Payroll Guide for New Employers and Small Businesses

Hiring your first employee is exciting. It’s the start of the next major phase of growth for your business, and a signal for great things to come in the future. But it also comes with some responsibility.

Take payroll, for example. Employees need to be paid for their time (duh). And that pay needs to be consistent, reliable, and in adherence with local, state, and federal laws, meaning you need a helpful payroll guide to get you through.

Don’t worry: Payday doesn’t have to be stressful as an employer. By understanding the specific steps needed to pay employees—and setting it up properly from the beginning—you can breeze through the payroll process headache-free. This payroll guide will walk you through the process of starting payroll for the first time, and running it effectively. 

Payroll 101: What is it? 

Payroll is all of the employees at your company who are entitled to receive compensation for their work. Running payroll is the process of paying these employees the total compensation that they’re entitled to during a set period of time—the pay period—and on a specific date—the payment date. 

‍As an employee, managing and running payroll involves calculating employees’ earnings and deductions during a specific pay period, processing payments, withholding deductions, and managing records for tax and compliance purposes. Accurate payroll management is an essential part of running a business with employees.

It ensures that your employees receive accurate and timely compensation—thereby ensuring they want to stay with your company—and is a legal requirement for adhering to employment laws and small business tax obligations. Efficient and accurate payroll processing has a direct impact on: 

• Employee satisfaction and retention 
• Compliance with tax and employment laws
• Your company’s financial health 
• Your company’s employer reputation

Failing to run payroll properly isn't really an option for companies that want to grow and remain viable. It’s something that you simply have to get right if you want to retain employees and scale your company, which is just what this payroll guide will help you do.

What’s different about payroll for a small business? 

Companies of all sizes need to run payroll if they staff employees—from multinational juggernauts like Apple all the way down to a two-person retail company with a single location. Payroll for small businesses will, of course, be less complicated, with specific nuances to keep in mind. 

Unique characteristics of running payroll for a small business: 

• Hourly vs. salaried payroll. Small businesses like yours often employ part-time and hourly workers. This payroll differs from salaried employees. Hourly payroll requires accurate time tracking for each employee—including total hours worked and overtime—to ensure correct payment amounts. This means that time clocks and employee scheduling software are essential tools for managing payroll. 
• Simplified processes and needs. Larger companies—especially international ones—need more complex payroll solutions to remain compliant. Small businesses, on the other hand, typically have much more straight-forward payroll needs., which is good news for you. You can use simpler payroll systems and steer clear of more complex platforms with steeper learning curves and high operation costs. 
• Direct owner involvement. In small companies, the business owner often handles payroll themselves. You'll have a deeper level of understanding over the payroll process, meaning you can quickly make financial and strategic decisions, and ensure that you’re aware of legal requirements.
• More cost-effective tooling. With limited budgets, small businesses need to find payroll solutions that are effective and affordable. Prioritize payroll services or software that offer essential features without the high price tag of enterprise solutions.  
• Fewer compliancy resources. All businesses need to navigate federal, state, and local payroll tax regulations. Small businesses, however, have to do this with fewer resources. Staying compliant requires a keen understanding of applicable laws and diligent record-keeping that even a payroll guide can't always help with. This means It's critical to have the support of payroll software or third-party services designed to help small businesses maintain compliance

Efficiency and affordability are key when running small business payroll processes. Software plays a big role in helping independent business owners remain efficient as they scale. The ideal tool? One that handles time and attendance tracking, automated payroll processing, tax deductions, and document filing. 

What goes into payroll processing? 

Payroll processing is typically broken into three stages: 

• Pre-payroll
• Payroll
• Post-payroll

Each stage comes with its own to-do list, legal and policy considerations, and tooling requirements. Let’s look at the specific steps you’ll need to complete in each stage. 

Pre-payroll

This stage includes all work that takes place before payroll is processed. This includes foundational work to create and set payroll processes, along with recurring tasks to initiative the payment process on an ongoing basis. Pre-payroll includes: 

• Setting your payroll policies and processes: Establish clear policies regarding pay periods, overtime, leave, and benefits to ensure consistency and compliance. This payroll policy will apply to all employees within a company, and outline your obligations to employees. 
• Registering as an employer: Before processing payroll, you need to register with the appropriate state and federal authorities to obtain an employer identification number (EIN). Follow the EIN application process outlined on the IRS website to get started.
• Implementing a payroll system: Choose a payroll system that meets your business's needs, whether it's software, a manual process, or an outsourced provider.
• Collecting employee data: Gather all necessary employee information, including W-4 forms for tax withholdings and I-9 forms for employment eligibility verification. Complete this step as part of the onboarding process. 
• Tracking hours and calculating wages: Accurately record working hours for each employee to calculate gross wages correctly.Your payroll software and systems outlined during the setup phase will dictate how, exactly, this is done. 

Once this foundational work is set up—and your recurring processes for gathering hourly and wage information is set—you can confidently manage payroll for each cycle. 

Payroll 

The second stage—payroll—is where the most important work happens. This is where you validate work hours, calculate wages and withholdings, and send payments to your team. Complete your payroll on a recurring basis, with timing dependent on your company’s specific pay periods. Typically, this is bi-weekly or monthly. Payroll includes: 

• Reviewing and approving timesheets: Ensure that the hours worked by employees are accurately recorded and approved before processing payroll. Make this process easier by using a platform that includes time tracking, time sheets, and collaborative approvals all in one platform. 
• Calculating wages: Determine the gross pay for each employee based on their hours worked, salary rates, and any applicable overtime. Gross pay is the total amount of money earned before any deductions. 
• Calculating and withholding payroll taxes and other deductions: Deduct federal and state taxes, Social Security, Medicare, and any other deductions from the employee's gross pay. Make sure you’re aware of all payroll tax obligations in the pre-payroll stage so that you don’t hit any roadblocks during payment. 
• Determining net pay: Subtract all deductions from gross pay to arrive at the employee's net pay. Then, transfer that amount directly into the employees bank account (or deliver via check). 
• Issuing payments: Pay employees through their chosen method, such as direct deposit or physical checks.

Post-payroll 

Payroll work doesn’t stop once money is sent to employees. There are still a few tasks to complete in the post-payroll phase. Post-payroll includes: 

• Sending out payments and stubs: Distribute paychecks or direct deposit notifications along with pay stubs detailing gross pay, deductions, and net pay.
• Reporting and submitting payroll taxes: File the required payroll tax documents with state and federal tax authorities and remit any tax payments due.
• Keeping payroll records: Maintain accurate records of all payroll transactions for compliance and future reference.
• Store payroll records: Securely keep all payroll-related documents and records for the required period as mandated by law for auditing and compliance purposes.

While it may seem like there are a lot of steps to cover in the payroll process (and there are), you can automate a lot of these steps for each payroll cycle after an initial setup phase. Modern payroll software—integrated with time tracking and timesheet tools—helps to dramatically simplify and streamline this process. 

Take the headache out of payroll with Homebase 

Running payroll sounds complicated on the surface. But it doesn’t have to be. The right tooling can make all the difference for a first-time employer. Homebase, for example, offers a range of features and modules to make payroll easier. This includes: 

• Automating time tracking and payroll processing
• Enabling easy timesheet review and approvals
• Handling tax calculations and filing automatically
• Integrating with other tools in your tech stack, including point-of-scale (POS) and other business management software 

Focus on growing your business and nurturing your employees. Leave payroll administration to Homebase. Ready to try it out? Get started now.