There’s a good chance payroll feels stressful if you’re running a small business for the first time. Money in, money out, paid on time, taxes handled—sounds simple, right? But there are a lot of details and rules to keep up with.
Payroll comes up way faster than most founders expect. Let’s break down the basics so you can feel confident handling it, keep your people happy, and stay on the good side of the IRS.
What Actually Is Payroll, Anyway?
Payroll means more than just writing a paycheck. It’s the process of calculating and distributing what your workers are owed. This includes regular wages, overtime, deductions, and company contributions for things like taxes or benefits.
Getting payroll right isn’t just about being nice. It’s a legal requirement. Bad payroll can snowball into penalties, unhappy employees, and big accounting headaches later.
For small companies, handling payroll efficiently signals you’re running a serious operation—even if you’re just starting out.
Setting Up Payroll From the Start
Before you can pay anyone, you’ll need a system. Some small owners run things manually with spreadsheets. Others go digital from day one.
Look at your size and budget. Running payroll by hand saves money up front but adds risk and time. Software or payroll services cost more but automate calculations and filings, reducing errors.
Regardless of approach, a payroll system needs to track employee info, hours worked, pay rates, and deductions. It should also spit out reports when you need them and keep records tidy for audits.
Payroll Taxes: What You Have to Withhold and Pay
Surprise: not all the money you pay employees actually goes straight into their pockets. As an employer, you have to keep back certain amounts for the government.
Payroll taxes include federal income tax, Social Security, and Medicare. You take these out of your employees’ checks each pay period. Sometimes you have to deal with local or state income tax too.
Then there are taxes the employer pays separately, like the employer share of Social Security and Medicare, or federal and state unemployment taxes.
Each tax has its own rules, deposit schedules, and paperwork. Most payroll software and services handle these, but you need to understand what you’re responsible for.
Are You Paying Employees or Contractors?
This matters a ton because rules and taxes are different. Employees are part of your company. You tell them when and how to work, and you pay taxes on their behalf.
Independent contractors work for themselves. They invoice you, manage their own taxes, and usually have a less formal relationship.
Getting this wrong can mean trouble—misclassification penalties can pile up fast. If you’re not sure, the IRS offers guidance, or you can talk to a payroll pro.
A common mistake: labeling someone a contractor to avoid extra paperwork or taxes, when they really act like an employee.
Staying on the Right Side of Payroll Laws
You’re likely aware there are federal payroll laws, but states (and sometimes cities) have their own rules, too. The Fair Labor Standards Act (FLSA) covers things like minimum wage and overtime for most businesses.
Some locations may require a higher minimum wage or more frequent pay periods than federal law. Failing to follow these can trigger fines or lawsuits.
Check both federal and local requirements from the start. Don’t just trust your gut here—laws change, and “I didn’t know” never works with the IRS.
How Often Should You Pay People?
Pay schedules are more flexible than most realize. Some small employers cut checks weekly. Others pay twice a month (semimonthly) or every two weeks (biweekly). Some even go monthly, though that’s less common.
Think about what works for your cash flow and employee needs. Weekly pay can be nice but creates more work. Less frequent pay saves time but may challenge team members with bills or financial responsibilities.
State law sometimes mandates a minimum pay frequency, so check for your location.
Payroll Records: What You Need to Keep (and How Long)
You’ll have to save a lot of documents, even if you think you’ll never need them. Pay stubs, timesheets, tax filings, and withholdings—these all fall under payroll records.
Federal rules say you should save payroll records for at least three years. Some states may want you to keep them even longer.
It’s tempting to ditch old files, but don’t take that risk. You never know when a question or audit will pop up, and having clear records always beats scrambling.
Payroll Problems: What to Do When Something Goes Wrong
Everyone makes mistakes—maybe an employee was paid the wrong amount, or you forgot to withhold enough taxes last pay period. Don’t panic.
First, fix the error as soon as you notice it. Notify the employee and document what happened. Then, if taxes were wrong, adjust them in your next filing or reach out to your payroll provider for help.
If you have seasonal or temporary workers, payroll gets even trickier. Their status, taxes, and how you set up pay can vary. Review state and federal rules closely for these folks—there’s not always a one-size-fits-all answer.
Should You Use Payroll Software or Outsource?
A lot of smaller business owners start out DIY. Excel gets the job done for a couple of employees, but once you add more people or get busy, mistakes creep in.
Payroll software saves time and frustration by automating deductions, reminders, and filings. Many even handle direct deposit, tax forms, and year-end reporting.
Some companies choose to fully outsource payroll to a provider or CPA. This frees up your brain for other business stuff, but it costs more than doing it solo.
Key features to look for: easy setup, tax compliance, solid support, and clear reporting. When in doubt, ask for recommendations from other small business owners. You’ll get honest input about what works in the real world.
Common Payroll FAQs and Tips to Keep Things Simple
Small business owners worry about payroll for all sorts of reasons. A few questions come up again and again:
– When do I withhold taxes? (Each pay period.)
– What paperwork do I need from new hires? (Form W-4 for employees, Form W-9 for contractors.)
– How do I handle wage garnishments or deductions? (Usually, you get legal paperwork and follow what it says—ask your payroll provider if unsure.)
– Can I pay people under the table? (No, and the fines are steep if you get caught. Just don’t.)
To keep things straightforward, choose a pay schedule and stick to it. Set calendar reminders for tax deadlines. Keep an organized digital or physical folder for each employee.
If you use payroll software, learn how to run and save reports, so you’re ready if anyone asks to see them.
Sometimes it helps to read up on other founders’ payroll stories. For small business news and advice, this resource is a good place to start.
Wrapping It Up: Payroll Doesn’t Have to Be a Headache
Payroll is just one of those things in business that you have to get right, but it doesn’t have to take over your life. Start off with a system. Don’t guess on tax or worker status details. Ask for help when needed, and keep records organized.
The sooner you establish a process, the less you’ll have to stress about payroll. Later on, as your company grows, you can upgrade that process or bring in a pro—but you’ll have the basics down.
Sticking with clear practices and honest communication goes a long way. Most small business owners find their payroll groove over time, even if the first few paydays feel shaky. Keep learning, stay organized, and payroll becomes just one more regular part of running your company.