Payroll Made Simple: What Every Small Business Owner Should Know

Kim Bernstein
Aug 11
4 min read

Payroll is one of those business tasks that seems simple on the surface. You pay your employees, withhold the right taxes, and send the money where it needs to go. In reality, payroll has many moving parts, and mistakes can cost both time and money.

Whether you have one employee or a growing team, understanding how payroll works will help you make better decisions for your business.

What Payroll Really Involves

Payroll is more than just issuing checks or sending direct deposits.

A proper payroll process includes:

1. Collecting employee information

Before the first payday, gather Social Security numbers, W-4 forms, and any state-specific tax forms. For contractors, collect W-9 forms.

2. Calculating gross pay

Gross pay is the total amount earned before taxes or deductions. This could include hourly wages, salary, tips, commissions, or bonuses.

3. Determining deductions and withholdings

This step covers federal income tax, Social Security and Medicare taxes, state or local taxes, and voluntary deductions such as health insurance or retirement contributions.

4. Paying employees

Payments can be made through checks, direct deposit, or pay cards. Each method has its own processing time and potential fees.

5. Filing and paying payroll taxes

Employers must send withheld taxes to the IRS and state agencies on time, along with filing regular payroll tax forms such as Form 941 or state equivalents.

6. Keeping records

Payroll records must be kept for a set number of years, including pay stubs, tax filings, and proof of payment. These records protect you in the event of an audit.

Common Payroll Mistakes and How to Avoid Them

Even with the best intentions, payroll mistakes happen. Here are some of the most common, and how you can prevent them.

Misclassifying workers

Confusing employees with independent contractors is one of the biggest payroll pitfalls.

How to avoid it: Review the IRS guidelines for worker classification and check your state’s rules as they may be stricter. When in doubt, consult with a payroll or tax professional.

Missing deadlines

Late filings for payroll taxes can result in hefty penalties.

How to avoid it: Create a payroll calendar with every filing deadline marked. Better yet, use a payroll service that automatically files and pays your taxes.

Incorrect tax rates

Federal, state, and local tax rates can change without much notice.

How to avoid it: Subscribe to IRS and state tax agency updates or choose a payroll platform that updates rates automatically.

Not keeping proper records

Missing or incomplete payroll records can cause major issues in an audit.

How to avoid it: Store payroll records securely for at least three to four years, and make sure they are organized by pay period.

Improper S-Corp payroll handling

If you own an S-Corp, you are required to pay yourself a reasonable salary before taking any distributions. Many owners either skip this step or set the salary too low.

How to avoid it: Document how you determine your salary. Use IRS guidance, industry benchmarks, and your company’s financials as support. This is an area where a tax professional can save you from potential audit trouble.

Payroll Options for Small Businesses

Do it yourself

Best for very small businesses with a low number of employees. You must stay on top of tax rates, deadlines, and compliance.

Hire an in-house payroll specialist

Makes sense for larger companies but may not be cost-effective for smaller ones.

Use a payroll service provider

Automates payroll calculations, tax filings, and direct deposits. Saves time, reduces errors, and improves compliance.

Why I Recommend Gusto for Small Businesses

In my experience, Gusto makes payroll much simpler. It calculates taxes automatically, files necessary forms, and keeps you compliant with federal and state laws. Employees can log in to view their pay stubs and year-end forms, which reduces questions and admin work.

If you want to see how it works, you can sign up through my partner link:

👉 Sign up for Gusto

Want to Learn More About Payroll for S-Corps and Beyond?

Payroll is just one piece of running a financially healthy business. If you are an S-Corp owner, payroll is directly tied to your reasonable compensation requirements and overall tax strategy.

To help you learn more, check out these free resources:

S-Corp Salary Calculator - Estimate your reasonable compensation as an S-Corp owner.
What Is Reasonable Compensation for S-Corp Owners? - Understand how to determine the right salary.
LLC vs S-Corp: Which One Is Right for Your Business? - Compare structures to see which best fits your goals.
Is Your Business Ready for an S-Corp Election? - Learn the signs it may be time to make the switch.

We also have an entire library of resources on our KB2 Bookkeeping & Tax blog covering payroll, tax planning, and small business tips to help you avoid costly mistakes.

Using the right payroll system is one of the easiest ways to protect your business, keep your team happy, and stay on the right side of the IRS.

Ready to simplify payroll and protect your business?

Whether you are just starting payroll or want to improve your current process, KB2 Bookkeeping & Tax can help you set it up correctly, stay compliant, and save time. We can even help you navigate S-Corp payroll requirements so you avoid costly mistakes.

📞 Call us at 512-843-2320

📧 Email us at info@kb2bookkeeping.com

Or get started with our preferred payroll platform: Sign up for Gusto