Payroll for a small business, step by step

Payroll for small business is the routine of working out what each person is owed, taking off what the law requires, paying them, and then paying the tax office and everyone else who is owed a share. The routine is the same in most countries. The rates, deadlines and forms are not, so this guide covers the steps and the checks, and leaves the numbers to your tax office or accountant.

Before the first pay run

Set these up once, in this order, and the monthly work becomes small.

1. Register as an employer where your country asks for it. This is usually a separate registration with the tax office or social security body.
2. Decide who is an employee. Employees go through payroll. Contractors send invoices. Getting this wrong is expensive in many countries, so use the official test, not a guess.
3. Collect the details for each person. Full name, address, tax number or national ID, bank account, start date, contract, pay rate and any tax code or form your country uses.
4. Choose a pay schedule. Weekly, every two weeks, or monthly. Some countries fix this by law or by contract. Pick one and keep it, because every change creates extra work.
5. Open a clear route for the money. Many owners keep a dedicated account for wages and tax, so the money for payroll is never spent on something else.

How one pay run works

Every pay run follows the same line, from hours to a payment.

1. Collect the inputs. Hours worked, overtime, days off, bonuses, expenses to pay back, and any change since last time such as a raise or a new bank account.
2. Work out gross pay. Salary for the period, or hours times rate, plus extras.
3. Take off the deductions. Income tax, social contributions, pension contributions, and anything the person agreed to, such as a loan repayment. The rules and rates come from your country.
4. Add the employer costs. Contributions and levies the employer pays on top. They do not appear in the person's net pay, but they are part of what the person costs you.
5. Get net pay. This is the amount that reaches the person's bank account.
6. Approve. Someone other than the person who prepared the run looks at it and signs it off.
7. Pay people and pay the authorities. Wages go to staff. Tax and contributions go to the tax office, on their deadline.
8. Give out payslips and file the reports. Each person gets a payslip. Your country may also want a report per period or per year.
9. Keep the records.

The checks that catch mistakes

Most payroll errors are not clever. They are a missing bank detail, a rate typed with an extra zero, or a leaver who was paid again. A short check before approval catches nearly all of them.

• Compare with last time. Any line that moved by a lot needs an explanation: a bonus, extra hours, a raise.
• Look for gaps. A person with no bank details, no pay set up or no hours entered.
• Check new joiners and leavers. Joiners are on the run from their start date, leavers are not on it after their last day, and final pay includes unused leave if your rules say so.
• Match the totals. The total net pay plus the tax and contributions should equal the total cost you expect.
• Two people. The person who prepares the run should not be the one who approves it. In a very small business that may be the owner and the bookkeeper, which is still better than one pair of eyes.

Who does the work: you, an accountant or software

Whatever you choose, you remain responsible as the employer. Using a provider moves the work, not the responsibility.

Payroll in nerix

nerix has a Payroll place for Business workspaces, built on the People records, and it follows the line above. You enter the first day, last day and pay day of the period, then calculate. Lines that need a look are marked, for example no bank details, no pay set up, missing hours or a big change from last time. A different person than the preparer must approve the run, and then it is finalised. A payslip shows pay, deductions and employer costs, and an employee sees only their own.

Two limits are worth knowing before you rely on it. First, nerix makes the numbers, the payslips and a bank file in XML or CSV that you upload to your bank yourself. It never pays anyone, and "Mark as paid" is only a note that a person paid. Second, the rules for deductions come from pay rule packs for a country, which go through the states Draft, Needs review, In use and Retired, so a person on your side reads and accepts the rules before they are used. Treat that review as part of payroll, and ask your accountant to look at the first run. Payroll data is private, with separate permissions to read, run, approve, export and manage. See the People and Money pages for the rest of the family, and Pricing for which plans include them.

Common mistakes to avoid

• Treating an employee as a contractor to save paperwork. The cost of putting it right can be far greater than the saving.
• Paying late to the tax office. Penalties and interest usually come on top. Put every deadline in a calendar the day you register.
• Mixing business and personal money. It makes the books hard to read and the tax return harder.
• No written record of changes. A raise agreed in a corridor and never written down is a dispute waiting to happen. Put every change in writing and date it.
• Forgetting the leave balance. Unused leave can be owed at the end of a job. Keep a clear record next to payroll, as in our guide to time off tracking.
• Sharing pay with people who do not need it. Payslips and pay rates are private. Give access only to the people who run payroll.

Records to keep

For each pay run, keep the inputs, the calculation, the approval, the payslips, the proof of payment and the filings. For each person, keep the contract, the pay history and the tax forms. Many countries ask for several years, and some ask for longer for pension or tax. Ask your tax office what applies to you, then set a reminder to delete what is past its time.

If you are also tracking costs staff paid for themselves, read expense tracking for small teams so claims reach payroll or the books in a clean way.

The short version

Payroll is a loop: collect inputs, work out gross to net, check, approve, pay, file and keep records. Set up the employer registration and staff details once, check each run against the last one, and never let one person prepare and approve alone. Choose a spreadsheet, an accountant or software by how many people you pay and how complex the rules are, and remember that you stay responsible either way.