How Much Does Payroll Cost for a 5-Person Team?
When I first launched my company more than a decade ago, I assumed payroll would be one of the simpler parts of running a small business. It’s just paying people, right? I quickly learned there’s a lot more to it—especially when it comes to understanding the real cost of payroll for a small team. If you’re a business owner with a team of five and you’re wondering how much you should budget for payroll each month, you’re in the right place.
My name is Rachel Monroe, and I’m a graduate of the University of Pennsylvania with a bachelor’s degree in Business Finance. I’ve owned and operated a successful small business consulting firm in Denver, Colorado for the past 11 years. As a writer and editor for Price it Here, I’ve helped hundreds of business owners break down operational costs so they can scale smarter. Payroll is always one of the first things we talk about.
Let me walk you through what you need to know.
The Basic Payroll Breakdown: What Are You Really Paying For?
When calculating payroll costs for five employees, you’re not just accounting for wages. You’re also covering a variety of employer-related expenses, including:
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Payroll taxes (Social Security, Medicare, FUTA, SUTA)
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Payroll service provider or software fees
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Direct deposit and check printing
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Workers’ compensation insurance
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Potential benefits like healthcare, retirement, or paid time off
These costs can add up fast, and many small business owners underestimate them.
Average Payroll Cost for a 5-Person Team
Here’s a general rule of thumb: you can expect payroll costs to be 1.2 to 1.4 times each employee’s gross wages. That means for every $1 you pay in wages, you’re spending $1.20 to $1.40 in total payroll expenses once everything is included.
Let’s say your five employees each make an average of $4,000 per month in gross pay:
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Total gross wages: $20,000/month
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Estimated total payroll cost (including taxes and fees): $24,000–$28,000/month
Annually, this puts you in the range of $288,000 to $336,000 for payroll.
Now, if you offer benefits like health insurance or 401(k) contributions, that figure will climb even higher.
Payroll Software or Outsourcing: What Will That Cost You?
For small teams, outsourcing payroll or using cloud-based payroll software is often the smartest move. It reduces the risk of mistakes and saves you the time you’d spend calculating taxes or filing with state and federal agencies.
Here’s what you can expect to pay:
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Payroll software (e.g., Gusto, QuickBooks, Patriot):
Around $40–$80/month base fee + $6–$12/month per employee
→ Total for 5 employees: $70–$140/month -
Full-service payroll provider (outsourced):
$150–$250/month, depending on services included
→ Total for 5 employees: $1,800–$3,000/year
Although outsourcing seems pricier on the surface, it can pay off by reducing costly compliance mistakes—especially as your business grows.
Payroll Tax Obligations You Can’t Overlook
When you process payroll, you’re responsible for several taxes beyond your employees’ base pay. These include:
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Social Security tax: 6.2% employer match
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Medicare tax: 1.45% employer match
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FUTA (Federal Unemployment Tax): 6.0% on the first $7,000 of wages per employee
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SUTA (State Unemployment Tax): Varies by state
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Workers’ Compensation Insurance: Typically 0.5%–3% of wages depending on industry
Even though these are mandatory, many business owners forget to include them in their payroll cost estimates.
Benefits Add Another Layer of Cost
If you offer benefits like healthcare, paid vacation, or a retirement plan, you’ll need to include those in your monthly payroll budget. On average:
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Health insurance: $400–$600/month per employee
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401(k) match (up to 3% of salary): $120/month per $4,000 salary
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Paid time off: Can add 5–10% to annual payroll, depending on your policy
These numbers can significantly raise your total cost per employee—sometimes by $6,000 or more per year.
How Location and Industry Impact Your Payroll Costs
Where your business operates and what type of work your employees perform can dramatically influence payroll expenses. For example:
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State and local tax rates vary widely. A business in California will have higher payroll taxes than one in Florida, which has no state income tax.
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Workers’ compensation rates are higher for physically demanding or hazardous jobs. A small construction firm will pay more in premiums than a marketing agency.
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Minimum wage laws also differ by state and municipality, impacting base wages and compliance requirements.
If you’re expanding into a new state or hiring remote employees across state lines, you’ll want to do a thorough analysis of how those changes will affect your payroll burden.
How to Keep Payroll Costs Predictable and Manageable
Even with just five employees, payroll is a major recurring expense. Keeping it under control requires some proactive steps:
Forecast Ahead
Budgeting for raises, bonuses, and new hires will help you avoid surprises. I recommend creating quarterly projections and comparing them against actuals.
Use a Payroll Service
It’s a small investment that prevents big mistakes. A reliable provider helps you automate tax filing, issue W-2s, and stay compliant with labor laws.
Review Benefits Regularly
Many businesses overspend on benefits that employees aren’t fully utilizing. Conduct an annual audit to ensure your benefits package is both competitive and cost-effective.
Avoid Payroll Mistakes
Misclassifying employees (as independent contractors), missing tax deadlines, or underpaying wages can lead to major fines. Using software or outsourcing can reduce this risk.
Should You Hire a Payroll Specialist?
If you’re handling payroll in-house and it’s starting to eat up your time—or you’re worried about staying compliant—it may be worth bringing in a professional. For a five-person team, this doesn’t always mean hiring a full-time payroll manager. Instead, you could:
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Use an outsourced payroll service with HR support
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Hire a freelance payroll accountant for quarterly reviews
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Work with a PEO (Professional Employer Organization) to bundle payroll, benefits, and HR services
These options can be more affordable than a full-time hire while still offering peace of mind.
Payroll Is an Investment in Your Team
It’s easy to think of payroll as just another bill to pay, but it’s so much more than that. Your team is your greatest asset. Payroll is how you show them they’re valued—and how you stay in business long-term by meeting legal obligations.
As a small business owner myself, I’ve helped dozens of companies build sustainable payroll practices. Whether you’re paying five people or fifty, the key is staying proactive. Know your numbers, review them often, and don’t be afraid to get help when things get complicated.
If you want to grow, your payroll strategy has to grow with you.
About the Author
My name is Rachel Monroe, and I’m a University of Pennsylvania graduate with a bachelor’s in Business Finance. As the owner of a small business consulting firm in Denver for 11 years and a writer for Price it Here, I help entrepreneurs like you make smarter financial decisions, avoid compliance risks, and build profitable companies from the inside out.
