Cheap payroll service for small business

So, you’re a small business owner looking for a cheap payroll service, right? Well, let’s cut to the chase: yes, affordable payroll services for small businesses absolutely exist, and they can be a must. The key is to find a provider that balances cost-effectiveness with the essential features you need to stay compliant and pay your team accurately and on time. We’re talking about streamlining your payroll process, saving you precious time and money, and helping you avoid those nasty IRS penalties.

Think about it: manually managing payroll can be a huge drain, especially for a small business where every minute counts.

Between calculating wages, withholding taxes, filing reports, and keeping up with ever-changing regulations, it’s enough to make your head spin.

Even if you only have a few employees, mishandling payroll can lead to significant headaches, fines, and even legal issues.

That’s where a good, affordable payroll service comes in, acting as your silent partner to ensure your employees are paid correctly and you’re always on the right side of the law.

The good news is the market is flooded with options, from basic, low-cost solutions to more comprehensive platforms that scale with your growth.

The trick isn’t just finding the cheapest one, but the one that offers the most value for your specific needs without unnecessary bells and whistles.

We’ll dive into what to look for, who the top contenders are, and how to make an informed decision that benefits your business and your bottom line.

Understanding the True Cost of Payroll for Small Businesses

When we talk about “cheap” payroll, it’s crucial to understand what that really entails beyond just the sticker price.

Many small business owners underestimate the hidden costs of managing payroll in-house, or they opt for solutions that seem cheap but lack crucial features, leading to more work and potential compliance issues down the road. It’s not just about paying employees.

It’s about accurate tax calculations, timely filings, and compliance with federal, state, and local regulations.

The Hidden Costs of Manual Payroll Management

Doing payroll by hand might seem free, but it’s far from it.

• Time Consumption: According to a study by the American Payroll Association, small businesses spend an average of 8 hours per month on payroll tasks. For a busy owner, that’s valuable time that could be spent on growth, customer service, or innovation. If your time is worth, say, $50 an hour, that’s $400 a month in lost productivity.
• Error Potential: Manual calculations are prone to human error. A single mistake in withholding or reporting can lead to IRS penalties, state fines, and employee dissatisfaction. The IRS imposes penalties for incorrect tax filings, with fines ranging from 5% to 25% of the underpayment, depending on the severity and duration.
• Compliance Risk: Tax laws, minimum wage requirements, and benefits regulations change frequently. Staying updated is a full-time job. A lapse in compliance can result in significant legal issues and financial penalties. For instance, misclassifying an employee can lead to back taxes, fines, and interest.
• Software and Tools: Even if you’re not paying for a service, you might be paying for spreadsheets, accounting software modules, or tax tables that need constant updating.

Factors Influencing Payroll Service Pricing

Payroll service costs are generally based on a few key factors.

Understanding these can help you compare “cheap” options effectively.

• Base Fee: Most services charge a flat monthly or annual base fee. This can range from $10 to $50 per month for basic plans.
• Per-Employee Fee: On top of the base fee, there’s usually a per-employee charge. This often falls between $2 to $10 per employee per month. The more employees you have, the higher this component of the cost.
• Add-on Services: Many services offer additional features like HR support, time tracking, benefits administration, or advanced reporting. These are typically extra and can significantly increase the total cost. Be mindful of what’s included in the “cheap” basic package versus what you might actually need.
• Payroll Frequency: Some services might charge more for weekly payrolls compared to bi-weekly or monthly, simply because of the increased processing frequency.
• Tax Filing: A crucial service is automated tax filing. Most reputable “cheap” services include this, but always double-check. Some might offer it as an add-on or only for federal taxes, leaving state and local filings to you.

Top Affordable Payroll Services for Small Businesses

Navigating the sea of payroll providers can be overwhelming, but several stand out for their affordability, ease of use, and comprehensive features tailored for small businesses.

These options often provide excellent value, making professional payroll accessible even on a tight budget.

Gusto: A User-Friendly Powerhouse

Gusto is consistently ranked high for small businesses due to its intuitive interface and robust feature set, even in its basic plans.

