Employee self-service portals
- Corrections to payrolls because of wrong calculations of overtime or missed hours
- Off-cycle payrolls
Payroll Cycle Frequency and Complexity
Your pay cycle frequency also impacts the pricing model you should opt for. Companies with a weekly payroll cycle might pay more than a company with a monthly payroll cycle. Complexity in the payroll processing also leads to higher costs. Complexities might include scenarios where there are multiple pay rates for the same employee, different classifications of employees, such as staff on hourly wages, salaried employees and contractors, or payrolls across states or countries with different payroll and tax regulations.
Hidden Costs in Payroll Service Charges
Many times, firms get unpleasant surprises in their payroll outsourcing fees. This is because providers often charge extra for services not covered under the basic plan, and it becomes difficult to keep track of these additional costs. Here, we list out a few common additional charges to watch out for that might not be covered under a basic payroll plan.
- Payroll corrections because of a missed overtime or other changes/errors
- Year-end forms
- Off-cycle payroll runs (outside of your normal payroll schedule)
- Onboarding fee or set-up charges
- Tax notices handling and correspondence with tax authorities
- Cancellation fees – applicable if you switch the provider before the contract period ends
- Other customisation needs or add-on services
Selecting a Payroll Plan & Reducing the Cost of Payroll Per Employee
While selecting a payroll package or provider, you should also consider your outsourced payroll cost per employee and evaluate how different providers structure their pricing.. Make sure to check for any hidden costs in payroll service charges, and ensure to check for these before signing the contract. While comparing payroll outsourcing providers, it is important to ask for a breakdown of the charges to the minutest detail for better clarity and understanding.
How to Optimise Payroll Costs
A few tips to manage payroll outsourcing fees and reduce the overall payroll processing cost per employee are listed below.
- While comparing payroll providers, always compare all-inclusive costs and not just the basic cost of payroll. Also, account for growth or an expansion of your team size, as this will greatly affect the payroll service charges. This will give a holistic view of your costs per month.
- Use payroll software to reduce errors and automate your payroll processes, increasing efficiency and reducing costs in the long run.
- Automate payroll processing by using a scalable payroll solution which can minimise time and manual errors, thereby reducing the chances of costly penalties.
- Consider outsourcing your payroll processing to a reliable provider and reap the benefits of lower payroll costs, higher productivity and increased compliance.
In-House vs. Outsourced Payroll Costs
How much does it cost to outsource payroll is a question that bothers many business owners when they consider outsourcing payroll. The truth is, the many benefits of outsourcing payroll processing far outweigh any negative effects of outsourcing your payroll processing. By choosing a trusted and reputable payroll outsourcing partner, businesses can save a significant amount of time and resources spent on conducting payroll activities.
Some of the advantages of outsourcing payroll processing over in-house payroll include:
- Reduced labour costs
- Elimination of software subscription fees
- Enhanced efficiency and accuracy in payroll processing, especially with complex processing
- Diminished cost of payroll per employee
- Increased compliance and thus, reduced penalties
- Easy scalability
- More time and resources to focus on core activities
Stop Worrying Over Payroll
If payroll processing is taking away your time and energy, it’s time to think about outsourcing your payroll functions to a reliable partner. No more surprises in payroll costs! Choose a payroll partner who is transparent and reliable, and offers customised plans suited to your firm. If you would like to streamline your payroll processing and gain from expert solutions, learn more about our payroll outsourcing services.