Step-by-Step Guide on How to Pay Employees in a Small Business

by / ⠀Career Advice / January 31, 2023
man handing over money

Turns out, there is quite a process to pay employees from a small business. While you can’t just give them a pile of cash from the bank, there are tax documents and other items and processes that you need to do first.

This is an important part of the business experience. If you can’t pay your employees then you have no business being in business. With that being said, let’s get started.

Types of Payment

There are three types of payment that businesses give their employees.

  • Hourly Wage
  • Fixed Annual Salary
  • Commission

The most common is, of course, the hourly wage which is based on an hourly rate. The pay is determined by how much they worked during a pay period. Hourly wage is best for part-timers and those who don’t have a consistent schedule.

A fixed annual salary is on their payday, they are given a consistent figure, determined by dividing the salary by the pay periods. These are for corporate jobs.

Finally, there is the commission where they earn a low rate, but get additional pay based on sales goals. You find this kind in services such as retail.

How to Pay an Employee of a Small Business

Now you know the different types, it is time to get into how to pay employees. For starters, choose a payroll system that will be the easiest to use.

Step 1: Collect Paperwork

Employees need to fill out a couple of forms in order to get paid:

  • USCIS 1-9 form for work eligibility.
  • IRS W-4 form for federal tax withholding
  • State form
  • Any other requirements
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Businesses are able to pay via direct deposit. If that is the route you want to go, then you need the employee’s banking information.

Step 2: Calculate the Pre-Tax Pay

You also need to know when you plan to pay your employees. Whether it is weekly or monthly you need to know how to figure out their pay before taxes.

Hourly: Multiply the hourly rate by the employee’s work hours.

Salary: Divide salary by pay periods.

Commission: Pick what the base pay will be.  Next, add commission for the pay period.

Step 3: Taxes

Now, the next step is to use the employee paperwork that you gathered to figure out their pay after taxes. These can include:

  • Federal Income Tax
  • State Income Tax
  • Local Taxes
  • FICA (Federal Insurance Contributions Act)
  • Deductions for things like healthcare and retirement

Step 4: Calculate the Pay

After figuring out the gross pay and the taxes involved, you now need to calculate the employee’s net pay. How you do this is to take the payment and then subtract the withheld amount.

Double-check to make sure all payments are correct.

Step 5: Handout the Paychecks

The next step is that you hand out the paychecks to the employees. If you are going the direct deposit route, then the bank or payroll provider will handle the checks.

Step 6: Filing Taxes

Nope, you are not done with taxes yet. Why? Because you now need to pay the taxes for your employees. To do this, you take the withheld portions of their pay and put those funds into taxes with groups such as the IRS or the state’s tax collectors.

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Depending on the business, the owner will solely pay taxes.

Step 7: Benefits

Remember, not all of the withheld pay goes to taxes. The rest needs to go to the employee’s benefits. These include:

  • Insurances such as Health and Dental
  • Retirement Funds
  • Health Savings Accounts
  • And Much More

Step 8: Update Payroll Records

Finally, the last step is to update your payroll records. There may be a time that you have to face an audit so be sure to keep your payroll records for years. Be sure to update the payroll register to keep it up-to-date and organized.


There is quite a bit that you need to know in order to pay your employees of a small business. You need to determine how much they will make and how you plan on paying them back.

A small business owner also needs to know how to run payrolls and that everything you do is correct. People take their time and money seriously, so be sure that you know what you are doing otherwise you will have a lot of angry employees.

The good news is that you don’t have to go through this yourself. There are many online resources for you to use if you need help. If that doesn’t interest you, ask fellow small business owners on how they do it. Trying to work on something important by yourself can be daunting and it can have serious consequences if you mess it up.

But, as long as you have a payroll service you like and a good head on your shoulders, then what’s the worst that can happen?

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About The Author

Tristan Anderson

Hello! My name is Tristan Anderson and I live in Manhattan, Kansas. I enjoy being in nature and animals. I am also a huge geek who loves Star Wars and has a growing collection.


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