--- title: "How to Run Payroll for a Small Business" description: "A plain-English guide to running payroll: gross vs net pay, what to withhold, pay frequencies, record-keeping requirements, and the mistakes that cost real money." canonical: https://incomewise.app/guides/small-business-payroll published: 2026-08-02 updated: 2026-08-02 reading_minutes: 8 keywords: ["how to run payroll","small business payroll","payroll for small business","gross vs net pay","payroll records","payroll expense","employee payroll tracking","payroll software small business"] publisher: "IncomeWise (Income Split Planner)" license: "Free to quote with attribution and a link to the canonical URL" --- # How to Run Payroll for a Small Business Payroll is the largest expense in most small businesses and the one with the least tolerance for error. Pay someone late and you have a morale problem; get a withholding wrong and you have a regulator problem. The mechanics, though, are simpler than the anxiety around them suggests — it's arithmetic plus a filing habit. ## Gross, deductions, net — in that order Every payslip is the same four-line calculation. Gross pay is what the employee earns for the period. Add any bonus or commission. Subtract tax withheld and any other deductions — pension or retirement contributions, health insurance, student loan repayments, court orders. What's left is net pay: the number that actually lands in their account. The trap is treating net pay as your cost. It isn't. Your cost is the gross figure plus any employer-side contributions you owe on top — the withheld tax is still your money leaving the business, it just goes to the tax authority instead of the employee. Book the gross amount as your payroll expense, or you will systematically overstate your profit. ## Choose a pay frequency and don't change it Monthly is the simplest to administer and the most common outside the US. Bi-weekly (26 pay periods a year) is the US default and is kinder to employees managing rent and bills. Weekly suits shift and trade work where hours vary. Whichever you pick, the cost of switching later is high — employees plan around pay dates, and a transition month leaves someone short. Decide once, at hiring, and write the frequency into the contract. ## What you must withhold The specifics are jurisdictional and change, so this is the shape rather than the numbers: income tax withheld at source, social security or national insurance contributions (usually with an employer share on top), and any statutory pension enrolment. On top of those sit voluntary deductions the employee has agreed to. Two rules hold almost everywhere. First, withheld money is not yours — it's held in trust and remitted on a schedule, and spending it is the single fastest way to turn a cash-flow squeeze into a legal problem. Second, the employer share is a real cost that never appears on the payslip, so budget headcount at total cost, not at salary. ## Employee or contractor? Getting this wrong is expensive and the penalties are retrospective. The test varies by country but the substance is consistent: if you control when, where and how the work is done, supply the tools, and the person works largely for you alone, they're an employee regardless of what the contract calls them. Contractors invoice you and handle their own tax; they belong in your expenses as a supplier cost, not in payroll. If you're genuinely unsure, get an hour of professional advice — it is dramatically cheaper than a reclassification assessment. ## Keep records that outlive the employee Payroll records are a legal requirement in most jurisdictions, typically for three to seven years, and they must survive someone leaving. That's the part homegrown spreadsheets get wrong: delete the departed employee's tab and the history goes with them. Store the employee's name as recorded on the payslip alongside the run itself, so the record stands on its own. IncomeWise's payroll module denormalises the name onto each run for exactly this reason — removing someone from your active roster never erases their pay history. - Period covered, and the date paid. - Gross pay, each deduction itemised, and net pay. - Employee name and role as at the pay date. - Employer contributions paid on top. ## Make payroll hit your P&L automatically The most common bookkeeping gap in a small business is payroll that's paid but never recorded as an expense. The money leaves the bank, the payslip is filed, and the profit and loss statement quietly shows a business that looks 30% more profitable than it is. Whatever system you use, the payroll run and the expense entry should be one action, not two. In IncomeWise, recording a payroll run writes the matching Payroll expense in the same database transaction — the two either both exist or neither does, so the P&L can't drift out of step with the payslips. ## The four mistakes that actually cost money None of these are exotic. All four are common enough to be worth naming. - Spending withheld tax during a cash squeeze, intending to top it back up. - Booking net pay as the payroll expense, which overstates profit every single month. - Classifying an employee as a contractor to avoid contributions. - Paying a bonus without recording it, so the year-end reconciliation never balances. ## Frequently asked questions ### What's the difference between gross and net pay? Gross pay is total earnings for the period before anything is taken out. Net pay is what the employee actually receives after tax withholding and other deductions. Your business cost is the gross figure plus any employer-side contributions — never the net figure. ### How do I record payroll in my books? Record the gross amount plus any bonus as a Payroll expense, dated the pay date. Withheld tax is part of that expense — it's your money leaving the business, just routed to the tax authority rather than the employee. Recording only net pay overstates your profit every month. ### How often should I run payroll? Monthly is simplest to administer and standard outside the US; bi-weekly is the US norm and easier for employees budgeting around rent. Weekly suits variable-hours shift work. Pick one at hiring and keep it — switching leaves someone short in the transition month. ### How long do I have to keep payroll records? Typically three to seven years depending on jurisdiction, and they must survive the employee leaving. Keep the period, pay date, gross, each deduction, net, and the employee's name as recorded at the time. ### Do I need payroll software for two employees? Not necessarily dedicated payroll software, but you do need somewhere that stores each run permanently and posts the expense to your books. IncomeWise's Business workspace records payroll runs per employee and logs the matching Payroll expense automatically, as part of the same $3/month subscription that covers personal budgeting. ## Related guides - [Small Business Bookkeeping: A Practical Guide](https://incomewise.app/guides/small-business-bookkeeping) - [How to Invoice Clients and Actually Get Paid](https://incomewise.app/guides/how-to-invoice-clients) - [Inventory Management for Small Businesses](https://incomewise.app/guides/inventory-management-small-business) --- Published by [IncomeWise](https://incomewise.app/) — a free multi-currency budgeting app with an AI advisor, personal and business workspaces, and no bank login required. Premium is $3/month and unlocks both workspaces. Canonical HTML version: https://incomewise.app/guides/small-business-payroll