How to Do Payroll: The Ten Rules Every Small Business Owner Should Know
Many new employers start with passion, not paperwork. You’re great at what you do, whether that’s fixing cars, caring for patients, or building homes, but when payroll comes around, it can feel like a maze of taxes, forms, and deadlines.
This guide walks you through the ten essential rules for how to do payroll correctly, avoid costly mistakes, and stay compliant, so you can focus on what matters most: your people.
Rule #1: Know the Payroll Rules Before You Start
Payroll isn’t just about clicking “submit.” It’s a regulated process with federal, state, and local compliance requirements. Every employer is responsible for correct tax withholdings, filings, and payments.
Mistakes can lead to fines, audits, or worse, so before you run that first payroll, learn your state’s requirements for registration, frequency, and reporting.
💡 Tip: Bookmark the IRS Employer’s Tax Guide and your state labor department’s payroll resources.
Rule #2: Open Payroll Tax Accounts Before Paying Employees
You’ll need a Federal Employer Identification Number (FEIN) and state accounts for unemployment and withholding before processing payroll.
Running payroll without these accounts in place often leads to late deposit penalties or “suspense accounts” where tax payments get lost.
👉 Nonprofits and contractors: Check out our guides on nonprofit payroll compliance and certified payroll for construction.
Rule #3: Workers’ Compensation Is Required, Not Optional
Most states mandate workers’ compensation insurance for all employers. Skipping it isn’t worth the risk, fines, legal exposure, and denial of future coverage can follow.
Opt for “pay-as-you-go” workers’ comp options to maintain coverage and manage cash flow effectively.
Rule #4: Collect Employee Documents on Day One
Before your employee’s first paycheck, you need:
- Form W-4 for tax withholdings
- Form I-9 for employment eligibility
Missing or incomplete forms mean payroll delays and compliance issues.
💡 Pro Tip: Use an employee onboarding system to digitally collect and store all required documents securely.
Rule #5: The 10% Rule – Understand Employer Taxes
Your employee’s gross pay isn’t your total cost. Employers pay roughly 10% extra in taxes, including:
- Social Security (6.2%)
- Medicare (1.45%)
- Federal and state unemployment taxes
Plan your budget accordingly, this is the real cost of payroll.
Rule #6: Never Use Withheld Taxes as Cash Flow
Employee withholdings aren’t your funds. Failing to deposit taxes on time is considered theft and can lead to severe penalties, public listing on state “tax offender” sites, or even criminal charges.
Always separate payroll tax liabilities and remit them promptly.
Rule #7: Define Your Workweek and Overtime Rules
Choose a consistent pay frequency, weekly or biweekly is best for simplicity. A workweek is any seven consecutive days and defines when overtime (1.5x pay) kicks in.
Avoid confusion with semi-monthly pay schedules; they often misalign with overtime calculations.
Rule #8: File Payroll Reports Quarterly and Annually
Stay organized with reporting:
- Quarterly: IRS Form 941 and State Unemployment Reports
- Annually: W-2s, W-3, and Federal Form 940
Mark your calendar for March 31, June 30, September 30, and December 31.
Automation through a small business payroll platform simplifies filings and prevents missed deadlines.
Rule #9: Get Employee Authorization for All Deductions
Every voluntary deduction, uniforms, benefits, training, requires written employee consent.
Always keep signed authorization forms or digital acknowledgments on file to stay compliant with wage deduction laws.
Rule #10: Keep Payroll on a Consistent Schedule
Payroll must run on a regular, recurring schedule. States can fine employers who delay paychecks, even for cash flow reasons.
If your revenue cycles fluctuate (like restaurants or retail), schedule payroll right after peak income days to maintain compliance and consistency.
Final Thoughts: Payroll Done Right Starts with People
Payroll isn’t just math, it’s trust. Every paycheck reflects your promise to your employees.
At PeopleWorX, we combine powerful technology with real human support, helping small businesses handle payroll confidently and compliantly. You’ll never be routed to a call center, just a dedicated payroll expert who knows your business.
Need help learning how to do payroll for your business? Speak with a PeopleWorX payroll expert and take the stress out of payday.