It’s often praised for making complex payroll tasks feel simple. Global payroll software

• Core Offering: Gusto’s “Core” plan typically starts around $40/month base fee plus $6/employee per month. This includes full-service payroll in all 50 states, automated tax filing, new hire reporting, direct deposit, and employee self-service portals.
• Benefits:
  • Ease of Use: Their dashboard is incredibly clean and straightforward, ideal for business owners who aren’t payroll experts.
  • Automated Tax Filing: Gusto handles all federal, state, and local payroll tax filings automatically, which is a massive time-saver and compliance safeguard.
  • Employee Self-Service: Employees can access pay stubs, W-2s, and manage their personal information directly, reducing administrative burden.
  • Integrations: Integrates seamlessly with popular accounting software like QuickBooks Online and Xero.
• Considerations: While excellent, Gusto’s higher tiers offer more advanced HR features that can get pricey if you don’t need them. Stick to the Core plan for maximum affordability.

QuickBooks Payroll: Seamless Accounting Integration

If you’re already using QuickBooks for your accounting, their payroll service is a natural fit, offering unparalleled integration.

• Core Offering: QuickBooks Payroll “Core” plan usually starts around $45/month base fee plus $5/employee per month. This includes full-service payroll, automated tax calculations and filings, direct deposit, and basic HR features.
  • Deep Integration: The biggest advantage is its seamless integration with QuickBooks accounting software. Payroll data flows directly into your general ledger, simplifying reconciliation and financial reporting.
  • Tax Guarantee: QuickBooks often offers a tax penalty protection guarantee, covering any IRS or state penalties resulting from their errors.
  • Reporting: Strong reporting capabilities allow you to track payroll expenses and other financial metrics easily.
• Considerations: While integrated, the user interface can sometimes feel less modern or intuitive than Gusto for payroll-specific tasks. Also, ensure you’re choosing the payroll tier that matches your needs without overpaying for features you won’t use.

Patriot Payroll: Budget-Friendly and Feature-Rich

Patriot Payroll is often cited as one of the most cost-effective full-service payroll options for small businesses, especially those with simpler payroll needs.

• Core Offering: Patriot’s “Full Service Payroll” plan typically starts around $30/month base fee plus $4/employee per month. They also offer a “Basic Payroll” plan around $10/month + $4/employee if you want to handle tax filings yourself, though full-service is highly recommended for compliance.
  • Affordability: One of the lowest-priced full-service options available without sacrificing essential features.
  • User-Friendly: Despite the low cost, their platform is straightforward and easy to navigate for non-payroll professionals.
  • U.S.-Based Support: They pride themselves on their U.S.-based customer support, which can be a huge plus when you have questions.
  • Flexibility: Options for basic or full-service payroll allow you to choose based on your comfort level with tax compliance.
• Considerations: While excellent for core payroll, Patriot might not offer the same depth of HR features or integrations as Gusto or QuickBooks if you need a comprehensive HR suite down the line.

OnPay: All-Inclusive for Small Businesses

OnPay is known for its transparent pricing model and comprehensive features that cater well to growing small businesses.

• Core Offering: OnPay uses a simpler pricing structure, typically around $40/month base fee plus $6/employee per month, with most features included without hidden fees.
  • Transparent Pricing: What you see is generally what you get, with fewer add-on surprises.
  • Robust Features: Includes full-service tax filings federal, state, and local, unlimited payroll runs, multi-state payroll, workers’ comp integration, and basic HR tools like offer letters and PTO tracking.
  • Highly Rated Support: Customers often praise their responsive and knowledgeable customer service.
  • Flexibility: Handles various pay types hourly, salary, tips, commissions and supports various industries like agriculture and restaurants.
• Considerations: While competitive, for very small businesses with just one or two employees, other options might slightly edge them out on the absolute lowest price point. However, for 5+ employees, OnPay becomes very competitive.

Square Payroll: Great for Small Teams and Integrations

If you’re already using Square for POS or payment processing, Square Payroll offers seamless integration and a straightforward approach.

• Core Offering: Square Payroll charges a $35/month base fee plus $5/employee per month. They also have a contractor-only plan at just $5 per contractor per month, with no base fee.
  • Seamless Square Integration: Perfect for businesses already using Square POS, Appointments, or other Square products, as employee hours and tips can sync directly.
  • Contractor-Only Option: Highly affordable for businesses primarily relying on 1099 contractors, making tax season much easier.
  • Time Tracking: Built-in time tracking features are robust, allowing employees to clock in/out directly from the POS or via the app.
  • User-Friendly Interface: Known for its clean and simple design, making payroll runs quick and easy.
• Considerations: While great for Square users, if you’re not in the Square ecosystem, other providers might offer more standalone HR features. Their tax filing capabilities are comprehensive, but always confirm state-specific nuances if you operate in multiple states.

