If you're a business owner who’s recently been through the process of finding your payroll service provider, chances are, you didn’t know there were two pricing models (cost per transaction vs PEPM) before you made your decision.
Because if you’re anything like me, you probably spoke to one salesperson, saw the price, and just went with it.
But you should know that when it comes to cost and quality of service, there are distinct differences between the two types.
And by the end of this article, you'll know the pros and cons of each, so you can decide what’s best for you and your business.
Why Are There Two Pricing Models for Payroll Services?
The first payroll company, ADP, started using the per transaction pricing model in the 1970s.
That meant that companies were only charged whenever they needed that service rather than on a monthly basis.
But when software companies came into the market (like Office 365), ADP and other companies started using the PEPM model (charging per employee per month), which has now become a trend for the last decade.
Why Did Companies Switch from Cost Per Transaction to PEPM?
PEPM became popular with payroll companies because it’s a steady monthly amount, and because they can ultimately make more money.
But you might be wondering, “Is this model really that bad for employers?”
After we go over the pros and cons of each, I’ll let you be the judge…
What is the Cost Per Transaction Model?
As I said earlier, the payroll service provider charges a fee for each transaction processed. And the cost of each transaction depends on the provider.
Here are the pros and cons of the CPT model:
Cost Per Transaction Pros:
The CPT model is the fairest one for the employer since they don’t have to pay if they don’t use the service.
And employers are only charged for transactions that are processed, which makes it easier for them to manage payroll costs and keeps everything transparent.
Cost Per Transaction Cons:
The cost per transaction model can get a little tricky when it comes to making adjustments in employee paychecks.
For example, if an employee needs two checks in a month, the employer will have to pay twice.
And while this scenario is less than ideal, it’s rare for this to happen.
What is the PEPM Model?
As I said earlier, the Per Employee Per Month (PEPM) model is a newer model that gained popularity when software companies introduced it around a decade ago.
And instead of paying per transaction, employers pay a flat fee per employee per month for a bundle of services they may or may not use such as payroll processing and tax filing.
Here are the pros and cons of the PEPM model:
PEPM Pros:
The only advantage of the PEPM model is for the payroll provider because they make more money with this model.
And as an employer, there really isn’t a pro.
PEPM Cons:
In the PEPM model:
1. You have to remember to remove the employee from the account if they go on an extended leave.
So if an employee is on maternity leave you would remove them from the system since they aren’t working.
But let’s say they wanted to buy a car…
They wouldn’t be able to show proof of employment because now they can’t access their pay stubs.
And another drawback is…
2. You could pay for people who don’t work for you.
For example, if you have summer help and you forget to take them out of the system, you’ll end up paying for someone that hasn’t made you money.
So, if you’re someone that gets busy, this model can quickly become frustrating and expensive.
And the last con is…
3. You have to pay whether you use their services or not.
Do you really know what services you’re paying for?
You might be paying for things you never use.
Why is Baron Different?
At Baron Payroll, we believe in fairness and transparency, which is why we use the per transaction pricing model.
When you work with us, you can rest assured that you won’t have to worry about paying for things you don’t use.
Because 99 times out of 100, PEPM is not the best pricing model for your business.
Ready to make a switch to Baron?
It will only take about an hour of your time because we do all the heavy lifting for you!
Book an appointment today with an advisor to get started.
And if you found this article helpful, here are some others you might like:
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- Fingerprint Time Clock: How Can it Benefit Your New York Business?
- How to Choose the Best Payroll Company for Your Small Business
- The Pros and Cons of Paying Employees with Payroll Paycards
- Why Employee Printback Checks are Good for Your Business
- How Will the New York State Secure Choice Retirement Savings Program Impact Your Business
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