A Beginner's Guide to Running Payroll for Your Small Business

Running payroll for the first time can feel overwhelming. Between tax calculations, deductions, filing deadlines, and employment law, it is easy to wonder how anyone manages it without a dedicated finance team. The good news is that payroll is a process, and like any process, it becomes manageable once you understand the steps involved.

This guide walks you through the fundamentals of running payroll for a small business, whether you have one employee or fifty.

What does "running payroll" actually mean?

At its simplest, running payroll means calculating how much each employee should be paid, making the necessary deductions, and ensuring the correct amounts reach the right people — including your employees, your tax authority, and any pension or benefits providers.

A typical payroll cycle involves:

Calculating gross pay (salary or hours worked multiplied by the hourly rate)
Subtracting tax withholdings based on each employee's tax code or filing status
Subtracting other deductions such as pension contributions, loan repayments, or benefits
Calculating employer contributions (social security, national insurance, pension matching)
Issuing net pay to employees
Reporting and remitting deductions to the relevant authorities

Each of these steps has rules, and those rules vary depending on where your business operates. But the overall structure is the same almost everywhere.

Step 1: Register as an employer

Before you can pay anyone, you need to register with your local tax authority as an employer. This process varies by country but generally involves providing your business details, bank information, and agreeing to report payroll data on a regular basis.

In most jurisdictions, you will receive an employer reference number or tax identification number that you will use for all payroll-related filings. Keep this safe — you will need it every pay period.

Step 2: Collect employee information

Every new employee needs to provide certain information before their first payday. At a minimum, you will need:

Full legal name and address
Tax identification or social security number
Tax code or withholding allowances
Bank account details for direct deposit
Pension or retirement enrolment preferences
Any existing deduction orders (such as student loan repayments or court orders)

Getting this information upfront avoids delays when the first pay run arrives. Many businesses use a new starter form or digital onboarding process to collect everything in one go.

Step 3: Choose your pay frequency

Most businesses pay employees on one of four schedules:

Weekly: Common in hospitality, retail, and manual labour industries. Employees appreciate the regular cash flow, but it means more payroll runs for you.
Fortnightly (bi-weekly): A middle ground that reduces administrative work while still paying employees relatively frequently.
Monthly: The most common schedule for salaried employees. One payroll run per month keeps things simple.
Four-weekly: Sometimes confused with monthly, but this creates 13 pay periods per year rather than 12.

The right choice depends on your industry norms, employee expectations, and how much administrative time you can afford. There is no legal requirement in most places to pay on a specific frequency, but whatever you choose should be clearly stated in each employee's contract.

Step 4: Calculate gross pay

Gross pay is the total amount an employee earns before any deductions. For salaried employees, this is simply their annual salary divided by the number of pay periods. For hourly workers, it is the number of hours worked multiplied by their hourly rate.

Do not forget to include:

Overtime pay (usually at a premium rate for hours beyond the standard threshold)
Bonuses or commissions
Holiday pay or paid time off
Statutory payments such as sick pay or parental leave pay, if applicable

Accurate timekeeping is essential for hourly workers. If your employees track their hours manually, you are relying on the accuracy of paper timesheets or spreadsheets. Modern timesheet software can automate this process, reducing errors and disputes.

Step 5: Make deductions

This is the part that trips up most new employers. Deductions fall into two categories: mandatory and voluntary.

Mandatory deductions

These are required by law and typically include:

Income tax: Calculated based on the employee's earnings and their tax code or withholding status. Tax tables or software calculate the correct amount automatically.
Social contributions: Depending on your country, this might be called national insurance, social security, or payroll tax. Both the employee and the employer usually contribute.
Court-ordered deductions: Some employees may have court orders requiring you to deduct money from their pay, such as child support or debt repayment orders.

Voluntary deductions

These are agreed between you and the employee:

Pension contributions: In many countries, employers are required to offer a workplace pension. Employees contribute a percentage of their pay, and employers match or top up.
Health insurance premiums: If you offer employer-sponsored health coverage, the employee's share is deducted from their pay.
Salary sacrifice schemes: Arrangements where employees give up a portion of their salary in exchange for a non-cash benefit, such as additional pension contributions or a company car.

Step 6: Pay your employees

Once you have calculated the net pay (gross pay minus all deductions), it is time to pay your people. Most businesses use direct bank transfers, which are fast, reliable, and create an automatic paper trail.

Make sure every employee receives a payslip — this is a legal requirement in most jurisdictions. The payslip should clearly show:

Gross pay
Each deduction and its amount
Net pay
Year-to-date totals for pay and deductions

Good payslips reduce employee queries and protect you in the event of a dispute.

Step 7: Report to your tax authority

After each pay run, you need to report the details to your tax authority. In many countries, this reporting happens in real time — meaning you submit data on or before each payday.

The report typically includes:

Each employee's gross pay, tax deducted, and other deductions
Employer contributions
Any new starters or leavers

Late or inaccurate reporting can result in penalties, so this step is non-negotiable. Payroll software handles this automatically, which is one of the strongest arguments for using it.

Step 8: Keep records

Payroll records should be kept for a minimum number of years as required by your local laws — typically three to seven years. Records should include:

Payslips and pay data for every employee
Tax filings and submissions
Employee contracts and personal information
Details of any deductions, including the authority for making them
Records of any statutory payments made

Good record-keeping protects you during audits and makes it much easier to resolve employee queries.

Common payroll mistakes to avoid

Even experienced employers make payroll errors. Here are the most common ones:

Missing deadlines: Late tax filings almost always attract penalties. Set reminders or use software that files automatically.
Incorrect tax codes: Using the wrong tax code means deducting too much or too little tax. Check codes whenever they change.
Forgetting about benefits in kind: If you provide benefits like a company car or private health insurance, these may need to be reported and may affect tax calculations.
Not accounting for statutory payments: Sick pay, maternity pay, and other statutory entitlements have specific calculation rules. Do not guess — check the current rates.
Manual errors: Spreadsheet payroll is error-prone. A misplaced decimal can mean an employee is overpaid or underpaid, and correcting it is always more work than getting it right the first time.

Should you use payroll software?

If you have more than a handful of employees, the answer is almost certainly yes. Payroll software automates tax calculations, generates payslips, handles filings, and keeps records — all things that are time-consuming and error-prone when done manually.

The best payroll systems integrate with your wider business tools. When your payroll is connected to your accounting, timesheets, and HR records, you eliminate double entry and reduce the risk of data falling out of sync.

Modern platforms like Relentify are designed to bring payroll, accounting, and workforce management together in a single system, so you are not juggling multiple subscriptions and manual data transfers between tools.

Getting started

Running payroll does not have to be complicated. Start by understanding the basic cycle — calculate, deduct, pay, report, record — and build from there. Choose a pay frequency that works for your business, collect the right information from your employees upfront, and invest in software that takes the manual work off your plate.

The most important thing is accuracy. Your employees rely on being paid correctly and on time, and your tax authority expects accurate reporting. With the right setup, payroll becomes a routine process rather than a monthly source of stress.