Key Features to Look for in an Affordable Payroll Service

Choosing a “cheap” payroll service shouldn’t mean compromising on essential functionality.

The goal is to find a provider that offers the most bang for your buck, covering your core payroll needs without breaking the bank.

Full-Service Tax Filing and Remittance

This is non-negotiable for compliance and peace of mind. A full-service payroll provider should handle:

• Federal Taxes: Calculate, withhold, and remit federal income tax, Social Security, Medicare FICA, and FUTA.
• State and Local Taxes: Automatically calculate, withhold, and remit state income tax, state unemployment insurance SUI, and any relevant local taxes. This is crucial as state tax laws vary wildly.
• Year-End Forms: Prepare and file W-2s for employees and 1099s for contractors. They should also file quarterly forms like 941 and annual forms like 940.
• Penalty Protection: Many reputable providers offer a guarantee that if they make an error leading to a tax penalty, they will cover it. This is a significant indicator of their confidence and commitment to accuracy.

Direct Deposit and Multiple Pay Options

Efficiency and employee satisfaction are paramount.

• Direct Deposit: This is standard practice and should be included. It’s faster, more secure, and preferred by most employees. According to the American Payroll Association, 82% of employees use direct deposit for their paychecks.
• Check Printing Option: While direct deposit is primary, some employees or contractors might still prefer paper checks. Ensure the service allows you to print checks on your own printer or offers a check-mailing service though this might be an extra cost.
• Pay Cards: Some services also offer pay card options for employees who don’t have bank accounts, ensuring everyone gets paid efficiently.

Employee Self-Service Portal

Empowering employees reduces your administrative burden.

• Access to Pay Stubs: Employees should be able to log in and view or download their current and historical pay stubs anytime. This reduces requests to HR or management.
• W-2s and 1099s: Secure access to year-end tax forms is a huge convenience, especially during tax season.
• Personal Information Updates: Allowing employees to update their address, banking information, or tax withholdings W-4 securely within the portal minimizes manual data entry and potential errors.
• Time-Off Requests: Some advanced self-service portals might even allow employees to view accrued PTO and submit time-off requests, further streamlining HR processes.

New Hire Reporting and Compliance Assistance

Staying compliant from day one is critical. Best online payroll services for small business

• New Hire Reporting: All employers are legally required to report new hires to state agencies, typically within 20 days of their start date. A good payroll service automates this.
• Compliance Alerts: The best services provide alerts or resources to keep you informed about changes in tax laws, minimum wage, or other employment regulations that affect your business.
• Resource Library: Look for providers who offer a knowledge base, FAQs, or direct access to HR professionals even if it’s an add-on to help you navigate compliance questions.

Integration with Accounting Software

Streamlining your financial workflow is a major benefit.

• Seamless Data Flow: The payroll service should integrate easily with popular accounting software like QuickBooks, Xero, or FreshBooks. This means payroll entries automatically post to your general ledger, eliminating manual data entry and reconciliation errors.
• Reduced Manual Work: This integration saves significant time at month-end or quarter-end, ensuring your financial statements are accurate and up-to-date with minimal effort.
• Comprehensive Financial Picture: With integrated data, you get a clearer, more accurate view of your business’s financial health, making budgeting and forecasting easier.

Considerations Before Choosing a “Cheap” Service

While the allure of “cheap” is strong, it’s essential to look beyond the lowest price tag.

A truly affordable solution is one that meets your needs without unexpected costs or compromising on critical features.

Your Business Size and Growth Plans

What works for a solo entrepreneur might not work for a business with 10 employees, and definitely not for one planning to scale to 50.

• Number of Employees: Most “cheap” services scale their pricing based on your headcount. If you have just one or two employees, some services might offer extremely low base fees or even per-run pricing. For example, Square Payroll has a contractor-only plan for $5 per contractor, no base fee.
• Contractors vs. Employees: Do you primarily use 1099 contractors or W-2 employees? Some services specialize or offer better pricing for one over the other. Ensure the service handles both if you have a mixed workforce.
• Future Growth: Will the “cheap” service you pick now be able to handle your needs if you double your workforce in the next year? Consider if their pricing structure or feature set becomes prohibitively expensive or limiting as you grow. Migrating payroll services can be a hassle, so choosing one that can scale is smart.

