Payroll Cost

Payroll is a significant cost for businesses. This expense can vary depending on the payroll method used, the size of the business and its location. Accuracy in payroll processing is essential because government agencies can impose costly fines on employers who make mistakes or miss deadlines.

What are payroll costs?

Let's explore payroll costs in more detail. While it's clear that employer payroll costs encompass the total compensation paid to employees for their work, it's essential to identify the components that make up this overall figure. Payroll costs can be divided into several categories:

Employee benefits

Many Canadian employers now offer employee benefits as a standard practice. These may include contributions to registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), where employers match a portion of what employees contribute. These benefits are typically exempt from taxation and are classified as voluntary expenditures. Other optional benefits could include stock options available to employees at favourable rates.

Tax deductions

Federal taxes remain consistent nationwide; however, provincial and territorial tax rates differ significantly. For instance, if an employee resides in Alberta but works in British Columbia, they will be subject to British Columbia's tax regulations. It's useful to examine how entities like the Northwest Territories and Nunavut implement their tax deductions. Additionally, Quebec operates under its own tax framework which is separate from the rest of Canada.

CPP contributions

All Canadians between the ages of 18 and 70 are required to contribute to the Canadian Pension Plan (CPP), a taxable benefit designed to provide income during retirement. Employees contribute half of the required amount, while employers are responsible for the other half. In Quebec, this system is replaced by the Quebec Pension Plan (QPP).

EI contributions

Employment Insurance (EI) is a program that provides temporary financial support to Canadians who have lost their jobs. This enables them to concentrate on securing new employment without the added stress of financial burdens.

How do you calculate payroll costs?

Calculating payroll expenses for your employees may seem daunting because of the various steps involved. Here’s a simplified step-by-step guide to help you with accurate calculations:

Step 1: Gather information from the TD1 form   

Start by having your employees complete their TD1 forms, which will include details like personal information and their Social Insurance Numbers (SINs). This is the foundational step for registering them in your payroll system.

Step 2: Determine gross pay based on payroll cycle

Assess each employee’s total earnings before any deductions are applied for the year.

Step 3: Calculate net pay by evaluating deductions   

Identify the necessary deductions for each employee, including taxes and taxable benefits, and subtract these from the gross pay to determine the net income. Using a payroll calculator can simplify this process for you.

Step 4: Make payroll tax deposits

Ensure that you remit the calculated deductions to the Canada Revenue Agency (CRA) either electronically or by cheque. Remember to complete this submission by the 15th of the month following the deductions.

Step 5: Finalize payroll tax documents   

Lastly, prepare a T4 slip for each employee at the end of the year. Make sure to file the T4 information return and provide copies to your employees. This can also be done digitally.

What factors affect payroll costs?

Managing payroll can be challenging. Here’s a breakdown of what you need to consider:

• Payroll frequency: Many online payroll services have different pricing structures based on how often you pay your employees. Some charge for each payroll cycle, while others allow unlimited runs each month, including off-cycle payments. If you choose a provider that bills per payroll run, be cautious, especially with weekly pay periods, since the more frequently you pay, the higher your payroll costs will be.
• Number of employees: The number of employees plays a significant role in your payroll management. Many payroll service providers add a set fee for each employee, which can benefit larger companies as they often qualify for volume discounts.
• Direct deposit: Most full-service payroll providers include direct deposit in their monthly fees. While the initial setup might incur additional costs, your employees will appreciate the convenience of having their pay directly deposited into their bank accounts.
• Employees located around the globe: If you have employees in different countries, you may experience an increase in payroll pricing. Managing payroll becomes more complex due to varying tax laws, which might require you to invest in advanced payroll services to handle these unique calculations effectively.
• Tax filing services: Your business is responsible for various payroll taxes each cycle in Canada, including federal and provincial income taxes. Additionally, you need to contribute to CPP and EI premiums for every full-time employee. There may also be other local payroll tax obligations to consider, depending on your province.
• Employee benefits: If you offer a range of employee benefits, keep these costs in mind as they can impact your payroll. Many payroll providers package these benefits, but they often come at a higher tier or with increased fees. Make sure to review your healthcare and compensation expenses to avoid unexpected overages.
• Adding or removing employees: Keeping your payroll system in order means being diligent about adding and removing employees. Changing your payroll system can also affect your tax data, and service providers may charge fees for these adjustments when adding or removing employees.

How much do payroll services cost?

Different payroll providers offer different pricing structures, but most have per-payroll processing or per-employee fees. There may also be annual or monthly base costs for additional services, like year-end Forms T4, T4A, R1, and R2 preparation and delivery.

