Payroll Costs Explained: The 2025 Guide to Managing Your Team’s Payroll

If only paying your team was as simple as calculating hours worked x wage.

The true cost of payroll often surprises small business owners—too often in ways that impact the bottom line. Beyond wages, you're facing employer taxes, processing fees, and sleepless nights spent crunching numbers.

The good news? Understanding your actual payroll costs help you take control. You'll make smarter decisions about payroll processing, avoid costly tax mistakes, and create a better experience for your team.

TL;DR How much does payroll cost in 2025?

For small businesses with hourly teams, payroll service costs typically range from 1.25 to 1.4 times what you pay in wages. This means for every $100 you pay an employee, you're actually spending $125-$140 when you factor in all payroll-related expenses.

Most small businesses allocate 15-30% of their total revenue to payroll expenses, though this varies significantly by industry. For instance, retail businesses often spend around 8% of revenue on payroll, while construction companies typically spend closer to 20%.

Your payroll costs include:

• Employee Wages: The base hourly pay for your team members.
• Employer Taxes: You're responsible for FICA taxes (Social Security and Medicare), plus federal and state unemployment taxes for small business payroll.
• Benefits: Health insurance, retirement contributions, paid time off, and workers' compensation can add substantially to your total cost.
• Administrative Expenses: Processing payroll itself costs money, whether through software, outsourced services, or staff time.

For payroll services, here's what you can expect to pay in 2025:

• Do-it-yourself: Free upfront, but costs you valuable time (estimated 5-10 hours per month) plus potential penalties for errors.
• Payroll Software: $20-$180 monthly base fee plus $4-$12 payroll service cost per employee. For a team of 10, you're looking at $60-$300 per month. Check out our list of the best payroll software in 2025 for more details.

‍Outsourced Services: According to QuickBooks (2025), hiring a dedicated payroll specialist costs around $64,865 annually for a full-time employee. Consider a full-service payroll solution instead.

Understanding total payroll costs for hourly teams

Let's break down payroll basics and find the exact costs of payroll services for small businesses, so you know what's eating into your budget.

Direct payroll costs

Hourly wages are just the beginning of your payroll expenses. For hourly teams, it's never as simple as hours x rate. You're also dealing with:

• Regular hours at standard pay.
• Overtime at time-and-a-half after 40 hours.
• Double-time for those holiday shifts.
• Premium pay for those who take the late shifts.

Benefits take a bigger bite than you might think with:

• Health insurance contributions.
• 401(k) matching that adds up fast.
• PTO that still needs funding even when nobody's working.
• Workers' comp insurance that varies based on how risky your industry is.

PTO gets especially tricky with hourly teams whose schedules change weekly. Set clear policies and use tools that track accruals automatically. (Psst... Homebase does this without making you do extra math!)

The government always gets paid

Every paycheck triggers mandatory contributions:

• 7.65% in FICA taxes that never go away
• Federal unemployment tax taking 6% from the first $7,000
• State unemployment rates that penalize layoffs

Your hourly team's changing schedules and seasonal staffing make these taxes even harder to predict.

Hidden admin costs

Even running payroll eats into profits:

• Late nights spent reviewing timesheets
• Software fees that recur month after month
• Processing charges for every direct deposit
• Time spent keeping up with changing regulations

Your hourly teams face even higher admin costs with shifting schedules and overtime calculations. Especially when every pay period means hunting down missing punches and fixing timecard errors.

Manual methods cost more than you think

Outdated payroll approaches create expensive problems:

• Buddy punching and time theft draining your bank account (Did you know we built Homebase to prevent this with photo verification at clock-in?)
• Calculation errors turning into costly overtime mistakes
• Compliance violations triggering penalty fees
• Hours wasted reconciling paper timesheets with your accounting system

The true cost of a $15/hour employee

Payroll costs per employee are bigger than you think. For a retail employee working 40 hours weekly at $15/hour:

• Base wages: $31,200 annually
• Employer taxes: $3,087
• Workers' comp: $312
• Basic benefits: $4,500
• Admin costs: $240
• Total annual cost: $39,339

That's $18.91 per hour in actual cost—26% more than their base rate.

How to calculate your true payroll cost

Knowing exactly what payroll costs you isn't just good accounting—it's essential for pricing your products correctly, forecasting cash flow, and making smart hiring decisions.

Here's a step-by-step approach to calculating your true payroll expenses for hourly employees.

Step 1: Calculate gross wages

Start with the base hourly wages for each employee:

Gross Wages = Hourly Rate × Hours Worked

For hourly teams, this calculation must account for:

• Regular hours at standard rate.
• Overtime hours at premium rate (typically 1.5× or 2× regular pay).
• Shift differentials or premium pay for specific shifts.
• Holiday pay or other special circumstance pay.

Example: A server working 35 regular hours at $12/hour plus 8 overtime hours at $18/hour = (35 × $12) + (8 × $18) = $420 + $144 = $564 per week

(For those of you who do this manually…bless you.)