Industry-Specific Needs

Certain industries have unique payroll complexities.

• Tips and Gratuities: Restaurants, salons, and service industries often deal with complex tip reporting and tax withholding. Ensure the service can handle this accurately.
• Shift Differentials/Commissions: If your employees earn varying rates based on shifts or receive commissions, the system needs to support these complex pay structures.
• Multi-State Payroll: If you hire employees in different states, you need a service that can handle multi-state tax compliance effortlessly. State tax laws vary significantly, and this can quickly become a compliance nightmare if not handled correctly. Gusto and OnPay are particularly strong here.
• Job Costing/Project Tracking: Construction, creative agencies, or project-based businesses might need features to track payroll costs against specific jobs or projects.

Customer Support Quality and Availability

When something goes wrong, you need help, fast.

• Accessibility: How can you reach support? Phone, email, chat? What are their hours of operation? Is it only during business hours or 24/7?
• Expertise: Is the support staff knowledgeable about payroll, tax laws, and the specific software? Look for U.S.-based support if that’s important to you.
• Reputation: Check online reviews Capterra, G2, Trustpilot to see what other small business owners say about their support experience. A service might be cheap, but if you spend hours on hold or waiting for replies, it’s not truly affordable in terms of your time.
• Self-Help Resources: A good knowledge base, FAQs, and tutorial videos can be invaluable for answering common questions without needing to contact support.

Setup Process and Ease of Use

The initial setup can be daunting, especially if you’re migrating from manual payroll.

• Onboarding Assistance: Does the service offer guided setup, or will you be left to figure it out yourself? Some providers offer dedicated onboarding specialists, which can be a huge relief.
• Data Migration: If you’re switching from another system, how easy is it to import historical payroll data?
• Intuitive Interface: Once set up, how easy is it to run payroll each period? Look for a clean, user-friendly interface that doesn’t require a steep learning curve. Test out free trials or demos to get a feel for the platform.
• Training Resources: Are there tutorials, webinars, or guides available to help you and your employees get comfortable with the system?

The Onboarding Process for Your New Payroll Service

Once you’ve picked your cheap payroll service, the next step is getting it up and running.

A smooth onboarding process is crucial to avoid disruptions and ensure your first payroll run is accurate.

Gathering Essential Business Information

Before you even log into your new system, have these details ready. Global payroll systems

This will make the setup process much faster and smoother.

• Employer Identification Number EIN: Your unique federal tax ID number.
• Business Legal Name and Address: As registered with the IRS and state.
• State Tax IDs: This includes your State Unemployment Insurance SUI tax rate and ID, and any state withholding tax IDs. These are crucial for state-level tax filings.
• Bank Account Information: For direct deposit and tax remittances routing and account numbers for your business bank account.
• Prior Payroll Data: If you’re switching from another system or manual payroll, you’ll need:
  • Year-to-date YTD earnings for each employee.
  • YTD tax withholdings for each employee.
  • YTD tax payments made to federal and state agencies.
  • Previous pay stubs or payroll summaries are vital for this.

Employee Data Collection

Each employee will need their details entered into the system.

• Personal Information: Full name, address, phone number, email.
• Social Security Number SSN: Essential for tax purposes.
• Hire Date and Pay Rate: Their start date and how much they are paid hourly, salary, commission, etc..
• W-4 Information: The tax withholding information they provided.
• Direct Deposit Information: Their bank name, routing number, and account number.
• I-9 Verification: While not typically entered into the payroll system, ensure you have completed and retained I-9 forms for all employees to verify their eligibility to work in the U.S.

Setting Up Payroll Schedules and Pay Types

Configure how and when you pay your team.

• Pay Frequency: Weekly, bi-weekly, semi-monthly, or monthly. Choose the schedule that best fits your business operations.
• Pay Period Dates: Define the start and end dates for each pay period.
• Pay Date: The actual date employees receive their pay. Remember to account for weekends and holidays.
• Types of Pay: Configure regular wages, overtime rates, bonuses, commissions, tips, and any other specific pay components.
• Deductions: Set up any pre-tax or post-tax deductions like health insurance premiums, 401k contributions, garnishments, or other voluntary deductions.

