How to Pay Employees in a Small Business

Determining how to pay your employees is overwhelming, considering everything it involves, such as dealing with taxes, tracking hours worked, and staying abreast of the latest labor laws. What’s more, a small business can rarely afford to outsource the task to a payroll expert.

It’s surprisingly easy to pay employees as long as you follow a few simple steps.

payroll laptop hands 

Prepare payroll forms from the start

Don’t leave payment to the last minute. Preparation should begin before the first week or month has lapsed. Ideally, the onboarding phase should include obtaining your new team member’s respective forms and tax documents.

Typically, you need to collect the I-9 and W-4 forms during employee onboarding. The former checks for employment eligibility, and the latter details the federal income tax to withhold. Some states have specific forms.

In addition, you need bank details or direct deposit form information if you plan to pay your staff via direct deposit.

Make sure you collect all of these documents as soon as possible so you avoid any undue delay. Postponing payment at the beginning leaves a poor first impression of you as an employer.

Use time trackers to calculate hours worked

The next step is to calculate the pre-tax payment accurately. This is the amount before taxes, also called the gross pay. Typically, you calculate it by entering your employee’s rate in an hourly salary calculator and multiplying it by the number of hours they have worked.

You should be tracking when they start work, finish work, and any breaks in between. Your software should account for any extra hours worked, including overtime, vacation time, sick days, or additional shifts.

Calculate deductions

Go back to the forms you collected in the first step to establish the tax deductions from your employees’ paychecks. In general, you should withhold income taxes, benefits, and payroll taxes. Income taxes include local, state, and federal taxes. Benefit deductions include retirement benefits and health insurance payments. Payroll taxes include Medicare, Social Security, and other related taxes.

You have the net pay after deducting the above amounts out of your employees’ pre-tax payments. This is what they ultimately take home.  

Distribute paychecks

Your payroll process determines how you will distribute paychecks. Some companies still pay their staff with physical checks. However, direct deposit is becoming standard, including among small and medium-sized enterprises.

Everything up to this point needs to take place before your employees’ payday. Don’t leave things until the last minute to avoid delaying payments. Late payments are illegal, among other things. In states like California, the fines for paying your employees late are quite hefty.

Distribute payroll taxes

You don’t keep the taxes you deduct from your employees’ paychecks – you’re just withholding them for the benefit of the federal, state, or local tax agencies. You need to distribute these sums accordingly. The state tax agency gets state taxes, the IRS gets any federal tax you’ve withheld, and so on. The employer pays some payroll taxes, like SUI and FUTA.

Maintain payment records and documents, it’s the law

You must keep all payroll documents and records easily accessible and organized after concluding a payroll period. You will need to check these records down the line.

What’s more, the law obligates you to hold on to payroll records and documents. The Fair Labor Standards Act regulates overtime, minimum wage, records, and youth employment requirements affecting workers in the private sector. This law mandates employers to store records for a minimum of three years. These include schedules, time cards, and any pay deductions or additions. If you ever face an audit, you’ll need all of this information on hand.


Setting up an efficient payroll system is crucial for the success of your small business. It not only ensures that you’re complying with legal requirements but also plays a key role in keeping your employees satisfied. While it may seem daunting at first, with the right tools and a bit of diligence, you can establish a payroll system that works smoothly for you and your team. And remember, when in doubt, don’t hesitate to seek professional advice to navigate the more complex aspects of payroll management.

FG Editorial Team
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