How to Pay Employees As A Small Business: A Complete Guide

Between tracking hours, calculating taxes, and keeping up with labor laws, figuring out how to pay employees can turn into a real headache. This is especially true when you're already wearing a dozen other hats as a small business owner.

You don't have the luxury of handing this off to a payroll department, but that doesn't mean you're stuck with Sunday night spreadsheet sessions forever.

The good news? Paying your team doesn't have to drain your time or stress you out. We've put together this complete guide for how to pay employees, covering everything from payment methods to compliance requirements. By the end, you'll have a clear roadmap to get your team paid accurately and on time—without the Sunday night math homework.

What is employee payroll?

Employee payroll is the process of paying everyone who works for your company.

But payroll isn't just handing a check to your employees. From tracking employee hours and calculating wages to withholding taxes, there's a lot that happens behind the scenes before your team can get paid.

Why is doing payroll right important for your business?

Getting payroll right isn't just about following rules—it's about protecting your business and keeping your team happy.

• Avoid costly penalties: According to the IRS, 33% of employers make payroll errors. In California, you can face up to $100 fines per employee for late payments.
• Build team trust: Nothing kills morale faster than paycheck mistakes or delayed payments that leave your team wondering if they can count on you.
• Stay legally compliant: With 29 states having minimum wages above federal levels and labor laws constantly changing, accurate payroll keeps you on the right side of regulations.

Salary vs. Hourly pay: Which option works for your team?

When you're figuring out how to pay employees, you'll typically choose between two main approaches: salary or hourly pay. Each has its perks depending on your business and the kind of work your team does.

Salary pay: Same paycheck every time

Salaried employees get a fixed amount each pay period. Whether they work 35 hours or 50 hours in a week, their paycheck stays the same.

Here's how it works: An employee earning $48,000 a year gets $4,000 per month (if you pay monthly) or $2,000 twice a month, no matter how many hours they clock. This is perfect for managers, office roles, or jobs where getting things done matters more than punching a time clock. Think assistant managers, coordinators, or specialized roles like chefs where the work goes beyond just showing up.

Hourly pay: You work, you get paid

Hourly employees earn money for each hour they work. More hours = bigger paycheck. Fewer hours = smaller paycheck.

Here's how it works: Someone making $15 an hour who works 25 hours gets $375 that week. Work 40 hours? They get $600 (before taxes and deductions). This is the ideal for shift workers, part-timers, or jobs where your schedule changes week to week. Most restaurant, retail, and service businesses work this way since busy times aren't predictable.

The choice usually comes down to how your business runs. Most small businesses mix it up—salary for managers, hourly for everyone else—to match how people actually work.

Different ways to pay employees: How to choose the best method for your team

Once you know how much to pay your team, you need to figure out how to actually get that money to them. And you have more options than ever to make payday work for everyone.

Here are the most popular ways small businesses pay their teams:

• Direct deposit: The crowd favorite because it's simple and reliable. Money goes straight from your business account to your team's bank accounts on payday—no lost checks, no bank trips, and your team gets paid even when they're not at work. Just keep a backup option for employees without bank accounts.
• Paper checks: Old school but still useful as a backup when other methods don't work. Everyone knows how to cash a check, but they can get lost and employees have to make bank trips. Perfect for team members who like having something physical on payday.
• Digital payment apps: Apps like Venmo or Cash App get money to your team fast, sometimes instantly. Most people already know how to use them, but transaction limits and keeping records organized for taxes can get tricky.
• Early wage access: Let employees access their earned wages before regular payday to handle unexpected expenses without payday loans. Just make sure any fees don't hurt your employees and that it works with your payroll schedule.

Most successful small businesses offer a couple of payment options—direct deposit for most people, with a backup method for those who need something different.

How often should you pay employees?

Your payroll frequency affects everything from cash flow to employee satisfaction. Here's how the most common schedules stack up:

• Weekly payroll: Great for restaurants and retail where hours change a lot. Your team gets consistent paychecks, but you'll run payroll 52 times per year.
• Biweekly (every two weeks): The sweet spot for many small businesses. Just 26 payrolls annually, predictable for employees, and easier on your admin time.
• Monthly payroll: Saves you the most time with only 12 payrolls per year, but can be tough on hourly employees who need more frequent income.

Check your state's requirements since some require weekly or biweekly pay for hourly employees. Most employees prefer more frequent pay since it helps them manage expenses, especially if they're living paycheck to paycheck.

How much should you pay your employees?

Figuring out competitive wages means going beyond minimum wage requirements. You want to attract good people without breaking your budget.

Do your market research:

• Check job postings for similar roles in your area
• Use salary websites like Indeed or Glassdoor
• Ask other local business owners what they're paying

Remember that happy, well-paid employees stick around longer, saving you money on hiring and training replacements. Factor in regional cost of living differences and consider offering benefits like flexible scheduling or paid time off to compete with businesses that might pay slightly more in base wages.