Running Your First Payroll and Post-Payroll Steps

The moment of truth!

• Run a Test Payroll: Many services allow you to run a “mock” payroll to see how it looks before processing real payments. This is highly recommended to catch any errors.
• Review and Approve: Carefully review all earnings, deductions, and net pay for accuracy before final approval.
• Process Payroll: Once approved, the service will process direct deposits, generate checks, and remit taxes.
• Verify Tax Remittances: After your first payroll, check your federal and state tax accounts e.g., IRS EFTPS to ensure the payroll service has indeed remitted the taxes on your behalf. This provides peace of mind.
• Employee Communication: Inform employees about the new system and how they can access their self-service portal. Provide clear instructions for viewing pay stubs and updating information.

Beyond “Cheap”: Maximizing Value from Your Payroll Service

While getting a “cheap” payroll service is the initial goal, the true success lies in maximizing the value you extract from it.

This means leveraging its features efficiently and considering how it supports your broader business operations.

Leveraging Built-in Reporting and Analytics

Your payroll system is a goldmine of data.

• Payroll Cost Tracking: Generate reports on total payroll expenses, including wages, taxes, and benefits. This is crucial for budgeting and understanding your labor costs.
• Departmental Costing: If your business has departments, use the system to track payroll costs per department. This helps in allocating expenses and assessing departmental profitability.
• Historical Data Analysis: Analyze trends in wages, overtime, and turnover. This data can inform hiring decisions, budgeting, and operational efficiency improvements. For example, if you see consistent overtime, it might signal a need for more staff or better scheduling.
• Custom Reports: Many services allow you to create custom reports based on specific needs, such as tracking paid time off PTO balances, commission payouts, or gross-to-net calculations.

Integrating with Other Business Systems

The real power comes from connected systems.

• Accounting Software: We’ve discussed this, but it’s worth reiterating. Seamless integration with QuickBooks, Xero, or other accounting platforms eliminates manual data entry, reduces errors, and provides a holistic view of your financials.
• Time Tracking Systems: If your payroll service has a built-in time tracker or integrates with a third-party solution like When I Work, Homebase, or TSheets, employee hours can flow directly into payroll, ensuring accurate calculations and reducing manual input errors. This is especially vital for hourly employees.
• HRIS/Benefits Administration: For growing businesses, consider how payroll integrates with HR information systems HRIS or benefits administration platforms. This allows for unified employee records, smoother onboarding, and streamlined benefits enrollment and deductions. Some payroll providers offer these as integrated add-ons.

Utilizing HR Support and Compliance Resources

Don’t overlook the HR capabilities that often come with payroll services.

• Basic HR Features: Even “cheap” plans often include basic HR functionalities like new hire checklists, employee directories, and basic PTO tracking. Use these to standardize your HR processes.
• Compliance Library: Many providers offer a robust library of legal resources, customizable HR templates e.g., offer letters, employee handbooks, and compliance guides. Staying informed about labor laws is critical to avoiding costly penalties.
• Expert Advice: Some services offer access to HR professionals or legal advisors often as an add-on or in higher tiers. If you have complex HR questions or need to draft specific policies, this can be invaluable, saving you from expensive legal consultations.
• Automated Updates: A good service automatically updates its system to reflect changes in federal, state, and local tax laws and regulations, ensuring your payroll remains compliant without you having to constantly monitor legal changes.

Training Your Team and Employees

A system is only as good as its users. Paycheck software

• Manager Training: If managers are involved in approving time cards or managing PTO, ensure they are trained on how to use the relevant features in the payroll system.
• Employee Self-Service Training: Show employees how to access their pay stubs, W-2s, and update their personal information in the self-service portal. This empowers them and reduces administrative burden on you.
• Ongoing Support: Designate someone in your business even if it’s just you as the primary contact for the payroll service and ensure they understand how to use all relevant features and troubleshoot common issues.

When a “Cheap” Service Might Not Be Enough

While cheap payroll services are a godsend for most small businesses, there are scenarios where a more robust or specialized solution might be necessary, even if it means a higher price tag.

Understanding these limitations upfront can save you headaches later.

