How Much Should Payroll Cost?

The Milestone Team December 13, 2022

Managing a business is challenging enough without having to worry about payroll and knowing the right percentage to apply. Payroll is more than just labor costs. It requires processing benefits, taxes, bonuses etc. as well.

Payroll costs can make or break a business, so they should be managed carefully. In order to reach this goal, it is important to identify what percentage of revenue should be spent on payroll services. As a general rule, it is recommended that payroll shouldn’t exceed 20-30% of a company’s gross revenue. However, in certain industries, including those in the service sector, payroll costs can be as high as 50%. In general, though, the benchmark should be between 20% and 30%.

Your payroll expenses will increase as your business grows and more resources are needed. Nevertheless, strive to keep your payroll costs reasonable – the less you pay for payroll, the higher your profit margin will be.

How Do You Calculate Payroll Costs?

The pricing of payroll services can vary from platform to platform, and payroll service providers often offer several different packages, depending on your needs. In order to calculate payroll costs, there are many questions to consider:

  • In terms of frequency, do you plan on paying your employees on a weekly, bi-weekly, semi-monthly, or monthly basis? 
  • How many active employees do you have on your staff?
  • How do you plan on paying your employees?
  • Where are your employees located? In one state or multiple states?
  • How will you file your taxes and send out forms and documents?
  • Who manages workers’ compensation, 401(k) plans and healthcare?

How Much Should Payroll Cost?

The costs associated with using a payroll service are usually divided into two categories: base monthly costs and costs per employee per month. 

Payroll services can cost anywhere from $30 to $200 a month for a basic account, based on the type of service that you choose. The payroll processing fee is usually charged per employee per month in addition to the base account fee, which is an average of $10 to $25 per month. In addition, a setup fee is usually charged once. Depending on whether you use basic payroll services or a full-service payroll provider, costs will vary.

How Much Should I Budget for Payroll Taxes?

It is undoubtedly a fact that payroll taxes are one of the biggest bites taken out of your compensation. In accordance with statistics provided by the U.S. Department of the Treasury, payroll taxes made up approximately 31% of federal tax revenue in fiscal year 2021. That’s $1.25 trillion out of $4.05 trillion. The government uses these taxes to fund the Social Security and Medicare programs, as they are derived from the wages, salaries, and tips that are paid to employees. Payroll taxes are withheld by employers on behalf of their employees and paid directly to the government. 

Payroll taxes contribute to the difference between your salary and your take-home pay. The deduction of health insurance premiums and retirement savings from your paycheck in combination with payroll taxes can significantly reduce your paycheck. Upon starting a new job and completing a W-4 tax withholding form, your employer begins deducting social security and Medicare payroll taxes from your earnings.

Social Security taxes are currently 6.2% for employers and 6.2% for employees, which amounts to a 12.4% tax rate. The current Medicare tax rate is 1.45% for employers and 1.45% for employees. It totals 2.9%. This will result in combined FICA tax rates of 7.65% for employers and 7.65% for employees.

How Milestone Makes Payroll Easy for Small Businesses

Milestone partners with your business to provide the best possible answers facing your business today, tomorrow, and down the line. 

  • Unmatched Expertise → Decades of proven experience in both accounting and HR, customized to your specific business needs.
  • Collaborative Partnership → Whether you’re looking for the fundamentals or a full-service strategic partner, we’re here to help.
  • Unleash your back office → A unified approach to accounting and HR services that creates synergy across your business.

Payroll is something you have to get right the first time. Our payroll service experts will use the most efficient tools and design the best process to ensure success. Contact us today.

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