Startup Payroll Costs

Payroll-related expenses consume 76% of total operating costs for venture-backed startups, or 68% if you include cost of goods sold, based on our analysis of over $900 million in startup spending.

For a typical 10-person startup using the most basic pricing plans, monthly payroll processing fees range from $115 with Rippling, to $200 with Gusto, to $790 with Justworks. While Justworks is more expensive, it operates as a Professional Employer Organization (PEO) providing additional HR services and benefits administration.

Analyzing the $900 million in startup expenses, payroll processing costs represent about 0.4% of total operating expenses for the average venture-backed startup.

In this article, we’ll use Kruze Consulting’s proprietary data (and experience!) to explain:

• How payroll costs fit into a startup’s overall expenses
• The cost to set up payroll at a new startup
• Compare the best startup payroll providers costs side by side
• Explain the payroll taxes and how much to expect to pay as the company
• List the typical founder salaries
• List the first employee expenses
• List the first non-founder equity compensation
• Explain how to optimize payroll costs at your startup

Real startup payroll cost breakdown

Our analysis of over 100 funded startups reveals the true cost structure of startup payroll:

Yes - over 75% of your operating expenses are going to be payroll costs. So getting a good system set up to manage this highly-regulated, recurring expense is critical. Oh, and guess what - employees like getting paid on time, so don’t mess it up!

How much does it cost to set up payroll?

Setting up payroll can be pretty low cost if you use one of the providers mentioned below. Generally, if your startup is new and you are getting ready to run your first payrolls, the biggest cost that you’ll have to worry about is state fees to get registered to actually have an employee in that state.

Kruze does help some companies set up payroll, but not as much as we used to, because vendors like Gusto make it so easy that there isn’t really that much complicated work involved. Most founders can handle setting up payroll on their own.

And we strongly recommend using a payroll service – running in-house payroll is a huge mistake. If you miss a payroll tax payment, the time required to get that fixed is huge. Payroll outsourcing is the way to go.

Monthly processing costs by provider

Analyzing the basic plans offered by the largest payroll providers serving startups, the cost of running payroll varies by provider, play type - and most importantly - number of employees on the plan.

The companies we analyzed to come up with the 0.5% of operating costs that go to payroll providers were on a variety of plan levels, some of whom were spending quite a bit on “extras.” These companies had, on average, just over $400,000 a month in wages, consultants, commissions, etc. and are spending about $2,400 a month on payroll processing fees. Most of these companies have international payroll, which adds to the typical processing fee.

Understanding startup payroll tax obligations

Payroll taxes for startups represent approximately 3.4% of total costs paid by the startups (so this is NOT including the amounts paid by the employees as deductions from their gross wages), including:

• Payroll taxes – Federal - includes social security, Medicare, etc.
• State specific payroll taxes – including unemployment insurance, disability, etc.
• Workers’ compensation insurance – some states require employers to pay into a state fund
• Local tax obligations

The tax burden typically breaks down as:

• Employee portion: ~20% of wages through withholdings
• Employer portion: ~10% of gross payroll
• Total tax impact: ~30% of total wages

In our analysis, the employer portion of payroll taxes came to 7.6% of wages. This is lower than the 10% of gross payroll for several reasons, including the fact that higher paid employees’ social security payments (and others) are capped, some companies have employees in lower tax states or even abroad, many state programs payments are capped, etc.

For most startups getting going, we recommend assuming that the employer portion is going to be 10% of payroll, as this is what the startup will experience early in its life, and employees won’t reach the wage caps until most of the year is complete.

FICA limits and job changes

An important nuance of payroll taxes that many startup founders don’t realize is how FICA limits work when hiring employees mid-year. If you hire someone who was previously at another company that year, your company’s FICA obligation starts fresh – regardless of how much FICA tax the employee has already paid at their previous job.

While employees can get refunds for excess FICA contributions when filing their personal taxes, employers cannot. Each employer must pay their full FICA obligation as if the employee’s FICA “meter” started at zero when joining the company.

This is particularly relevant when hiring experienced, higher-paid employees who may have already hit their FICA limits at a previous employer that year. You are going to probably pay the full FICA contribution for them as well!

Managing employee benefits costs

Benefits represent 3.7% of all company costs for venture-backed startups, and 8% of wages. Key considerations include:

1. Healthcare coverage
2. Retirement plans
3. Paid time off
4. Additional perks and incentives
5. Workers’ compensation insurance

Smaller startups will likely start with less generous benefits, and some companies will pay benefits through a PEO, meaning that they may not directly pay the benefit but instead bear it through higher payroll costs.