Complex Payroll Needs

If your business has highly specific or intricate payroll requirements, a basic, cheap service might fall short.

• Highly Variable Pay Structures: Businesses with complex commission structures, intricate bonus calculations, tips, or frequent pay differentials e.g., hazard pay, on-call pay might need more customizable payroll logic than basic services offer.
• Garnishments and Deductions: While most services handle standard deductions, if you have frequent or complex court-ordered garnishments, child support, or bankruptcy deductions, ensure the service can manage these accurately and handle the communication with relevant agencies.
• Certified Payroll: If you work on government contracts e.g., construction, you might be required to file certified payroll reports like the U.S. Department of Labor Form WH-347. This is a niche requirement not typically supported by basic, cheap services.
• Multi-Jurisdictional Employees: While many services handle multi-state payroll, if you have employees working in numerous states, or across international borders, the complexity rapidly increases, potentially requiring a service with deeper global tax expertise.

Advanced HR and Benefits Management

A growing business often needs more than just payroll.

• Comprehensive HR Information System HRIS: As you grow, you might need a centralized system for employee records, performance management, applicant tracking, onboarding workflows, and training management. Basic payroll systems typically don’t offer this depth.
• Benefits Administration: If you offer health insurance, 401k, FSA, or other complex benefits, you’ll need a system that can seamlessly manage enrollments, deductions, and carrier feeds. Some payroll services offer integrated benefits platforms, but the “cheap” plans usually don’t include this.
• Time and Attendance: While basic time tracking is often included, if you have complex scheduling needs, shift bidding, geofencing, or advanced absence management, you might need a dedicated time and attendance system that integrates with payroll.
• Performance Management: For businesses focused on employee development, a system that supports goal setting, performance reviews, and feedback loops is essential. These are typically features of full HR platforms, not basic payroll.

Industry-Specific Compliance and Reporting

Certain industries have unique regulatory burdens.

• Union Payroll: If you have unionized employees, you’ll need to adhere to collective bargaining agreements, union dues, and specific reporting requirements, which are often outside the scope of general payroll services.
• Prevailing Wage: Similar to certified payroll, some construction or government projects require adherence to prevailing wage laws, which mandate specific wage and benefit rates for workers.
• Healthcare/HIPAA: If your business handles sensitive health information, ensuring your payroll and HR systems are HIPAA compliant is paramount.
• Franchise Operations: Franchises often have specific reporting requirements or need to integrate with proprietary systems that a generic payroll service might not support.

In these situations, while the initial cost might be higher, investing in a more comprehensive or specialized payroll and HR solution often pays for itself by ensuring compliance, reducing administrative burden, and allowing you to focus on your core business.

Alternative Approaches to Small Business Financial Management

While dedicated payroll services are often the best and most compliant option for processing employee wages and taxes, small business owners, especially those with contractors or very few employees, might consider other avenues for managing their finances and payments.

It’s crucial, however, to understand the limitations and compliance responsibilities that come with these alternatives.

Utilizing Accounting Software with Basic Payroll Features

Many popular accounting software platforms offer integrated basic payroll functionalities or act as a conduit to a full-fledged payroll service.

• QuickBooks Desktop/Online Payroll: As discussed, QuickBooks offers tiered payroll solutions that integrate seamlessly with its accounting software. For very small businesses using QuickBooks, this can be a cost-effective way to get basic payroll done without managing separate platforms. However, remember the “cheap” tiered services might have limited features compared to dedicated full-service payroll.
• Xero Payroll via Gusto or other integrations: Xero itself doesn’t have a built-in payroll module in the US it partners with Gusto. However, its strong integration capabilities allow you to connect your payroll provider directly, streamlining data flow into your general ledger.
• FreshBooks/Zoho Books Integrations: These platforms, while primarily for invoicing and accounting, also integrate with third-party payroll services. This approach still means you’re paying for a payroll service, but the workflow is unified.

Pros: Free direct deposit for small business

• Unified Financial Management: All financial data, including payroll expenses, resides in one place.
• Streamlined Reconciliation: Easier to reconcile bank accounts and generate financial reports.
• Familiar Interface: If you’re already comfortable with your accounting software, learning a new payroll module might be quicker than a standalone system.

