The Payroll Process: How Small Businesses Run Payroll

Payroll has a way of creeping into your nights and weekends—checking (and rechecking) calculations, filing taxes, and hoping there aren’t any mistakes. At first, it seems like just thirty minutes here and there, but for most business owners, managing payroll processes adds up to 21 days per year. 

The worst part? Payroll accuracy only averages 80%.

If payroll is eating up hours every week and your team still isn’t getting paid accurately, that’s a problem. The fix? A payroll process that works for you—not against you. In this guide, you’ll learn all about how to process payroll for your small business—minus the late-night cram sessions.

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What is the payroll process? 

Payroll processing is everything that goes into managing and distributing employee wages. But it’s about more than just cutting checks. Accurately compensating hourly teams involves time tracking (including breaks and overtime), calculating your employees' gross pay, withholding payroll taxes, and maintaining pristine records for tax compliance purposes.

That’s a lot of math—and one wrong calculation could mean compliance issues, costly errors, or frustrated employees.

If payroll feels overwhelming, that’s because it is. The good news is that with the right payroll management process, the entire process can run on autopilot, making it a win for your team, your business, and perhaps most importantly: your sanity. 

The payroll process explained: a step-by-step guide.

Tracking employee hours, overtime, and those inevitable last-minute shift swaps can make payroll preparation the ultimate headache. And that’s just the timetracking part. These payroll steps will help you cut through the payroll chaos, ensure accurate pay, and keep your payroll processes running smoothly, so you can stay focused and most importantly, pain-free.

Step 1: Set up your payroll process.

Before you even think about cutting a check, you need to set up a payroll process for your business. Here’s how to get started:

• Choose a payroll schedule: Will you pay your team weekly, biweekly, semi-monthly, or monthly? Before you make a decision consider factors like cash flow, state laws, industry norms, processing costs, and employee preferences.
• Decide how you’ll process payroll: You can handle payroll manually, use payroll software, or outsource it to a payroll provider.
• Register for tax accounts: To stay compliant, you’ll need a federal, state, and local tax ID, plus an Employer Identification Number (EIN) from the IRS.

Step 2: Collect employee payroll information.

Payroll only works if you have the right employee details on file. Before running payroll for the first time, make sure you have:

• W-4 forms: Determines how much federal income tax to withhold.
• I-9 forms: Verifies work eligibility in the U.S.
• Direct deposit information: Needed for electronic payments and processing paychecks.
• Payroll classification: Classifying employees as hourly, salaried, or independent contractors affects how they’re paid and taxed.

Step 3: Track employee work hours.

For hourly teams, accurate time tracking is everything. Whether you use paper timesheets, punch clocks, or digital time tracking software, the goal is the same: make sure employees are accurately compensated for their work—no more, no less.

A good time-tracking system should record:

• Clock-in and clock-out times.
• Breaks and unpaid time.
• Overtime hours.

Reviewing and approving timesheets before paying your team prevents errors in the payroll process, keeping your records neat and tidy.

Step 4: Calculate gross pay, deductions, and net pay.

Once work hours are finalized, it’s time to crunch the numbers and start paying employees. Here’s a quick breakdown:

• Gross pay: What an employee earns before deductions.
• Deductions: Covers federal income tax (usually 10–22%), Social Security (6.2%), Medicare (1.45%), plus state/local taxes and any benefits like health insurance.
• Net pay: The final amount that lands in their bank account after deductions.

For salaried employees, it’s even easier—just divide their annual salary by the number of pay periods, and that’s their paycheck amount.

Step 5: How payroll works on payday.

Now for the best part, payday! Most businesses pay employees via direct deposit or paper checks. How long does payroll take to process? Well, that depends on the payment method:

• Direct deposit: Usually takes 2–3 business days to hit your team’s bank accounts.
• Paper checks: Require printing and distribution, but can be immediately deposited by your team.

Step 6: File payroll taxes and reports.

Unfortunately, the payroll process doesn’t end on payday. You still have to manage taxes. And since missing a deadline can lead to costly penalties, staying on top of things is an absolute must.

As an employer, you’re responsible for withholding and paying:

• Federal income tax: Based on each employee’s W-4 form.
• Social Security and Medicare (FICA): A shared responsibility between employers and employees.
• Federal Unemployment Tax (FUTA): Paid by employers to fund unemployment benefits.

And it doesn’t stop there. The IRS requires businesses to file key payroll tax reports, including:

• Form 941: A quarterly report for federal payroll taxes.
• Form 940: An annual report for unemployment taxes.