Payroll costs for your startup’s first employees

Understanding payroll costs for your first employees is crucial for startup budget planning. While founders may not get paid initially, after a company has raised funding - even pre-seed or seed funding - it’s typical for the founders to draw a modest wage (you can read our founder salary report and guide here. And the earliest employees may trade some cash compensation for equity grants, which we’ll discuss, but even those first employees are typically paid. These initial hires often represent the largest financial commitment a startup makes after raising capital, so understanding the payroll portion of your startup’s costs is critical.

Founder payroll costs

According to our 2024 analysis of over 450 funded startups, seed-stage founder payroll varies by role:

• CEO: $132,000
• CTO: $134,000
• COO/Operations: $135,000
• Product/CPO: $149,000

Keep in mind that at these levels, the startup will be paying the full FICA and other payroll taxes, so again, it makes sense to estimate an extra 10% for payroll taxes and up to another 25% for benefits and other employee related costs. Read our entire Startup CEO Salary Report to see a breakdown of CEO payroll by stage, industry and money raised and more.

First employee payroll cost estimates

Since we provide accounting to so many startups right as they get going, we are able to estimate what the very first, non-founders, cost a startup. Based on this analysis, here are estimated payroll cost ranges for common first hires in high-cost (e.g., San Francisco, NYC) and mid-cost (e.g., Austin) locations:

Software Engineers payroll costs

Engineers are usually the very first hires at a new technology startup. While payroll will greatly vary depending on a number of factors that we can’t easily access in our payroll data, we see that typically the amount each first engineer makes can really vary depending on who they are, how much funding the company has, and where the employee lives.

Here are some cost ranges for the first engineering hires:

Sales people payroll costs

While founders typically run sales at startups, we have enough data points to be able to estimate some of the wages of the earliest sales employees. Remember, fully, on-target earnings (OTE) will usually be double the payroll costs since good sales people expect to earn commission - and a lot of it!

Sales Development Representatives (SDRs) payroll costs

Many of the startups we work with hire SDRs early to boost the sales funnel. Many times it’s the founders closing the deals, but the SDRs are getting the pipeline going. We think we have enough data points to be able to estimate some of the salaries of the earliest SDRs. Remember, fully, on-target earnings (OTE) will usually be double the payroll costs since good sales people get a lot of commission.

These ranges represent the 25th to 75th percentiles of salaries in our dataset, with the middle number representing the median. Remember that total cost to the company will be approximately 17% to 30% higher when including employer taxes, benefits, and processing fees.

Employees also require equipment - from computers, to software licenses and possibly desk equipment. So assuming another $2,500 to $3,000 per new employee, as a one off cost, is a good plan for making a solid budget.

First employee equity grants

While wages are a major component of compensation, equity is often just as important for early startup employees. This cost isn’t something that runs through a startup’s income statement, but it matters a lot, as the cap table is something that founders need to manage carefully. According to recent Carta data, analyzing 8,214 initial grants at tech startups from June 2023 to June 2024, here’s what founders typically grant to their first hires:

• First hire: typically receives between 0.5% to 4% equity (median 1.49%)
• Second hire: typically receives between 0.3% to 2% equity (median 0.85%)
• Third hire: typically receives between 0.21% to 1.2% equity (median 0.50%)
• Fourth hire: typically receives between 0.18% to 1% equity (median 0.44%)
• Fifth hire: typically receives between 0.13% to 0.8% equity (median 0.34%)

The most generous founders (90th percentile) grant their first five hires a combined 17.56% of the company, while more conservative founders (25th percentile) grant a combined 1.32%. The median founding team grants about 3.62% total equity to their first five employees.

Equity grants typically decrease significantly after the first five hires, with hires 6-10 receiving notably smaller grants. For instance, the sixth hire’s median grant is 0.28%, and by the tenth hire, the median drops to 0.18%.

Optimizing payroll costs

Managing payroll expenses efficiently is crucial since they represent over 75% of operating costs. When we work with founders to get a grip on their burn rate and runway, the first place we look is employee related expenses. Here’s how to optimize your startup’s payroll costs:

Choose the right payroll provider

The decision between in-house payroll and payroll outsourcing is really a no brainer, and is the first step in getting employee expenses under control. While in-house payroll might seem cost-effective initially, it’s really not at all. We strongly recommend outsourcing to a specialized provider because:

• Automated payroll processing reduces errors
• Providers handle tax filings and compliance
• Online payroll systems offer better employee experiences
• Employee onboarding is a lot easier
• Integration with accounting saves time and money
• Multi-state tax compliance is handled automatically

For most startups, we recommend:

• Single-state operations: Gusto’s basic plan
• Multi-state, growing teams: Rippling
• Complex benefits needs: Justworks PEO

Optimize payroll frequency

Choosing the right payroll frequency can have a significant impact on your processing costs and administrative burden. Most startups find that semi-monthly payroll (paying on the 15th and end of month) provides the best balance between employee satisfaction and administrative efficiency.

