How to Do Payroll for Small Business: Choose the Right Method First
SMALL BUSINESS INTEL, IN YOUR INBOX
Table of contents
The method you pick shapes everything: your cost, your risk, and how many hours a month you spend on it. Before you learn how payroll works, you need to decide how you're going to run it.
The short version
- You have four options: do it manually, use payroll software, hire an accountant, or use a full-service provider.
- Manual payroll is free but slow and error-prone. Software is fast, affordable, and handles taxes automatically. Accountants cost more but are worth it for complex situations. Full-service providers bundle payroll with HR.
- For most small businesses with hourly teams, payroll software is the right call once you have more than two or three employees.
- The biggest risk at any method is missing a tax deposit deadline. The IRS penalty clock starts on the due date, not when they contact you.
Your four options for doing payroll, and what each one costs
Manual payroll (DIY with spreadsheets)
You calculate wages, withholding, and taxes yourself, then pay employees by check or bank transfer.
Best for: Solo operators or businesses with one or two employees on salary or a simple flat rate.
Average cost: Free, but time-intensive. Manual payroll typically takes five or more hours per pay run, roughly 21 days a year.
The real risk: Calculation errors and missed tax deposit deadlines. The IRS charges failure-to-deposit penalties starting at 2% of the unpaid amount, rising to 15%. For hourly employees, you also need accurate time records before you can calculate anything, which means time tracking needs to be reliable before payroll can be.
When to move on: Any time you add overtime, variable hours, multiple pay rates, or a fourth employee.
Payroll software
Software handles calculations, tax withholding, direct deposit, and tax filings automatically. You review and approve.
Best for: Businesses with three to 50 employees, especially those with hourly teams and variable schedules.
Average cost: $20 to $150 per month, plus a per-employee fee. Homebase Payroll starts at $39/month plus $6 per person, with automated tax filing and direct deposit included.
What it changes: The manual re-entry step. Instead of copying hours from a timesheet into a spreadsheet, hours flow from time tracking directly into payroll. Overtime is calculated per workweek automatically. Tax deposits go out on schedule.
When it's the right call: Most businesses with hourly employees find that payroll software pays for itself quickly once manual processing takes more than a couple of hours per pay run.
An accountant or bookkeeper
A professional handles payroll on your behalf, including calculations, filings, and deposits.
Best for: Businesses with complex pay situations: multiple pay rates, contractor payments, tip income, benefits administration, or employees in multiple states.
Average cost: $50 to $149 for setup, plus ongoing fees that vary by employee count and pay frequency. Typically more expensive than software per pay run.
The trade-off: Most hands-off for you, but you're dependent on someone else's timeline and availability. Less visibility into what's actually happening in your payroll each cycle.
Full-service payroll provider or Professional Employer Organization (PEO)
A PEO shares employer responsibilities with you, handling payroll, HR, benefits, and compliance under one contract.
Best for: Growing businesses that want payroll and HR bundled, or those with complex compliance needs across multiple states.
Average cost: Typically $150 to $200+ per employee per month, often with annual contracts.
This model involves shared employer responsibilities and is harder to exit than a software subscription. It's not the right fit for every business.
What you need in place before you run payroll
Regardless of which method you choose, a few things have to be set up first.
EIN. Your Employer Identification Number is required to file payroll taxes and open a payroll bank account. Apply free at IRS.gov — it's issued instantly online.
State registration. Most states require separate registration to withhold state income tax and pay state unemployment insurance. Check your state's Department of Labor.
Employee paperwork. A W-4 (federal withholding), your state's withholding form, and a Form I-9 (work authorization) from every employee before or on day one.
A pay schedule. Weekly, biweekly, semimonthly, or monthly. Your pay period affects tax deposit deadlines and overtime calculations. Some states also set a minimum pay frequency, so check before committing.
New hire reporting. Most states require employers to report new hires within 20 days of their start date. Homebase handles new hire reporting automatically as part of payroll setup.
For a full walkthrough of running each pay cycle — including tax deposit schedules, quarterly filings, and common compliance mistakes — see the complete guide to managing small business payroll.
Frequently asked questions
Can I do payroll myself for my small business?
Yes, and many owners with one to three employees do. The risk grows fast once you add overtime, variable hours, or a fourth employee. A missed tax deposit deadline triggers IRS penalties starting at 2%, and they start counting from the due date, not when you hear about it.
How much does payroll cost for a small business?
Manual payroll is free but costs time: typically five or more hours per pay run. Software runs $20 to $150 per month. An accountant costs more and varies by scope. Full-service providers typically charge $150+ per employee per month.
What's the easiest way to do payroll for a small business?
Payroll software connected to your time tracking is the lowest-friction option for most small businesses. You approve; it calculates, deposits, and files. For hourly teams, eliminating the manual re-entry step is where most errors start.
Do I need an accountant to do payroll?
No. Most small businesses run payroll successfully with software. An accountant adds value when your situation is complex: contractors, multiple states, tips, or benefits that affect withholding.
What happens if I run payroll late or make a mistake?
IRS failure-to-deposit penalties range from 2% (one to five days late) to 15% (unpaid after an IRS notice). Calculation errors that shortchange employees can trigger wage claims and Department of Labor investigations. Worker misclassification — treating an employee as a contractor to avoid payroll taxes — is one of the IRS's highest enforcement priorities.
How Homebase handles payroll for hourly teams
Homebase connects scheduling, time tracking, and payroll in one place. When an employee clocks out, those hours are already in payroll — no re-entry, no errors.
"Before Homebase I was manually tallying up my team's work hours and entering them into payroll, crossing my fingers I hadn't made any mistakes. Now our entire team logs in and out quickly and easily with the Homebase app, and all I have to do is send their hours to my payroll program with the click of a button."
Homebase Payroll handles tax filings automatically, distributes W-2s at year-end, and includes a Payroll Assistant that flags errors before you process. Pricing starts at $39/month plus $6 per person. See how it works.