Small Business Payroll Best Practices

You’ve got your small business up and running. You’ve hired a few employees to help you out on your business venture. Like starting any business, it’s common to hit a few snags that aren’t really your forte. One of the areas where small business owners usually get stuck with is payroll processing. Out of all the accounting processes in your new business, such as bookkeeping, accounts payable and receivable, and taxes, payroll processing has got to be the most challenging, and something you want to get right the first time. 

Having a smooth payroll system in your business is crucial for its success, and will keep the chances of any bottlenecks in the monthly payroll accounts at bay. However, not paying attention to payroll processing is going to be the worst thing a business owner can do for their company since a payroll system that doesn’t work well often leads to low staff morale and poor productivity. In the following lines we are going to take a look at the payroll process of a small business and the things that small business owners can do to streamline the process.  

The Payroll Process

Just like any other business, the payroll process of a small business will begin after you hire your first staff member. For each pay period, your staff will work and have to be paid according to the hours they’ve put in on the pay rate that’s been agreed upon in their initial agreement or employment contract. But, before you can go ahead and hand over the paycheck to your employees, you are going to need to process a few actions, such as deductions, taxes, and insurance, etc., first. What you’ll be left with after that is the net pay of an employee, which will then be given to the employee in cash of a paycheck. In some states in the United States, employers are required by law to document all their payment information, along with the earnings, deductions and hours worked by their employee on the pay stub for the employee’s record. 

Processing a Payroll Options (Manual, Service or Software)

The time it takes to process a company’s payroll mainly depends on the way it is processed. While some small business owners prefer to carry out the payroll processing manually, others prefer to hire a third-party service or use software. Out of all three processing options, doing it manually is considered to be more time consuming and also increases the chances of errors. The payroll processing is also complicated since it involves tax deductions and the need to take into consideration many other variables. This is why it is recommended that small business owners invest in good payroll software to ensure that their payroll process follows the local laws and correct rules of payroll processing. 

Payroll Processing

Payroll processing isn’t rocket science. There are a few basic steps that need to taken during every payroll period, which is; totaling employee time, calculating resulting earnings and paying the employees. So, how are these three processes carried out? The following lines are going to help breakdown the process for small businesses;

STEP 1: Time Worked

To start the payroll process, small business owners need to first collect information on the time period worked for each of their employees for the specific pay period. Many employers use a time clock or a timekeeping system to collect the time of each of their employees. Carrying out this process manually means spending more time adding up the data on each of the employee’s timecard to determine the number of hours they have worked for a pay period. 

This can take hours of one’s time which could have been used taking care of some other more important business matters. This is why using payroll processing software is recommended even for small business owners, mainly because it allows them to collect employee time-in data and prepare the payroll on the fly. Furthermore, the data from the employee’s timecard can be passed on electronically to the company’s payroll system, which saves you even more time.  

STEP 2: Calculating Deductions 

For calculating employee earnings and deductions, employers can either upload the data electronically or input the data into the payroll system manually. Whether you carry out the payroll process manually or via a payroll system, the process of calculating each paycheck will remain the same. How long the process takes with a payroll system will mainly depend on the type of payroll system being used and the number of factors that are being configured into the system, which varies from business to business. To make sure that you are paying the right amount to your employees it’s important to verify the number of hours that have been worked against the timecard data. Different payroll systems use different ways of verifying this data. 


When it comes to determining employee overtime, small business owners need to look for any employees who have worked more than 40 hours a week so that you can pay them overtime for those extra hours worked. If you are going to use a payroll system, then this function is going to be carried out automatically. The best thing about using a payroll system is that they can carry out each of the processing functions according to the state laws to ensure that your business isn’t breaking any rules or regulations with its payroll processing. 

Gross Pay

When calculating gross pay, employers need to multiply the pay rate times the hours that have been worked by the employee. This will get you the total amount of the gross pay for each individual employee. Small businesses that have more than one employee are advised to find a reliable payroll processing software since it can be a time-consuming process when done manually. Employers also need to make sure that they are using the regular time pay rates for calculating regular hours, and overtime pay rates for calculating overtime hours. However, using payroll processing software can carry out this task automatically. Once you find the regular or straight time pay rates and the overtime pay rates, the two need to be added for to get the amount of total gross pay for every employee. 