Cons:

• Limited Payroll Features: The “basic” payroll features within accounting software often lack the depth of dedicated services, especially regarding tax filing, compliance alerts, and advanced HR functionalities.
• Compliance Burden: You might still be responsible for calculating and remitting taxes yourself, or relying on limited automation, increasing compliance risk.
• Scalability: May not scale well as your employee count or payroll complexity grows.

Paying Independent Contractors 1099 vs. Employees W-2

This is a critical distinction, especially for very small businesses looking to keep costs low.

• Independent Contractors 1099: If your workforce consists entirely of independent contractors, your payroll obligations are significantly simpler. You don’t withhold income tax, FICA, or FUTA. You only need to track payments and issue 1099-NEC forms at year-end if payments exceed $600.
  • Payment Methods: You can pay contractors via standard bank transfers, PayPal, Venmo for business, or even checks.
  • Square Payroll’s Contractor-Only Plan: This is an excellent example of a cheap, compliant way to manage contractor payments and 1099 issuance.
• Employees W-2: For W-2 employees, you are legally obligated to withhold federal, state, and local taxes, pay employer-side payroll taxes FICA, FUTA, SUI, and file numerous quarterly and annual reports.
  • Misclassification Risk: Be extremely careful not to misclassify an employee as a contractor to avoid payroll taxes. The IRS and state labor departments have strict guidelines behavioral, financial, and type of relationship control for determining classification. Misclassification can lead to severe penalties, back taxes, and legal action.

Pros of Contractors if legitimately classified:

• Lower Administrative Burden: No payroll tax withholding or reporting for you.
• Reduced Costs: No employer-side payroll taxes approx. 7.65% of wages, no benefits costs.
• Flexibility: Easier to scale up or down as needed.

Cons of Contractors:

• Misclassification Risk: This is a major legal and financial pitfall if not done correctly.
• Less Control: You have less control over how and when contractors perform their work.
• No Employee Benefits: Cannot offer benefits like health insurance or 401k to contractors.

Manual Payroll with significant caveats

For a truly tiny business e.g., one or two employees with minimal funds, manually calculating payroll might seem like an option. However, this is highly discouraged due to the immense risk and complexity.

• IRS Tax Tables: You’d need to use IRS Publication 15-T Federal Income Tax Withholding Methods and relevant state withholding guides to manually calculate each employee’s gross pay, pre-tax deductions, taxable wages, federal income tax, Social Security, Medicare, state income tax, and state unemployment.

• Tax Remittance: You would be responsible for manually making tax payments to the IRS via EFTPS Electronic Federal Tax Payment System and to state agencies by their deadlines.

• Form Filing: You’d be responsible for preparing and filing quarterly forms 941 and annual forms 940, W-2s, 1099s.

• Zero Direct Cost initially: No subscription fees for software or services.

Cons major ones: Top payroll companies for small business

• High Risk of Error: Human error is almost inevitable given the complexity of tax calculations and changes.
• Time-Consuming: Immense time investment, which detracts from core business activities.
• Severe Penalties: The IRS imposes penalties for late or incorrect payments and filings. These can include failure to deposit penalties, failure to file penalties, and even criminal charges in severe cases of willful non-compliance. These penalties far outweigh the cost of a cheap payroll service.
• Lack of Compliance Expertise: You need to stay constantly updated on federal, state, and local tax laws, minimum wage changes, and labor laws, which is nearly impossible for a small business owner.

Recommendation: For any business with W-2 employees, investing in a cheap, full-service payroll provider is not just recommended, but practically essential for compliance, peace of mind, and ultimately, cost savings by avoiding penalties. The “cheap” options discussed earlier Gusto, Patriot, QuickBooks, OnPay, Square Payroll offer an excellent balance of affordability and necessary features, making manual payroll an unnecessary and risky endeavor.

Frequently Asked Questions

What is the cheapest payroll service for a small business?

The cheapest full-service payroll options often start around $30-$40 per month base fee plus $4-$6 per employee per month. Patriot Payroll and Square Payroll especially for contractors are often cited among the lowest-cost providers while still offering essential features like tax filing.

Can I do payroll myself for a small business for free?

Yes, you can technically do payroll yourself for free using spreadsheets and IRS/state guides, but it’s highly discouraged. The time commitment, high risk of errors, and potential for costly tax penalties typically far outweigh the savings of not using a dedicated service.