Common factors that affect payroll cost

Payroll is not a one size fits all service. Various aspects will determine total cost, such as:

• Payroll frequency
• Total number of employees
• The types of services needed
• How often payees are added or removed
• The number of provinces where people are employed

Additional payroll service fees

A payroll provider’s price structure may not always include everything you need to run payroll from start to finish. Services that sometimes incur separate fees include:

• Direct deposit
• Automatic cheque signing
• Pay cheque printing and delivery
• Tax filing
• Year-end processing (Forms T4, T4A, R1, R2, etc.)

Add-ons can drastically increase payroll expenses, so employers may want to confirm what services are included in the package before making a commitment with a provider.

3 tips to reduce payroll service costs

If you're looking to lower your payroll service expenses, consider these practical tips:

1. Choose the right payroll plan for your business 

Take the time to explore various payroll service options that suit your business needs. Different providers offer multiple pricing tiers, so find a plan that fits your size and requirements without paying for unnecessary features.

2. Automate payroll processes

Automating tasks like tax calculations and filings makes payroll easier to manage. Automation reduces manual effort and enhances overall efficiency within your business, ultimately saving you money and time.

3. Bundle services for savings  

Consider consolidating your payroll with other services like accounting and invoicing under one provider. This can lead to cost savings on subscription fees while simplifying your operations’ management. Opting for all-in-one software can help you maintain better control of your finances without the hassle of juggling multiple platforms.

Cost of payroll services for small businesses

Small businesses today have realistic, affordable ways to deliver a world-class payroll outcome. Their options are to do it themselves, purchase payroll software or outsource payroll to a full-service provider. Whichever of these methods is chosen, along with the size of the workforce and the specific services needed, will largely determine the total cost.

Do-it-yourself payroll

DIY is the cheapest payroll option and one that some businesses choose in their early stages. With this approach, expenses typically depend on how employees are paid. Banks, for instance, charge fees for direct deposit and cheques come with the cost of paper, printing and delivery.

There is one caveat, however, for small business owners who calculate payroll on their own. It’s time-consuming and errors are expensive, especially if it becomes necessary to hire a tax attorney.

Payroll outsourcing cost

Comprehensive or managed payroll costs more than DIY payroll, but it could actually save money in the long-term because it limits the risk of tax penalties. The total expense usually hinges on the individual provider’s price per employee or processing, as well as any base fees they may charge.

Partnering with an HR and payroll provider

In addition to cost, employers should consider the value of the time they’ll get back by partnering with an HR and payroll provider. Alleviating administrative burdens usually allows them to focus on growing their business and improving their profit margins. For this reason, employers may want to automate or outsource payroll as soon as they have the budget to do so.

FAQs

How frequently should a business process payroll?

Most businesses run payroll bi-monthly, every two weeks, weekly or at least once a month. You can check your local regulations to ensure you’re meeting the required payroll frequency for your employees.

What’s the difference between payroll expenses and payroll liabilities?

Payroll expenses refer to the costs incurred by the business for compensating employees, while payroll liabilities represent the financial obligations your business has as an employer, such as taxes and other employee-related costs.

How is payroll classified under business expenses?

Payroll is the largest component of operating expenses and typically falls within the wages and salaries category. This includes additional payments like overtime, bonuses and commissions.

Is investing in payroll services beneficial?

Whether you should use payroll services really depends on your situation. If you only have a few employees and your payroll needs are straightforward, you might manage just fine with basic software or handling it yourself. But if your team is larger or your payroll process is more complicated, outsourcing to a payroll service can help simplify workflows, save you time, minimize mistakes and help you stay compliant with regulations.

How much is ADP payroll?

ADP offers solutions for all types of payroll from the simple to the complex. We’ll work with employers to determine the individual setup that’s right for their business and fits their budget.

How much does it cost to use a payroll company?

No two payroll companies are the same. That’s why when weighing costs, it’s essential for employers to consider the overall value they’ll receive from the provider. Pay particular attention to customer support and how well the software integrates with other products.

How much does it cost to have someone do your payroll?

Having someone, such as an accountant, process payroll can be expensive because the calculations are time-consuming and many CPAs charge by the hour. Hiring a professional on staff may not be any cheaper either. Employers will have to pay a salary, benefits and the related payroll taxes on that person’s income.

How much does online payroll cost?

Online payroll services usually charge by the number of employees per payroll processing. Add-on services can be purchased as necessary for a monthly or annual base fee.

How much does payroll cost per employee?

Payroll costs per employee will vary depending on your business size and individual needs. The two most common payment models are per employee per processing (PEPP) and per employee per month (PEPM).

What does ADP payroll cost per employee?

ADP provides payroll services priced for businesses of any size. So whether an employer has just one worker at a single location or thousands of employees operating around the globe, we have a payroll solution for them.

Download the switching payroll providers guide to learn how to make a smooth and successful transition to a new payroll provider.

This guide is intended to be used as a starting point in analyzing payroll costs and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.