How Much Do Payroll Services Cost Small Businesses?

Every business with employees needs to run payroll. While many small business owners start off doing payroll themselves, compliance and accuracy concerns make it a tricky process.

Not only are payroll tasks frequently time-consuming, but payroll mistakes can also prove costly in terms of audit penalties and employee turnover. Research suggests that 49% of workers will start a new job search after just two paycheque problems.

A qualified payroll professional is the key to avoiding penalties and ensuring you pay your employees accurately and on time. It’s a good idea, however, to compare the pros, cons, and payroll costs attached to:

Hiring an in-house payroll administrator, vs
Outsourcing to a payroll service provider

Before we take a detailed look at payroll services and their cost for small businesses, let’s get to the point. How much do payroll services costs for small businesses in Canada? Using the example of a small business with five employees, you can expect costs of about:

In-House Payroll: About $1,075 per month per employee (at a $65,000 annual salary, benefits, and ancillary costs)
Outsourced Payroll: Between $150 and $200 monthly for five employees or $30 to $40 per employee

Factors That Affect the Cost of Payroll Services for Small Businesses in Canada

The cost of payroll services for small businesses varies widely because of several factors. Being aware of these factors makes it easier to budget for the expense of payroll services.

Number of Employees: Most payroll service providers charge fees based on the number of employees processed per pay period and may offer discounted rates as the number of employees increases. Number of Employees: Many payroll service providers charge fees based on the number of employees processed per pay period.
Payroll Frequency: More frequent payroll runs (weekly vs. bi-weekly or monthly) result in higher cumulative costs. Increased frequency requires more time and resources from the provider.
Complexity of Payroll: Managing full-time, part-time, contract, and seasonal workers adds complexity. Variable Pay Elements such as overtime, commissions, bonuses, and shift differentials require detailed calculations and add complexity. Handling benefits, garnishments, and other deductions increases administrative tasks.
Additional Services: Year-End reporting, such as preparing T4 slips, Records of Employment (ROEs), and other year-end documents, incurs additional fees. Direct Deposit and Cheque Issuance fees may apply to process direct deposits or issue cheques.
Multi-Provincial Operations: Navigating different provincial tax rates and labour laws requires expertise. Payroll systems must accommodate the rules and regulations of more than one province.
Other Cost Factors: Integration with other systems, level of customer support, contract terms, setup and implementation fees, customization and reporting needs, and employee self-service features.

Now, let's get into the detail of what payroll professionals do and the specifics behind these costs.

What are the responsibilities of payroll personnel?

Payroll personnel are responsible for ensuring your employees get paid correctly at the right time and that the payroll deductions are remitted to the CRA and other authorities.

Typical payroll tasks include:

Recording employee timesheets and calculating wages and overtime. This work must be accurate and rendered in a timely manner.
Performing payroll tax calculations on wages, vacation pay, termination pay, and banked time
Performing payroll tax calculations on CPP and EI contributions
Calculating employer health tax and work-safe (WCB)/WSIB filings
Making government remittances of employee deductions. This includes annual reporting of these deductions.
Processing direct deposits or paycheques for hours worked
Submitting T4s for employee income tax filing
Issuing ROEs (record of employment) for exiting employees
Preparing bookkeeping entries
Maintaining payroll records of all payroll transactions for at least six years, documenting changes to payroll and its processes, and ensuring payroll audit preparedness
Ensuring payroll compliance with Federal and Provincial legislation and regulations
Handling employee inquiries and concerns
Reviewing and updating payroll processes and policies

Benefits administration, RRSP matching, and other human resources services might also fall under the umbrella of payroll responsibilities, especially if deductions are involved.

If you have employees in different provinces, your payroll personnel must ensure that wages, taxes, vacation days, and employment termination payments are made according to the provincial requirements where your employees work.

Ideally, the payroll professional you hire will have Payroll Compliance Practitioner (PCP) certification, ensuring they’re well-versed in payroll legislation and can keep your organization compliant.

A word about DIY payroll solutions

You may be able to cut costs using dedicated accounting software to do payroll yourself (or having your office manager or bookkeeper do it). But as your team grows, the process will get more complex.

Common DIY payroll mistakes include:

Miscalculating pay. Not only are physical timesheets prone to human error, such as incorrect wage payments, missed deductions, or misallocation of benefits. There’s also a lot of payroll data to track (think time and attendance, vacation pay, overtime, and commissions), and each province has its own payroll policies.
Misclassifying employees. Contractors, for example, are usually responsible for their own payroll deductions and require T4As instead of T4s.
Missing payroll deadlines. To ensure employees are paid on time - and avoid remittance penalties and late fees - payroll must be processed several days in advance so banks have ample time to process direct deposits. Missing tax remittance or payroll processing deadlines can result in penalties, interest charges, and strained employee relations.
Data Security Risks: Handling sensitive employee data, such as social insurance numbers and banking information, without proper security measures can lead to data breaches, identity theft, and legal liabilities. DIY solutions usually do not provide adequate encryption or secure storage for payroll data, making them vulnerable to unauthorized access.

Your employees count on timely pay runs and accurate pay amounts to meet mortgage withdrawals and other financial commitments. Automating payroll may help in this regard, but it does not guarantee the prevention or resolution of all common payroll errors and issues. The best way to avoid payroll errors and delays is to hire PCP-certified personnel or outsource payroll to an established payroll company.

So, how much do payroll services cost for small businesses like yours? Let’s find out.

Hiring an in-house payroll administrator

Hiring a full-time payroll compliance practitioner or experienced payroll specialist will keep your organization current on the latest payroll legislation.