Step 2: Add employer payroll taxes

For each employee, calculate your tax obligations:

• FICA taxes: 7.65% of gross wages (6.2% for Social Security + 1.45% for Medicare)
• FUTA (Federal Unemployment): 0.6% on first $7,000 earned per year
• State Unemployment Insurance: Varies by state (typically 2-5% on first $7,000-$15,000)

Employer Taxes = Gross Wages × FICA Rate + Applicable FUTA and SUI

Example: For our server with $564 weekly gross wages = $564 × 7.65% + (applicable unemployment taxes) = $43.15 + unemployment taxes per week

And remember, missing these can cause big issues 😱

Step 3: Include employee benefits

Calculate the employer portion of benefits:

• Health insurance premiums (employer portion)
• Retirement contributions (employer match)
• Workers' compensation insurance
• Paid time off accrual value
• Other benefits (life insurance, disability, etc.)

Weekly Benefits Value = (Annual Benefits Cost ÷ 52)

Example: If annual benefits for our server cost $6,000 = $6,000 ÷ 52 = $115.38 per week

Some of these are less common for small businesses (like health insurance), but some are WAY more complicated (like PTO!).

Step 4: Add administrative costs

Calculate what it costs to process payroll:

• Payroll service costs (base fee + per-employee fee)
• Time spent by managers reviewing and approving time
• Cost of payroll tax filings and year-end processing

Per-Employee Admin Cost = (Total Payroll Admin Costs ÷ Number of Employees)

Example: If payroll processing costs $250/month for 10 employees = ($250 × 12) ÷ 10 ÷ 52 = $5.77 per employee per week

Your time matters, even if you’re a small business owner. You deserve a system that actually serves you.

Step 5: Calculate total payroll cost

Add up all components for each employee:

Total Payroll Cost = Gross Wages + Employer Taxes + Benefits + Admin Costs

Example: For our server = $564 + $43.15 + $115.38 + $5.77 = $728.30 per week

That means each hour actually costs: = $728.30 ÷ 43 hours = $16.94 per hour (compared to the $12 base rate)

Step 6: Calculate your payroll percentage

To see how your payroll costs compare to industry standards:

Payroll Percentage = (Total Payroll Costs ÷ Total Revenue) × 100

Example: If weekly revenue is $7,500 and total payroll costs are $1,850 = ($1,850 ÷ $7,500) × 100 = 24.7% payroll percentage

That way, you can see whether you’re on track or need to make changes in the way you're managing things (AKA: Making your life easier)!

Pro tip: Run these calculations quarterly to account for seasonal variations in staffing and adjust your business strategy accordingly.

Common calculation mistakes for hourly teams

When calculating payroll costs for hourly employees, check for these mistakes:

1. Forgetting overtime premiums: Miscalculating or omitting overtime pay is one of the most common and costly payroll errors. (Btw... Homebase calculates this automatically!)
2. Inconsistent time rounding: Time clock rounding must be consistent and fair to avoid wage and hour violations.
3. Missing accrued PTO liability: PTO accrual based on hours worked creates a financial liability that should be included in payroll cost calculations.
4. Overlooking seasonal variations: Hourly teams often have seasonal fluctuations that affect your overall payroll percentage throughout the year.
5. Ignoring turnover costs: Hourly positions often have higher turnover rates, adding recruitment, onboarding, and training costs to your true payroll expense.

In-House vs. software vs. outsourced payroll: Cost comparison

There’s a heckin’ plethora of payroll options out there when you’re deciding how to run payroll. Here’s how the costs stack up:

In-house payroll aka. Running payroll yourself

Total Cost: $4,000-$7,000 annually for a 10-employee business

• DIY approach saves on service fees but requires 5-10 hours per month of your time
• Owner's time valued at $50/hour = $3,000-$6,000 in opportunity cost annually
• Additional costs for tax filing software and potential penalties from errors

Best for: Very small teams (1-5 employees) with stable hours and minimal overtime needs.

Payroll software AKA: Something like Homebase

Total Cost: $1,200-$3,600 annually for a 10-employee business

• Base fees ($20-$180/month) plus per-employee fees ($4-$12/employee/month)
• Reduces time spent to 1-2 hours per month (saving $2,400-$4,800 in opportunity cost)
• Often includes tax filing, direct deposit, and basic reporting
• Integration with time tracking reduces errors in hourly calculations

Best for: Growing small businesses with hourly employees looking to balance cost with functionality.

Outsourced payroll AKA: Full-service payroll (like an accountant!)

Total Cost: $3,600-$7,200 annually for a 10-employee business

• Higher service fees but minimal time investment (saving up to $5,400 in opportunity cost)
• Full-service compliance management and tax filing
• Additional expertise for complex hourly scenarios (multi-state, tip credits, etc.)

Best for: Established businesses with complex payroll needs or those focused on growth rather than administration.

For hourly teams specifically, software solutions with integrated time tracking typically offer the best value. They minimize double-entry errors while being a lot less pricey than full outsourcing.

