How Does Small Business Payroll Work?

Hiring employees can be a significant shift for small business owners who have mostly operated on their own, there needs to be a budget in place, and a plan of action to prepare for this. Managing payroll can often be a time-consuming process for owners who aren’t used to navigating accounting software and tracking employee data. Understanding your local tax laws will be necessary for proper deductions and withholdings, too.

Outsourcing Payroll

Outsourcing payroll can save you time and money. Some small businesses may prefer to use proprietary accounting and payroll software to manage this aspect of their business. While that is an option, freeing up time and resources to grow the company should be one’s priority. Hiring an online payroll service to manage this will be an option as you grow.

Managing Payroll In-House

Not every business owner is ready to pay a company to manage its payroll; after all, it is another expense. If you plan to keep payroll and accounting in-house, there are some things you should consider so you can maximize your time and resources. If you are going to hire someone, you should hire an accountant or bookkeeper who knows money management. Finding someone with experience will help minimize errors and keep payroll running on time. Most accountants and bookkeepers should be familiar with small business accounting software like Xero. It may be worth discussing software options with them before purchasing, as they may have a preference for a specific accounting program.

Payroll Systems

Some small businesses still operate with handwritten checks and spreadsheet accounting practices. In this digital age, keeping your records online and in the cloud is the ideal solution for any business. Maintaining records in the cloud will prevent a setback should you experience theft or a fire at your place of business. Having the ability to share this information with a remote tax specialist will help expedite your yearly tax return.

A payroll system to track and organize employee information, generate returns, produce pay slips and print necessary forms for the staff should be implemented.

Fully functional payroll systems come in a couple of main categories for small enterprises:

  • cloud-based systems
  • locally installed payroll software

Regardless of the option you choose, one of them will be needed for your business to operate. If you manage your accounting in another piece of software, find a payroll service that can facilitate the migration of that data from one application to another.


Tax laws and payroll information are always changing. Keeping your software up to date with the latest version will be necessary as add-on features are developed for the software. Keeping up with current versions of the software will also be required for security reasons. Manage payroll yourself until you can afford to outsource.




Updated October 15, 2020

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