Step-by-step guide: How to pay employees from start to finish

If the thought of running payroll feels overwhelming, you're not alone. But with the right process, you can get your team paid accurately and on time without the Sunday night stress.

Here's your step-by-step roadmap for how to pay employees:

1. Collect payroll forms during employee onboarding

Paying your employees starts long before payday. It actually starts the moment someone joins your team. You'll need the right paperwork to withhold the correct taxes and get money into their accounts.

Essential forms to collect:

• Form W-4 for federal income tax withholding (plus state W-4 if required)
• Form I-9 to verify employment eligibility
• Direct deposit form with banking information if you're using electronic payments

Time-saving tip: Don't chase down missing paperwork later—it turns into weeks of back-and-forth that delays getting new hires paid. Use Homebase's automated onboarding to send welcome packets where new employees can e-sign their W-4, I-9, and direct deposit forms before their first day, so you're ready to pay them from day one.

2. Track employee hours accurately

To calculate gross pay, you need to know exactly how many hours each employee worked. This includes start times, end times, breaks, overtime, sick days, and any shifts they picked up.

What you're tracking:

• Regular hours worked
• Overtime hours (anything over 40 hours per week)
• Break times and meal periods
• Paid time off, sick days, or vacation hours used

Time-saving tip: Digital time tracking prevents the "I forgot to clock out" conversations and automatically calculates totals for you. Use something like Homebase's time clock app to let employees clock in from their phones with photo verification. That way, you get accurate hours without the hassle of paper time cards.

3. Calculate taxes and deductions

This is where those onboarding forms come in handy. Use your employees' W-4 information to determine how much to withhold from their paychecks.

What gets deducted:

• Federal, state, and local income taxes
• Social Security and Medicare taxes (payroll taxes)
• Any benefit deductions like health insurance or retirement contributions

Example: An employee earning $600 in gross pay might have $100 withheld for taxes, leaving them with $500 in net pay (take-home amount).

Time-saving tip: Skip becoming a tax expert and avoid costly calculation errors that lead to penalties. Homebase automatically calculates all tax withholdings based on current federal, state, and local requirements, so you don't have to manually figure out tax tables or worry about compliance changes.

4. Pay your employees on payday

It's officially payday! Time to get money into your team's hands. Whether you're using direct deposit, checks, or another payment method, make sure everything processes before your designated payday.

Time-saving tip: Avoid the manual payment scramble every payday by setting up direct deposit to process automatically. Homebase handles multiple payment methods and can even run payroll automatically on your schedule, so payday happens without you lifting a finger.

5. File payroll taxes

When you withhold taxes from employee paychecks, you're holding that money on behalf of tax agencies. Now you need to send it where it belongs—IRS for federal taxes, state agencies for state taxes, and so on.

Don't forget employer-only taxes: You also owe FUTA (Federal Unemployment Tax) and SUI (State Unemployment Insurance) that come out of your pocket, not your employees'.

6. Keep records organized

Once payroll is complete, store all records securely and accessibly. The Fair Labor Standards Act requires you to keep payroll records for at least three years, including time cards, pay stubs, and tax documents.

What to keep:

• Timesheets and schedules
• Pay stubs and tax withholding records
• Any pay adjustments or deductions

The bottom line: This process gets easier with practice, but the right tools can save you hours every pay period. 

As one Homebase customer put it: "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."

Manual payroll vs. Payroll software: What's right for your business?

When you're starting out, doing payroll by hand might seem like the cheapest option. But as your team grows, the real costs of manual processing add up fast—and we're not just talking about money.

When manual payroll makes sense

Manual payroll can work if you have just one or two employees with simple, consistent schedules. Think of a small coffee shop with two part-time baristas who work the same hours every week, no benefits, and straightforward pay rates.

You might also stick with manual processing temporarily if you're between payroll providers or testing out a new system. But even then, it's more of a short-term solution than a long-term strategy.

Hidden costs of manual processing

Manual payroll looks free, but it's actually expensive in ways you might not realize:

• Your time: Calculating hours, taxes, and deductions can take 2-4 hours per pay period. That's time you're not spending on customers or growing your business.
• Error costs: Fixing payroll mistakes costs an average of $291 per error. Multiply that by multiple errors per year.
• Penalty risks: Late tax filings or incorrect calculations can result in IRS penalties averaging $845 annually for small businesses.
• Stress factor: The Sunday night anxiety of "Did I calculate this right?" isn't worth the supposed savings.

ROI calculation for small business

Here's the math that matters: If manual payroll takes you 3 hours biweekly and your time is worth $25/hour, that's $150 per month in opportunity cost. Add potential error costs and penalty risks, and most small businesses break even on payroll software within the first few months.

