Running Payroll for a Small Business: A Step-by-Step Guide
The seven steps in every payroll run, the setup you only do once, and when to move from doing it by hand to a payroll provider.
Payroll has a reputation for being complicated because the tax and compliance layer genuinely is. The actual process of running a single payroll cycle is a short, repeatable sequence — it just has to be done correctly and on time, every time, with no room for "close enough."
The one-time setup
Before the first payroll run, you need: an Employer Identification Number, state and local tax registrations wherever you have employees, a payroll bank account, each employee's completed tax withholding forms, and a decision on pay frequency (weekly, biweekly, semimonthly, or monthly).
Get this right once, and every subsequent run follows the same seven steps.
The seven steps in every payroll run
1. Confirm hours and time off for the period
For hourly employees, gather actual hours worked. For everyone, confirm any approved time off in the period — unpaid leave reduces gross pay, and paid leave needs to be reflected correctly rather than silently treated as a normal work day. Balance tracking that stays in sync with actual approved requests removes one manual reconciliation step here.
2. Calculate gross pay
Hourly employees: hours worked × rate, plus any overtime owed for hours beyond the applicable threshold. Salaried employees: the agreed period amount, adjusted only for unpaid leave or a mid-period start or end date.
3. Apply pre-tax deductions
Health insurance premiums, retirement contributions, and other pre-tax benefits reduce the amount subject to income tax withholding. Apply these before calculating tax withholding, not after.
4. Calculate tax withholding
Federal income tax, Social Security, and Medicare, based on each employee's W-4 elections and current tax tables, plus any applicable state and local income tax withholding.
5. Apply post-tax deductions
Wage garnishments, post-tax benefit contributions, and anything else that comes out after taxes are calculated.
6. Calculate and pay net pay
Gross pay, minus all deductions and withholding, equals net pay — the amount that actually reaches the employee, whether by direct deposit or check.
7. Remit taxes and file reports
Withheld taxes, plus the employer's own matching share of Social Security and Medicare, must be deposited with the relevant tax agencies on a schedule determined by your deposit frequency — this is not optional and not flexible on timing. Quarterly and annual filings (Form 941, annual W-2s, and their state equivalents) follow on their own separate schedule.
Where small businesses get this wrong
Missing the deposit schedule, not the tax rate. The calculation is usually fine; the deadline is what gets missed. Payroll tax deposits run on a fixed schedule set by the IRS based on your total liability, and being a day late carries a real penalty regardless of the amount.
Misclassifying a worker as a contractor. Paying someone as a 1099 contractor when the actual working relationship meets the legal test for an employee is one of the most consequential and most common payroll mistakes, with back-tax and penalty exposure that can span years once caught.
Treating overtime as optional or negotiable. Overtime for a non-exempt employee is owed by law once the threshold is crossed, regardless of whether it was pre-approved. The overtime calculation itself has its own common mistakes worth checking separately.
Not reconciling PTO against payroll. If time-off records and payroll aren't in sync, unpaid leave can get paid as if it were worked, or an employee's PTO balance can silently diverge from what payroll actually processed.
Manual payroll versus a provider
Running payroll by hand is a reasonable choice for a very small team with simple, consistent pay — a handful of salaried employees with no overtime complexity and few state filing obligations. The honest tradeoff is time and risk: every period takes real hours, and a missed deposit deadline or a misapplied tax table carries a penalty that a provider's automated filing avoids by design.
The switch usually gets triggered by one of three things: a second state to file in, enough overtime or shift variation that manual calculation stops being reliable, or simply enough headcount that the hours spent each period cost more than a provider would.
Setting up a payroll calendar
Whatever frequency you choose, a fixed, published schedule — which dates hours are due, which date payroll is calculated, which date employees are paid — removes the recurring "when do I submit my hours" question and keeps the tax deposit timing predictable. A payroll calendar template lays out a full year on whichever cadence fits your business.
Choosing a pay frequency
Biweekly is the most common choice for small businesses — 26 pay periods a year, predictable dates, and a manageable reconciliation workload. Semimonthly (24 periods a year, typically the 15th and last day of the month) simplifies aligning payroll with monthly benefit deductions but complicates overtime calculation slightly, since pay periods don't line up cleanly with calendar weeks. Weekly payroll is more common in hourly-heavy industries like restaurants and retail, partly because employees in those roles often prefer the shorter gap between paychecks. Whichever frequency is chosen, check your state's minimum pay frequency requirements — several states mandate at least semimonthly pay for at least some categories of employee, regardless of what a business would otherwise prefer.
Recordkeeping that outlasts the pay period itself
Payroll records need to be retained well beyond the period they cover — federal requirements generally call for at least three years for payroll records and two years for the records used to calculate pay, with some states requiring longer. This matters most when a past calculation is disputed or audited; being able to reconstruct exactly how a specific paycheck was calculated, including hours, rate, and any overtime, is the difference between a quick resolution and a drawn-out one.
The short version
Payroll is seven repeatable steps — confirm hours, calculate gross pay, apply deductions, withhold taxes, calculate net pay, pay employees, remit and file — done correctly and on a fixed schedule every period. The complexity that catches small businesses isn't usually the math; it's the filing deadlines and worker classification decisions sitting just outside the calculation itself.
Frequently asked questions
Can a small business run payroll without software?
Yes, below roughly five to ten employees with simple pay structures, though it takes real time each period and the risk of a tax filing error grows with headcount. Most businesses that start manually switch to a payroll provider once the time cost or the tax complexity outgrows a spreadsheet.
What are the basic steps to run payroll?
Confirm hours and any time off for the period, calculate gross pay, apply tax withholdings and deductions, calculate net pay, pay employees, then remit withheld taxes and file the required reports. Every payroll run follows that sequence regardless of company size.
How often should a small business run payroll?
Biweekly (every two weeks) and semimonthly (twice a month, on fixed dates) are the two most common schedules for small businesses. Weekly payroll is more common in hourly-heavy industries; monthly is rare in the US and can create cash-flow-timing complaints from employees.
What happens if payroll taxes are filed late?
Federal and state agencies both assess penalties and interest on late payroll tax deposits, and the penalty percentage typically increases the longer the deposit remains late. This is one of the more common triggers for a small business to move from manual payroll to a provider that handles filing automatically.