Whether processing a payroll manually or with a software, employer’s need to determine certain deductions from the employee’s payroll such as, taxes, benefits or insurance which will need to be deducted from the employee’s gross pay. Needless to say, doing this manually will be a time-consuming process and increase the chances of errors. On the other hand, when using payroll processing software all you have to do is set and verify the correct deductions once, and the software will automatically use the same principles for making the deductions. That said, employers still need to have a quick look at the gross and net pay of each of their employees to ensure that there are no mistakes or no extra zeros being added to their pay stub, or that the employee’s payroll is not missing any deductions. 

Net Pay

With an online payroll system the employee’s net pay is calculated automatically. But, this can also be carried out manually with a spreadsheet. To find the net pay of each of your employees, first you need to take the gross pay and subtract any deductions. The result is going to be the net pay of your employee. The same process is done repeatedly for each of your employees so that you know exactly what amount to pay them. 

STEP 3: Using a Payment Method

The payment method used in employee payroll processing can vary from business to business, but the most commonly used payment methods are cash, direct deposit, payroll check, or in some cases, debit cards. While some states have no issues with companies using any of these payment methods, but not all states approve of some of these payment methods, which is why small business owners need to make sure the payment method they use is in accordance with the local laws. Apart from that, many states in the US require employers to provide a printed pay stub to all of their employees. 

Once the payroll has been processed most employers either write paychecks or forward the employee payment information to their bank which carries out a direct deposit. Funding for the payroll account will mainly depend on whether you are doing the payroll processing manually or with software. 

The reason why small business owners should invest in reliable payroll software is because the software does all the heavy lifting for you. From calculating the time-in data to the gross and net salary of each employee, deductions, benefits and year-end W-2 or 1099 payroll tax documentation can all be conveniently done online thanks to payroll processing software. 

Maintaining Payroll Records

There are no federal law in place that dictates which of the payroll records should be retained. That said, there are certain requirements that all employers need to abide by. For instance, in order to process a payroll, certain information such as the employee’s full name, full mailing address, W-4 tax withholding and other information needs to be recorded by the employer. This is the reason why many employers are in the practice of keeping copies of the pay stubs given to each of their employees. 

Timely Processing of a Payroll

When it comes to the timing for each payroll processing, it is mainly going to depend on the state the business operates in. For instance, some states in the US follow monthly pay cycles, while other states require non-exempt employees to be paid on a weekly basis. Additionally, there are some states that require a pay stub to be provided immediately upon an employee’s termination, which usually requires an off-cycle payroll process. 

Risks to Avoid while Processing a Payroll

While payroll processing software has come a long way over the years, there are still some risks that are involved with running payroll. This is one of the reasons why small business owners need to leave the payroll to software that specializes in payroll processing.

 Here, are the most common mistakes that small business owners can run into if they do not use the correct payroll processing methods;

  • Inaccuracy with Overtime –It is important to make sure that all overtime is being calculated accurately according to the state that the business operates in, and more importantly, in the state where your employee works. For instance, if your office is in Texas, but you have an employee that works out of office in California, then you will have to calculate the overtime pay according to Californian laws. This needs to be checked for errors since a single complaint from a disgruntled employee can lead to a payroll audit and could also lead to a potential fine. 
  • Misclassification of an Employee – As an employer, you should not guess the legal classification of your employee. For example, small business owners need to properly identify their exempt employees and non-exempt employees, or if an employee is a 1099 contractor. 
  • Not Documenting Pay Stud Information – This is another area which should not be overlooked by any small business owner. That’s because in certain states, employers are required to provide printed stubs to their employees. 
  • Timely Payment – In some US states, employers are required by law to provide a final check immediately upon firing an employee. It is important for employers operating in such states to not wait until the next payroll cycle. 
  • Mismanagement of Payroll Records – As an employer, it is your responsibility to make sure all employee information such as employee Social Security numbers and I-9 documents are stored safely. Certain information needs to be retained by the employer. These laws vary on a state and federal level depending on where the business operates from, which means the employers need to stay abreast of these laws.

Ending Note

While the payroll process for small businesses is basic, carrying out the process takes time considering the many calculations and labor laws that need to be followed correctly, which is not feasible for a small company that has just started doing business. Hiring a payroll provider can free a small business owner from having to focus on one area of their business, which is, in this case payroll processing, so that they can manage their business properly.