The real ROI comes from peace of mind, accurate compliance, and getting your nights and weekends back.

Here's the reality: Manual payroll might work when you have one employee, but it doesn't scale. Most small businesses find that payroll software pays for itself in time savings and error prevention (usually within the first quarter).

Common payroll challenges small businesses face and how to solve them

Hourly payroll is extremely common among small businesses, but it's not without challenges. Pesky payroll errors can sneak up on even the most diligent business owners, and the costs add up fast. Here are the most common challenges small businesses face when paying their hourly teams.

Time constraints

As a small business owner, you’re probably balancing a lot of hats (so many hats). Payroll is just one of many to-do's on your list, so it can be hard to carve out a dedicated amount of time for running payroll. A lot of prep work goes into ensuring payroll is completed accurately, including:

• Calculating hourly pay rates and working hours
• Tracking overtime and break deductions
• Managing tax withholdings and benefit deductions
• Processing payments and maintaining records

Skipping the prep work can create tax discrepancies and in the worst-case scenario, you might find yourself in legal hot water. Homebase customers save an average of 30+ minutes every time they run payroll. That’s time that adds up fast.

Inaccurate employee timesheets

Here's the thing about hourly workers: They get paid for time on the clock, so getting an accurate timesheet is critical. Employee hours can be wrong for several reasons.

Common timesheet problems: Employees forget to clock in and out, time theft through buddy punching, unreported shift swaps, and sick days that don't get logged properly.

The solution: Use digital time clocks with verification features. Homebase prevents these issues with secure employee PINs, photo verification at clock-in, and GPS-enabled location confirmation. No more buddy punching, no more "I forgot to clock out" excuses.

Missing overtime calculations

With manual tracking, it's easy to miss when an employee slips into overtime territory. But here's the problem: hourly non-exempt employees are entitled to overtime pay—it's federal law.

• Set up automatic overtime alerts before your employees hit 40 hours
• Flag potential overtime so you can adjust schedules proactively
• Calculate time-and-a-half rates automatically to avoid underpayment
• Keep a good number of staff members without accidentally triggering expensive overtime

Time saving tip: Homebase automatically flags potential overtime and calculates time-and-a-half rates, so you never miss required payments.

Incorrect tax deductions and withholdings

Throw in all the tax deductions and compliance requirements, and hourly payroll becomes complicated enough to make anyone feel dizzy. Federal, state, and local requirements change frequently, and getting withholdings wrong results in penalties and unhappy employees.

The smart approach:

• Use payroll software that updates tax tables automatically
• Let technology handle the complex math while you focus on your business
• Stay current with changing regulations without becoming a tax expert

What works: Small businesses that succeed with hourly payroll invest in systems that prevent problems rather than fix them afterward. Automated time tracking, integrated payroll processing, and proactive compliance monitoring cost money upfront but save thousands in errors and penalties throughout the year.

Ready to simplify payroll for your team?

Running payroll doesn't have to be the Sunday night task you dread. From tracking hours to filing taxes, the right system can turn payroll from a weekly headache into a few simple clicks.

Homebase brings together everything you need to pay your team: time clocks that prevent buddy punching, automated payroll that handles tax calculations, and compliance guidance that keeps you on the right side of labor laws. Your team gets paid accurately and on time, while you get your evenings and weekends back.

We promised you freer Sundays by the end of this article, so here you go. Try Homebase, and let us handle the math, the taxes, and the compliance headaches so you can focus on what actually grows your business. Try it free and see why payroll doesn't have to be painful.

How to pay employees FAQs

How do I pay my employees?

Follow these basic steps: collect employee information and payroll forms, calculate gross pay based on hours worked and rates, determine net pay by deducting required taxes, pay employees through direct deposit or checks, file payroll taxes, and maintain accurate records.

What's the difference between salary pay vs hourly pay?

Salary pay is a fixed amount paid over a specific time period, typically annually or monthly. The amount doesn't change based on hours worked. Hourly pay compensates employees based on actual time worked, so total pay varies each period depending on hours.

How often should I pay hourly employees?

Most states require at least twice monthly for hourly employees. Weekly or biweekly schedules work well for businesses with fluctuating hours, while monthly pay works better for consistent schedules. Check your state requirements since some mandate more frequent pay for hourly workers.

What happens if I pay employees late?

Late payment penalties vary by state but can be costly. California charges $100 per employee for initial violations CAOttingerlaw, with higher penalties for repeat offenses. Beyond fines, late payments damage employee trust and can lead to turnover.

Do I need to pay overtime to hourly employees?

Yes, hourly non-exempt employees must receive overtime pay (1.5x their regular rate) for hours over 40 in a workweek. This is federal law under the FLSA. Some states have additional daily overtime requirements.