The first time you hire someone, payroll stops being a task and becomes a deadline. Money has to move on a fixed day, the right amounts have to be withheld, and filings have to reach federal and state agencies on their own schedule — whether or not you had a busy week.
The short answer on cost: nearly every payroll provider prices the same way — a flat monthly base fee plus a per-employee-per-month fee — and the number that matters to you is the total at your real head count on the tier that actually includes tax filing. Comparing base fees alone will mislead you every time, because a low base with a high per-person rate flips to the more expensive option somewhere around your fifth or sixth employee.
This guide explains what you're buying at each level, which costs are easy to miss, and the questions that make two quotes genuinely comparable. It's educational, not tax or legal advice — for your specific situation, talk to an accountant.
How payroll pricing is structured
Almost all providers use some version of this shape:
- A monthly base fee — the cost of having the service at all, charged whether you run payroll once or three times that month.
- A per-employee-per-month fee — charged for each active person on payroll.
- A contractor rate, often lower than the employee rate, sometimes the same.
- Tier pricing on top, where more capable plans raise both numbers.
That structure has one important consequence: the cheapest provider depends on your head count. A service with a low base fee and a high per-person fee is attractive for two employees and expensive for fifteen. One with a higher base and a low per-person fee is the reverse. Never compare a base fee to a base fee — compute the monthly total at your actual number of people, then again at the number you expect in a year.
Some providers also charge per payroll run rather than per month. If that's the model, your pay frequency becomes a cost decision: running weekly instead of biweekly roughly doubles that line.
What "full service" actually includes
The phrase is used loosely, so check for the specific pieces rather than the label. In rough order of how much work each removes from you:
Calculation only. The software works out gross pay, withholding, and net pay, and produces the numbers. You make the payments and file the returns yourself. This is the cheapest option and leaves you holding all the deadlines.
Payment processing. The service moves money to employees by direct deposit and debits your account. Convenient, but on its own it doesn't touch the filings.
Tax deposits and filings. The service withholds, deposits federal and state payroll taxes on the required schedule, and files the periodic returns — the federal quarterly return and the state unemployment and withholding returns that apply to you. This is the step most owners actually want to hand off, and it's the one worth confirming in writing.
Year-end forms. W-2s for employees and 1099s for contractors, prepared, filed, and delivered to recipients by the January deadline. Some plans include this; some bill it as a per-form fee in December, which is an unwelcome surprise if you budgeted a flat monthly cost.
New-hire reporting and registrations. Most states require new hires to be reported, and to run payroll in a state you generally need to be registered with that state's tax and unemployment agencies. Some providers handle registration for you, some charge for it, and some hand you a checklist. If you've hired a remote employee in a state where you have no other presence, ask this question first — it's the most common source of unexpected work.
Support when something goes wrong. A late deposit or a mis-filed return can trigger a penalty notice. Ask directly: if the error is yours, who fixes it and at what cost? If the error is theirs, who pays the penalty? Providers vary a great deal here, and the answer only matters after something has already gone wrong.
The costs that don't appear on the pricing page
These are the line items that turn a tidy quote into a larger invoice:
- Off-cycle and correction runs. A missed hire, a bonus, or a termination that can't wait for the next scheduled payroll. Often billed per run.
- Multi-state payroll. Frequently priced per additional state, per month — the biggest single driver of cost for small remote teams.
- Mid-year migration. Moving providers partway through a year means loading year-to-date figures accurately so year-end forms are right. Some providers do this at no charge to win the business; some charge for it. Ask before you switch.
- Add-on modules. Time tracking, PTO tracking, benefits administration, workers' compensation, HR document storage, and onboarding tools are commonly separate.
- Contractor payments if you use a lot of them — check whether contractors count toward the per-person fee and whether year-end 1099 filing is included.
The pattern here is the same one that shows up when you compare any outsourced service: the base price buys the routine case, and the exceptions carry fees. That's not dishonest, but it means the useful comparison is total annual cost for your pattern of work, including the exceptions you know you'll hit.
Doing payroll yourself vs software vs a full service
Doing it manually is feasible with one or two salaried employees in a single state, and free apart from your time. The risk isn't the arithmetic — it's the calendar. Deposit schedules, quarterly returns, and year-end forms all carry dates, and penalties attach to missed dates rather than wrong intentions.
Payroll software with tax filing is where most small employers land. It's the point at which the deadlines stop being yours to remember, which is the main thing you're actually paying for.
A bookkeeper or accountant who runs payroll for you costs more but folds payroll into someone who already sees your books, which matters if your payroll has complications — tips, multiple pay rates, prevailing wage, garnishments, or benefits deductions. If you're already at the point of handing off the books, as covered in our guide on when to stop doing your own bookkeeping, bundling payroll into the same relationship is often the simpler arrangement.
A PEO (professional employer organization) is a co-employment arrangement bundling payroll with benefits and HR, priced as a percentage of payroll or a higher per-employee fee. It can improve a small team's benefits pricing and is harder to unwind. Investigate it only once benefits are the actual problem.
For most owners, payroll is high on the outsourcing list for the reason we set out in what to outsource first when you're doing everything yourself: it's recurring, deadline-driven, penalty-bearing, and not a task where your personal effort makes the outcome any better.
Nine questions that make two quotes comparable
Ask every provider the same list and write the answers side by side:
- What is the monthly total at my head count — base plus per-person, on the plan that includes tax filing?
- Is that price introductory, and what does it become at renewal?
- Are federal and state deposits and filings included, or an upgrade?
- Are W-2s and 1099s included, or billed per form at year end?
- What does an off-cycle run cost?
- What's the charge per additional state?
- Who handles state tax and unemployment registration if I hire somewhere new?
- If a filing is late or wrong because of your error, who pays the penalty?
- What does it cost to leave — can I export full payroll history and year-to-date figures in a usable format?
That last question is the one people skip and regret. Payroll history is the record you need for year-end forms, for a loan application, and for the next provider's setup.
FAQ
How much does payroll cost for one employee?
For a single employee, you're mostly paying the base fee — the per-person fee is a small share of the total. That's why per-employee pricing looks expensive at head count one and gets more reasonable as you grow. If you have exactly one employee in one state, compare the full-service total honestly against the time cost of doing it yourself; the answer is closer than it is at five employees.
Do I need a payroll service if I only pay contractors?
Not necessarily. Paying contractors is simpler — no withholding, no employment tax deposits — and many businesses handle it through their accounting software, with 1099s at year end. A payroll service becomes worthwhile when you have enough contractors that tracking payments and issuing forms is a real chore, or when you're about to hire your first actual employee.
Is cheap payroll software risky?
Not inherently, but check what the low price excludes. The common pattern is that a low headline plan covers calculation and direct deposit while tax filing sits one tier up. That's a legitimate product; it's only a problem if you assumed filings were included and nobody was doing them.
When should I switch payroll providers?
The cleanest time is the start of a calendar year, because year-to-date figures start at zero and year-end forms come from a single system. Mid-year switches are perfectly doable, but they require accurate year-to-date data to be loaded, so allow more setup time and confirm who's responsible for it.
Does payroll include benefits and HR?
Usually not in the base price. Benefits administration, workers' compensation, and HR tooling are typically add-on modules or higher tiers. If benefits are your real reason for looking, price those explicitly rather than assuming they come along with payroll.
Compare payroll providers on the numbers that matter
Payroll is one of the few back-office costs where the right comparison is arithmetic, not opinion: total monthly cost at your head count, on the tier that includes filing, plus the exceptions you know you'll hit. Once you've written down your head count, your states, and your pay frequency, the shortlist gets short quickly.