While some employees prefer bi-weekly payments, this schedule requires additional processing runs and can complicate accounting and forecasting. Remember to make sure that your cadence works with local regulations - some states have specific requirements as to the frequency of payroll runs, and you don’t want to suddenly face a fine for making a silly mistake.

We recommend talking with the payroll processor and an experienced lawyer to avoid making a frequency error – this is especially true if you have any hourly or part time employees. Whatever frequency you choose, maintaining a consistent schedule helps with cash flow planning and reduces administrative overhead. And, guess what, employees like knowing when they will get paid.

Strategic benefits management

With benefits consuming 3.7% of total operating costs, on average, at our clients, strategic management of your benefits program is a big deal. Benefits really impact employee morale, and also the cost of having employees.

Regular audits of your benefits package can identify underutilized offerings and opportunities for cost savings. Many startups find that working with a PEO can provide access to better insurance rates and more comprehensive benefits packages than they could secure on their own, in particular if they have multi-state operations. Gusto and Rippling now allow outside benefits brokers to assist in getting better packages, so once you are large enough (say over 20 employees), consider using one.

Finally, we are seeing that there are new, innovative, health care benefit solutions like ICHRA, that are able to save companies money in some states.

Tax optimization

The R&D tax credit program can offer significant savings for technology companies - our clients have collectively saved over $100 million in payroll taxes through our R&D tax credit work. You can estimate your possible R&D tax credit savings using our calculator.

Some startups can also find state specific payroll tax credits, although these are usually a bit more challenging. Working with a qualified tax accountant, like Kruze, ensures you’re capturing all available tax credits while maintaining compliance with state and federal regulations.

Make the process efficient

A big reason we suggest Ripping, Gusto and Justworks is that their UX makes the process of running payroll easier. Beyond the automation, features like employee self-service portals reduce HR overhead by allowing team members to manage their own personal information, benefits selections, and time tracking.

Integrating your payroll system with your expense management and accounting software creates a seamless flow of information that reduces manual work and improves accuracy. The Kruze onboarding team is full of experienced experts who know how to get these systems to talk to each other – reach out to us to make sure you are getting the most out of your systems.

Cap table and equity grant management

Managing your cap table carefully is crucial since equity grants, while not a direct payroll cost, represent real value and future dilution (and eventually you’ll need to get those costs calculated according to GAAP and actually into your financial statements).

Based on the Carta data we analyzed above, we can see that the first ten employees typically receive between 4.75% (median) to 23% (90th percentile) of the company’s equity. That’s a massive range!

We recommend creating an equity budget just like you create a cash budget - in fact, we’ve got an option pool model that you can download for free. Consider reserving 10% to 15% for your first 10-20 employees, then carefully allocating grants based on role importance, experience level, and market conditions.

Regular reviews of your cap table can help ensure you’re not over-granting equity early, leaving you short on equity for later key hires. Remember that as part of every new round, VCs will expect the option pool to be large enough to compensate new hires for the next 18 to 24 months, so keeping a good handle on the cap table is extremely important.

Strategic hiring and budgeting

One of the most effective ways to control payroll costs is through strategic hiring aligned with your budget and runway. We recommend creating a detailed hiring plan that maps to your business, revenue and funding milestones. The best companies that Kruze Consulting works with stage hires based on specific needs and according to a plan.

Remember that each new hire typically costs about 25-30% above their base salary when including taxes, benefits, and other overhead. So a $200,000 salary actually means committing to about $250,000 in annual costs. We recommend building a detailed financial model that includes these costs, then working backwards from your available capital to determine how many people you can actually afford to hire.

This helps prevent the common startup mistake of over-hiring after raising capital. We have published a number of free startup financial models on our financial modeling page - check them out if you are looking for a good place to start.

Conclusion

Managing payroll costs effectively is crucial for startup success, given that they represent 76% of operating expenses (or 68% including COGS). Most of the VC dollars raised by startups will go to payroll costs.

While selecting the right payroll provider is important - with processing fees averaging 0.4% of operating expenses - the bigger picture involves strategic planning across multiple dimensions. This includes careful compensation planning across both cash and equity, thoughtful hiring aligned with business milestones, proactive benefits management, and efficient tax planning.

Successful startups approach payroll holistically, considering:

• Total compensation strategy (cash salary, benefits, and equity grants)
• Strategic hiring plans tied to funding and revenue milestones
• Tax optimization through credits and careful planning
• Benefits management that balances cost with employee satisfaction
• Operational efficiency through automation and systems integration

The people are the business, especially at the earliest stage companies that have yet to create meaningful IP or revenue. So managing payroll, and the associated costs, is about building a sustainable foundation for growth while maintaining enough runway to achieve your business objectives. The most successful startups we work with take a proactive, planned approach to these costs rather than treating them as a simple administrative function.