Keeping up with tax filings and payroll records takes time. Payroll software that automates payroll tax calculations, payments, and filings simplifies the processing, helping you stay on track without all the extra paperwork.

Step 7: Maintain payroll records for compliance.

Payroll records are your first line of defense for audits, tax filings, and employee disputes. While the Fair Labor Standards Act (FLSA) requires businesses to keep payroll records for at least three years, holding onto them longer is a smart move. To stay prepared, make sure you’re keeping:

• Timesheets: Track hours worked for accurate pay and overtime calculations.
• Wage calculations: Keep records of pay rates, bonuses, and deductions.
• Tax filings: Store copies of payroll tax returns and payment confirmations.
• Pay stubs: Provide employees with a breakdown of earnings, taxes, and deductions.

Storing and organizing these records can be a lot—especially as your team grows. If payroll paperwork is starting to pile up, it might be time for a better system.

Homebase Payroll does more than just process paychecks. It automates time tracking, payroll processing, and tax filings—and securely stores all your payroll records in one place. No more scrambling for timesheets or tax forms. Everything stays organized, compliant, and ready when you need it.

Manual payroll processing vs. payroll software: what’s better?

Trying to decide between handling payroll manually or investing in automation as you get your business off the ground? Let’s break down both options to see which payroll processing method is right for you.

1. Time required

• Manual payroll: Expect to spend hours tracking hours, calculating wages, deducting taxes, and filing reports when you process payroll manually. And don’t forget, as your team grows your workload will too.
• Payroll software: Handles payroll in minutes. Many platforms also offer mobile payroll apps so you can manage payroll from anywhere and maybe even take that vacation you’ve been putting off.

2. Error risk

• Manual payroll: A small mistake in calculations or tax withholdings can lead to overpayments, compliance issues, or costly penalties—which can feel pretty intimidating if numbers aren’t your thing.
• Payroll software: Automates wage and tax calculations, so everything adds up correctly with no risk of human error.

3. Compliance risk

• Manual payroll: Staying compliant means constantly tracking and applying changes to local tax and labor laws all on your own.
• Payroll software: Automatically updates tax rates and labor laws, so you can stay compliant without lifting a finger.

4. Cost

• Manual payroll: No upfront software costs, but errors, missed deadlines, and wasted time can be expensive in the long run.
• Payroll software: Payroll service providers come with monthly costs, but the time savings, reduced human error, and improved compliance are generally worth the added expense.

5. Who it’s best for

• Manual payroll: Best for very small teams (one or two employees) with simple payroll needs and minimal tax law changes—or for those with a strong financial background.
• Payroll software: Ideal for growing businesses that want a hassle-free, efficient, and error-resistant payroll process.

Key components of payroll processing.

Managing payroll can feel a bit like spinning plates—one for tracking employee hours, another for tax withholdings, and others for compliance and record-keeping. Think of these key payroll components as the plates that need the most attention to keep everything running smoothly.

Payroll schedules: how often should you pay your team?

Choosing a payroll schedule isn’t just about routine—it affects cash flow, employee satisfaction, and compliance. Most businesses choose weekly, bi-weekly, semi-monthly, or monthly pay periods, depending on what works best for their team and industry. Before deciding, check your state’s payroll laws as some require employees to be paid within a certain timeframe. 

Payroll taxes

Each time you run payroll, you're responsible for withholding and remitting certain payroll taxes. These typically include:

• Federal income tax: Based on each employee’s W-4 form.
• Social Security and Medicare (FICA): Split between employer and employee.
• State and local taxes: These vary by location and may include state income tax or unemployment tax.
• Federal Unemployment Tax (FUTA): Paid by employers to fund unemployment benefits.

For the most accurate and current tax rates as applicable to exempt and non-exempt employees, refer to the relevant publications or visit the official IRS website.

Payroll costs

Payroll isn’t free. How much you spend depends on your system, whether you handle it yourself or outsource, and the benefits you offer. Here are some common payroll costs to keep in mind:

• Base monthly fees: Payroll software or services usually charge a flat fee plus per-employee costs.
• 401(k) contributions: If you offer employer-matched retirement benefits, this adds to your payroll costs.
• Time tracking: Helps ensure accurate hours for hourly employees.
• Workers’ compensation: Required in most states to protect employees.
• Direct deposit and tax filings: Costs associated with processing payroll and filing taxes.
• Paid leave and overtime: Includes PTO, sick days, and overtime pay.
• Bonuses: Extra compensation for performance or incentives.