ROI of modern payroll solutions & ways to reduce costs

Smart payroll investments pay for themselves. Here's how modern solutions deliver ROI and help cut costs for your hourly team:

The real ROI of better payroll systems

Time savings: Modern payroll automation solutions save 5-8 hours per month for businesses with 10 employees. At $50/hour for management time, that's $3,000-$4,800 saved annually.

Error reduction: Manual payroll has a 1-8% error rate. For a business with $400,000 in annual payroll, even a 1% error rate costs $4,000 per year—more than most payroll software subscriptions.

Compliance benefits: The average penalty for a payroll tax violation is $850 per incident. Modern systems with automatic tax updates effectively eliminate this risk for most small businesses.

Employee retention: Employees who experience payroll errors are 2x more likely to seek new employment. With replacement costs at 25% of annual salary, preventing even one turnover ($7,800 for a $15/hour employee) pays for most systems.

5 ways to reduce payroll costs

1. Connect time tracking to payroll: Eliminate double-entry errors and save 3-4 hours per month by using a system where time data flows directly into payroll processing.
2. Optimize pay frequency: Bi-weekly instead of weekly payroll cuts processing costs in half while still meeting employee needs.
3. Implement direct deposit: Save $1-$3 per check in printing and distribution costs while reducing time spent on payroll administration.
4. Leverage tax credits: When applicable (for example, hiring veterans) tax credits can provide significant cost reductions, though they have specific eligibility requirements and regional limitations.
5. Automate tax filings: Eliminate penalties and interest charges by automating federal, state, and local tax payments and filings through your payroll system.

The typical payroll system pays for itself in 3-6 months through time savings, error reduction (or payroll fraud protection), and compliance benefits. 

The most cost-effective solutions combine payroll with scheduling and time tracking capabilities to address the unique challenges of managing hourly workers. (And frankly... we think the Big Guys overcharge. Check out our payroll pricing for small businesses.)

How Homebase helps small businesses take control of payroll costs

Running payroll shouldn't eat up your Sunday nights or drain your bank account. 

Unlike enterprise systems built for corporate HR departments, Homebase was created specifically for small businesses with hourly teams. Our customers save time and money through connected time tracking that eliminates errors, built-in compliance features that prevent costly mistakes, and fair pricing designed for small team budgets.

As Smiling Tree Toys founder Kathleen Smith puts it: "Before Homebase I was manually tallying up my team's work hours and entering them into payroll, crossing my fingers I hadn't made any mistakes. Now our entire team logs in and out quickly and easily with the Homebase app, and all I have to do is send their hours to my payroll program with the click of a button."

Mike Buzard, CEO of Beverage Destruction Service, shares: "I love the simplicity and the time tracking and the payroll system itself. It is so much easier than anything I've used in the past. I've run payroll from sitting on a horse moving cattle."

The average Homebase customer saves 5+ hours per week managing their team—time better spent growing your business or actually enjoying your evening off.

Want to see if Homebase is right for you? Try our payroll features free for 14 days, no credit card required.

FAQs

How much should payroll cost? 

Payroll costs should typically range between 15-30% of your total revenue, depending on your industry. Retail businesses usually spend around 8-15% of revenue on payroll, while service-based businesses might allocate 20-35%. For the payroll service itself, small businesses should budget $20-$40 per month plus $4-$8 per employee for basic software.

What are payroll fees examples? 

Payroll fees typically include base subscription costs ($20-$200 monthly), per-employee charges ($4-$12 each), tax filing fees ($20-$40 per filing), direct deposit fees ($1-$2 per transaction), year-end tax form preparation ($40-$100), and setup fees ($50-$150). Many providers also charge extra for same-day processing or off-cycle payrolls.

Can I do my own payroll for free? 

Yes, you can do payroll for free, but it requires significant time investment and carries compliance risks. The DIY approach involves manually calculating wages, withholding taxes, making deposits, and filing returns. While free upfront, it typically costs 5-10 hours per month and increases your risk of penalties—averaging $291 per mistake.

How much does payroll cost per employee? 

Payroll service costs per employee typically range from $4-$12 per month, on top of wages and taxes. Most services also require a base monthly fee of $20-$180. Your total payroll expense per employee generally equals 1.25-1.4 times their hourly wage—so a $15/hour employee actually costs around $18.75-$21/hour.

How much does payroll cost for small business? 

Small business payroll prices typically range from $20-$300 per month depending on team size and service level. For a 10-employee business, expect to pay approximately $60-$120 monthly for basic software or $100-$300 for full-service payroll. These prices generally include a base fee plus per-employee charges.

How much does it cost to outsource payroll? 

Outsourcing payroll typically costs $40-$180 per month as a base fee, plus $6-$12 per employee. For a 10-employee business, expect to pay $100-$300 monthly. Higher-tier services with dedicated bookkeeping support range from $200-$350 per month. Outsourcing saves approximately 5 hours of administrative time per pay period.

How much does payroll software cost? 

Payroll software typically costs $20-$180 per month as a base fee, plus $4-$8 per employee. For a 10-employee business, expect to pay $60-$120 monthly. Cloud-based solutions operate on a subscription model, while installed software might require an initial purchase of $300-$600 plus annual maintenance fees.