How much does payroll usually cost for a small business?

For a small business with 1-5 employees, you can expect to pay anywhere from $35 to $70 per month for a full-service payroll solution, including the base fee and per-employee charges.

What’s the difference between full-service and basic payroll?

Full-service payroll typically includes automated tax calculations, withholding, and remittance to federal, state, and local agencies, plus year-end form filing W-2s, 1099s. Basic payroll usually handles gross-to-net calculations and direct deposit, but leaves tax payments and filings to you, which increases your compliance burden.

Does Gusto offer a cheap plan for small businesses?

Yes, Gusto’s “Core” plan is their most affordable option, typically starting around $40/month base plus $6/employee per month, offering full-service payroll and automated tax filing.

Is QuickBooks Payroll good for small businesses on a budget?

Yes, QuickBooks Payroll’s “Core” plan is a strong contender, especially if you already use QuickBooks for accounting. It offers seamless integration and full-service payroll at a competitive price, starting around $45/month base plus $5/employee per month.

Does Square Payroll handle W-2 employees?

Yes, Square Payroll offers full-service payroll for W-2 employees, including tax filing and direct deposit, with a base fee of around $35/month plus $5/employee per month. They also have a very cheap contractor-only plan.

What features should I prioritize in a cheap payroll service?

Prioritize full-service tax filing and remittance, direct deposit, employee self-service portals, and new hire reporting. Integration with your accounting software is also a huge plus.

Can a cheap payroll service handle multi-state employees?

Many reputable affordable payroll services, like Gusto and OnPay, can handle multi-state payroll, calculating and filing taxes for employees in different states. Payroll processing for small business

Always confirm this feature if you have employees in multiple states.

What are common hidden fees in payroll services?

Watch out for extra charges for year-end W-2/1099 filing, processing amendments, additional payroll runs, state tax registration assistance, or advanced HR features.

Always review the full pricing structure before committing.

Do cheap payroll services include HR support?

Basic HR support, like new hire checklists and basic PTO tracking, might be included even in “cheap” plans.

More comprehensive HR advisory services or advanced HRIS features are usually part of higher-tiered plans or paid add-ons.

How long does it take to set up a new payroll service?

Setup time varies, but for a small business with 1-10 employees, it can typically be done within a few hours to a few days, depending on how quickly you can gather and input your business and employee data.

Is it worth paying for payroll services instead of doing it manually?

Yes, absolutely.

The cost of a cheap payroll service is almost always justified by the time saved, reduction in errors, guaranteed compliance, and avoidance of potentially massive tax penalties, which can far exceed the service fee.

What is a 1099-NEC and how does payroll service help with it?

A 1099-NEC Nonemployee Compensation form is used to report payments to independent contractors.

A good payroll service will track these payments and automatically generate and file 1099-NEC forms for you at year-end, simplifying tax season for your contractors. Adp small business payroll pricing

Do payroll services help with workers’ compensation?

Some payroll services, like OnPay, offer integrations with workers’ compensation insurance providers, allowing for “pay-as-you-go” premiums based on actual payroll, which can help manage cash flow and ensure accuracy.

Can I run unlimited payrolls with a cheap service?

Many affordable payroll services, including Gusto, Patriot, and OnPay, offer unlimited payroll runs without additional charges, which is great if you need to run off-cycle payrolls for bonuses or corrections.

How secure are cheap payroll services with my data?

Reputable payroll services employ robust security measures, including data encryption, secure servers, and regular security audits, to protect your sensitive financial and employee data.

Always choose a provider with a strong security reputation.

What if I make a mistake on payroll using a service?

Most payroll services allow you to correct errors by running an off-cycle payroll or adjusting future payrolls.

They can also assist with filing amended tax forms if necessary, though some may charge a fee for amendments.

How do payroll services handle employee benefits deductions?

Payroll services can manage pre-tax and post-tax deductions for benefits like health insurance premiums, 401k contributions, and FSA.

You typically configure these deductions in the system, and they are automatically withheld from employee paychecks.

When is it time to upgrade from a “cheap” payroll service?

You should consider upgrading if your business experiences significant growth e.g., 20+ employees, needs complex HR features performance management, advanced benefits, requires certified payroll or industry-specific compliance, or if your current “cheap” service no longer meets your expanding administrative or regulatory needs.

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