How Much Does It Cost to Run Payroll? A Guide for Small Businesses

Last updated: April 2026

Running payroll might seem like a straightforward process: just pay your employees, right? But once you factor in software subscriptions, time spent managing calculations, filing taxes, and staying compliant with changing laws, the total payroll costs add up quickly. For small business owners, understanding exactly how much it costs to run payroll is essential to making financially sound decisions.

In this guide, we’ll break down what goes into the cost of payroll, compare common processing methods (manual, software, outsourcing), and help you determine the most cost-effective approach for your business. Whether you’re handling payroll in-house or looking for better tools, knowing what you’re spending and what you could be saving can protect your business’s financial health.

What Factors Influence the Cost of Running Payroll?

Before we dive into specific numbers, it’s important to understand what influences payroll expenses. Payroll costs vary widely depending on the size and structure of your business, your payroll frequency, and whether you use software, hire a payroll service provider, or manage everything in-house.

Key factors include:

• Number of employees: More employees mean more calculations, filings, and recordkeeping.
• Payroll frequency: Weekly payroll requires more frequent processing than monthly or biweekly.
• Manual vs. software vs. outsourcing: Each method has its own cost structure and time investment.
• Location: Different states and municipalities have unique payroll tax laws.
• Compliance requirements: Staying compliant with tax filing and labor laws adds to administrative costs.
• Employee benefits: Health insurance, retirement contributions, and garnishments can increase processing complexity.

Even small differences in any of these variables can significantly affect your payroll-related expenses.

Manual Payroll Costs: Time, Risk, and Money

Some business owners choose to manage payroll manually to save money. At first glance, this approach seems cost-effective since you’re not paying for payroll software or services. But the real cost of doing payroll manually lies in the time and risk involved.

You’ll need to track employee hours, calculate gross pay, subtract pre- and post-tax deductions, determine payroll taxes, and file payments with local, state, and federal agencies. You must also issue paychecks and maintain compliance records.

The IRS estimates that 40% of small businesses pay a payroll penalty each year due to mistakes in filings or missed deadlines. These penalties can range from a few hundred to several thousand dollars, depending on the error.

Hidden manual payroll costs:

For business owners, that’s $300+ in time value per month that could be spent growing the business. Additionally, payroll mistakes can negatively impact employee morale and your reputation.

How Much Does Payroll Software Cost?

Payroll software is a popular choice for small businesses seeking accuracy, automation, and time savings. Costs vary depending on the provider, features, and size of your team.

Most payroll providers charge a base fee plus a per-employee fee. Others, like FRIDAY, offer small-business-friendly pricing with no surprise charges.

FRIDAY Pricing at a Glance

Monthly Plans:

• Just Time: $9/user, $0 base fee – for time tracking only
• Startup: $12/user + $59 base fee – includes payroll, tax filing, W-2s, direct deposit, onboarding
• Small Biz Pro: $16/user + $99 base fee – includes advanced tools like next-day payroll, job costing, and multi-state support

Annual Plans (Discounted):

• Just Time: $8/user
• Startup: $11/user + $49 base fee
• Small Biz Pro: $15/user + $90 base fee

All plans come with a 14-day free trial, no setup or cancellation fees, and free migration.

Other Providers (Average Pricing):

• Base software fee: $20 to $50/month
• Per employee fee: $4 to $10/month
• Setup fees: $0 to $200, depending on the provider

Comparison for 5 employees (monthly):

Payroll software can help minimize payroll mistakes, save time, and improve compliance, making it well worth the cost for most small business owners.

Cost of Outsourcing Payroll to a Provider

Outsourcing payroll to a third-party provider is another option, especially for growing businesses that want to reduce admin burden. These services typically handle everything from payroll processing to tax filing and reporting.

Average costs:

• Monthly base rate: $100 to $250
• Per employee: $5 to $15
• Additional fees: Setup, filing, year-end reports, support

Benefits of full-service payroll:

• Expert handling of tax laws and compliance
• Assistance with employee classification
• Filing of all forms and payments on your behalf

However, this convenience comes at a premium. Small businesses with tight margins may find it hard to justify the higher monthly costs compared to software or in-house processing.

Which Payroll Option Is Most Cost-Effective?

When comparing manual payroll, payroll software, and outsourcing, it helps to assess the true cost, not just the dollar amount, but also time, risk, and flexibility.

For most small business owners, payroll software offers the best balance of affordability and efficiency. Platforms like FRIDAY are designed to simplify basic payroll processing, handle tax payments, and reduce administrative costs, without locking you into confusing contracts or surprise fees.

Hidden Costs of Payroll That Business Owners Overlook

Even with software or outsourcing, there are often payroll-related expenses that catch business owners off guard. These hidden costs can erode profits if not accounted for.

Common overlooked expenses include:

• Direct deposit fees charged by banks
• Amendment fees for correcting past filings
• Garnishment handling or agency charges
• Integrations with accounting or HR systems
• Time spent training staff on payroll changes

Choosing a transparent, small-business-focused platform like FRIDAY helps avoid these surprise costs. There are no setup fees, hidden charges, or per-employee pricing, just accurate payroll, tax filing, and compliance built into your monthly plan.

Run Payroll Confidently and Affordably with FRIDAY

Payroll shouldn’t be a source of stress or financial drain. Understanding how much it costs to run payroll helps you choose the right system for your business. While manual processing might seem cheap, it often costs more in time and risk. Outsourcing offers convenience but comes at a higher price. For most small businesses, using a trusted payroll software like FRIDAY strikes the right balance.

FRIDAY is built specifically for small businesses looking for a simple, affordable payroll solution with no hidden fees. You’ll get all the tools you need to run payroll, file taxes, and stay compliant, without the headache.

Start your free 14-day trial with FRIDAY today.

FAQs

How much does it cost to run payroll for 5 employees?

The cost to run payroll for 5 employees typically ranges from $0 for manual payroll to $100 per month for software or $250 or more for outsourced services. The exact cost depends on the provider, features, and level of automation used.

Is it cheaper to do payroll manually?

Manual payroll has no direct software cost, but it often becomes more expensive over time due to the time required and the risk of errors. Mistakes can lead to penalties, making manual payroll less cost-effective for most small businesses.

What’s the average cost of payroll software for a small business?

The average cost of payroll software for a small business is $20 to $50 per month, plus $4 to $10 per employee. Total costs vary based on features, automation, and the number of employees.

What are the hidden costs of payroll services?

Hidden payroll costs often include setup fees, correction fees, integration charges, and add-ons for support or tax filing. Some providers also charge extra for direct deposit or year-end reporting.

How can payroll software help reduce payroll expenses?

Payroll software helps reduce expenses by automating calculations, tax filings, and reporting, which saves time and lowers the risk of costly errors. It also helps small businesses avoid penalties and reduce administrative workload.

Pincus Schiff

Pincus Schiff is a payroll software specialist at Friday App, where he helps businesses simplify payroll, stay compliant, and automate their workflows. He writes about payroll best practices, compliance, and the latest in workforce technology.