Payroll summary reports

A payroll summary report provides a big-picture view of your payroll activity, helping you track expenses, stay compliant, and prepare for tax season. These reports typically include:

• Gross and net pay for each employee.
• Taxes withheld, employer tax contributions, and required payroll reports—including Form 940, Form 941, W-2s, and W-3s, for federal, state, and local compliance.
• Overtime, deductions, and any additional earnings (like tips or bonuses).

How to streamline payroll with Homebase

Tracking hours, running calculations, making sure employees are paid on time, and filing taxes—it all adds up. But with Homebase Payroll, the heavy lifting is done for you. Here’s everything we can take off your payroll plate:

 Step 1: Automate timesheet tracking.

Manual time tracking is prone to human error. With Homebase Timesheets, your team’s hours, including break time and overtime calculations are automatically done for you. No manual entries or paperwork required.

Step 2: Approve and sync payroll data.

Catch mistakes before your payroll goes out to avoid costly errors and last-minute payroll fixes. Homebase allows you to quickly review hours, check overtime, and ensure everything’s spot-on. Once approved, the data syncs automatically, meaning no more manual entry, second-guessing, or complicated math.

Step 3: Automate payroll processing.

After approval, Homebase takes care of the rest:

• Automatically calculating wages, taxes, and deductions.
• Processing payments via direct deposit or paper check.
• Providing your team with detailed pay stubs that break everything down.

Step 4: File taxes automatically.

Not exactly a master of organization? Think of Homebase as the Marie Kondo of payroll—keeping everything tidy and in its place. Homebase ensures:

• All payroll records are stored in one spot, so you don’t have to waste time digging through spreadsheets.
• Payments, deductions, and filings are tracked for quick access whenever you need them.
• Payroll reports are auto-generated to keep you on top of labor costs and compliance.

With Homebase Full-Service Payroll, taxes, filings, and paychecks are handled for you, accurately and on time. No guesswork, no late nights. Just payroll made easy. Get started today!

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Frequently Asked Questions

What are the steps to processing payroll?

Processing payroll involves four key steps: 

1. First, you’ll need to gather employee hours and ensure time tracking is accurate to avoid overpaying or underpaying. 

2. Next, calculate gross pay by multiplying hours worked by the hourly rate or applying the appropriate salary calculation. 

3. After that, deduct taxes, benefits, and any other withholdings before running payroll through direct deposit, paper checks, or pay cards. 

4. Finally, you’ll need to file and pay payroll taxes on time and maintain records for compliance.

What are the types of payroll processing?

There are a few ways to process payroll, and the best option depends on your business needs. Some small business owners handle payroll manually, using spreadsheets and calculators to track wages, deductions, and taxes. While this might work for very small teams, it’s time-consuming and leaves room for errors. 

Payroll software is another option, automating calculations, tax withholdings, and direct deposits—saving business owners time and reducing mistakes. Some companies also choose to outsource payroll entirely, hiring an accountant or payroll service to manage everything for them.

How long does it take to process payroll?

Payroll processing typically takes between 2–3 business days, depending on the payment method. Direct deposit is the fastest, while paper checks require manual distribution.

What happens if I make a payroll mistake?

Payroll mistakes happen, but catching them early makes all the difference. Once you spot the error, fix it right away by issuing a revised paycheck or adjusting tax withholdings. Be sure to communicate with your team about any changes to their pay, and if needed, update your tax filings to keep everything on track.

Can I process payroll without software?

Yes, but it requires a lot of manual effort. Running payroll without software means tracking employee hours and wages by hand, calculating taxes and deductions, and ensuring payments are made accurately and on time. 

You’ll also need to handle payroll tax filings yourself to stay compliant with IRS and state regulations. This might work for very small businesses, but it can quickly become overwhelming as your team grows.

What’s the easiest payroll solution for small businesses?

The easiest payroll solution is one that saves time, reduces errors, and ensures employees are paid on time without hassle. Many small business owners choose payroll software like Homebase to automate calculations, tax withholdings, and direct deposits—making the process simple and stress-free.

How do I switch payroll providers?

Switching payroll providers is simpler than it sounds. Start by choosing a provider that fits your needs, then gather essential info like employee details, tax IDs, and payroll history. Once everything’s in place, let your employees know about the change and move forward with the new provider.

With Homebase Payroll, the transition is seamless. Our team handles the data transfer, sets up your payroll, and ensures everything runs smoothly—so you can focus on what matters.