However, hiring a full-time payroll administrator can be costly and might not make financial sense if your business has fewer than 100 employees.

Depending on job scope and experience level, the average annual salary of a full-time, experienced payroll professional in Canada is about $65,000. On top of their salary, you can also expect additional fees of about 10% to cover overhead costs like IT equipment, benefits, and payroll deductions.

Pros of hiring an in-house Payroll Compliance Practitioner

Accurate payroll calculations: An in-house payroll provider is more familiar with the specific payroll needs of your business, reducing the risk of errors and ensuring compliance with company policies and relevant laws.
Focus on Compliance: An in-house payroll provider can stay up-to-date on current payroll regulations to ensure that the business complies with federal and provincial laws, thereby minimizing the risk of fines or penalties.
Greater Control and Flexibility: With an in-house payroll team, you have direct control over payroll processes, allowing you to make adjustments quickly and implement changes without waiting on an external provider. In-house payroll allows for tailoring payroll processes to fit your business's specific needs and nuances, such as unique compensation structures, benefits, or reporting requirements. Payroll data is readily accessible, allowing for real-time adjustments and quick responses to employee inquiries or business needs.

Cons of hiring an in-house Payroll Compliance Practitioner

Higher Costs: Hiring in-house payroll staff involves paying salaries, benefits, and possibly bonuses, which can be costly compared to outsourcing payroll services. Ongoing training and development are necessary to keep the in-house team updated on the latest payroll laws and software, adding to the overall expense. Investing in payroll software and systems, along with maintaining and updating them, can be expensive.
Limited Backup and Continuity OR Single Point of Failure: payroll processing will be disrupted if the in-house payroll person is unavailable due to illness, vacation, or resignation. An in-house payroll system might lack the robust backup and disaster recovery plans that specialized payroll providers typically offer.
Scalability Issues: As your business grows, the payroll function may become more complex, requiring additional staff or resources. Scaling an in-house payroll team can be more difficult and expensive than using an external provider. A small in-house team may struggle to handle a rapidly growing workforce or sudden changes in payroll demands, leading to delays or errors.

Outsourcing to a payroll service provider

Online payroll services are usually more cost-effective than hiring in-house payroll personnel. Plus, payroll providers typically have payroll compliance professionals and experienced specialists on their team who can successfully perform any type of payroll task and navigate tricky compliance issues.

Most payroll service providers charge a one-time onboarding or base fee for any payroll software or time-tracking apps, followed by a monthly recurring fee based on the number of employees and scope of engagement.

At Enkel, for example, our monthly recurring fee starts at $150-200 for five employees (depending on payroll complexity).

Pros of outsourcing to a payroll provider

Cost Savings: Outsourcing payroll is usually more cost-effective than an in-house team, especially for small to mid-sized businesses. It eliminates the need for salaries, benefits, payroll software, and ongoing training expenses. Most payroll providers offer predictable, flat-rate pricing models, making it easier for businesses to budget for payroll expenses without unexpected costs.
Time Savings: Outsourcing payroll frees up time for business owners and HR staff to focus on core business activities rather than the complex and time-consuming task of payroll management. Payroll providers often have streamlined processes and advanced software to process payroll more efficiently and accurately than an in-house team.
Expertise and Compliance: Access to payroll compliance practitioners and experienced payroll professionals who are well-versed in compliance and upcoming legislative changes. Payroll providers specialize in payroll processing and have extensive knowledge of the latest tax laws, regulations, and best practices. This ensures accuracy and compliance with federal and provincial requirements.
Scalability: As your business grows, an outsourced payroll provider can easily scale their services to accommodate additional employees, more complex payroll structures, or operations across multiple provinces. Outsourced providers offer flexibility to adjust services based on your current needs, such as adding new services like benefits administration.
Business Continuity: Payroll providers have established processes and backups to ensure continuity in emergencies, such as system failures or natural disasters, ensuring that payroll is processed without interruption. Outsourcing ensures that payroll is handled consistently and reliably, regardless of internal staffing changes or other disruptions within your business.

Cons of outsourcing to a payroll provider

Less payroll submission flexibility: Professional payroll providers usually have stringent submission deadlines to ensure pay runs are processed quickly enough for funds to be disbursed.
Loss of Control: Outsourcing payroll can result in less immediate access to payroll data, making it more difficult to retrieve information or make quick adjustments. Relying on an external provider means that your business depends on the provider's processes, systems, and timelines, which may not always align with your needs.
Lack of Personalization: Outsourced providers often use standardized processes that may not fully accommodate the specific needs or nuances of your business. Employees may feel less comfortable dealing with an external provider for payroll issues, preferring to interact with an in-house team that understands the company culture and individual circumstances.

How To Choose and Hire a Payroll Service

Assess Your Needs: Clearly define what you need from a payroll service provider, considering current and future requirements.
Budget Appropriately: To avoid surprises, factor in all potential costs, including hidden fees and additional services.
Compare Providers: Obtain quotes from several providers to compare similar services and features.
Seek Expert Advice: Consult with a financial advisor or accountant to help evaluate options and understand the implications of each factor.
Negotiate Terms: Don't hesitate to negotiate pricing, especially if you're considering long-term contracts or bundling services.

When growing a business, payroll is one area where you can’t afford to perform tasks incorrectly. If you can’t justify the cost of hiring in-house to ensure you have competent, fully trained personnel, outsourcing to a proven payroll service provider is a safe and cost-effective option.

At Enkel, we provide accurate, on-time, hassle-free payroll processing to businesses across Canada. So, if you’re thinking about offloading your payroll, let's talk! Get in touch with us today to learn more.

How Much Do Payroll Services Cost for Small Businesses?