Payroll for Small Businesses: A Complete Guide

Jun 3

Running payroll is one of the most critical—and often complex—tasks for small business owners. Whether you have a handful of employees or a growing team, ensuring accurate and timely payments while staying compliant with tax laws is essential.

Many small business owners wonder: Do I need payroll software? Can’t I just pay employees through CashApp or Zelle? What makes payroll so complicated?

In this guide, we’ll answer these questions and explore why hiring a bookkeeper to manage payroll can save you time, money, and stress. So let’s get straight to the most common questions, starting with:

Do I Need Payroll Software?

If you have employees, the short answer is yes. While it’s technically possible to process payroll manually, payroll software simplifies the process and reduces errors. Here’s why:

1. Automation Saves Time

Calculating wages, taxes, and deductions manually is time-consuming. Payroll software automates these calculations, ensuring accuracy and freeing up your time to focus on growing your business.

2. Tax Compliance Made Easier

In my opinion, this is the most critical reason to use payroll software. Payroll taxes are complicated, with federal, state, and sometimes local requirements. Software automatically withholds the correct amounts and files tax forms (like W-2s and 941s) on your behalf. Remember that as an employer, it is your responsibility to ensure that these taxes get paid, so it is worth investing to make sure things are done correctly.

3. Direct Deposit & Payment Tracking

Most employees expect direct deposit, and payroll software facilitates this seamlessly. It also keeps records of all payments, making it easier to resolve discrepancies or provide documentation if audited. Without payroll software, you’ll be responsible for personally calculating employee pay and delivering paychecks individually.

4. Employee Self-Service Portals

Many payroll systems allow employees to access pay stubs, tax forms, and PTO balances online, reducing administrative work for you. In my experience, employees like having software that can give them access to important documents without having to go to their employer.

5. Time Tracking and Benefits

If you pay any employees hourly, payroll software allows you to easily calculate wages and produce reports for set time periods. It can also usually integrate with dedicated time tracking software so that you don’t even have to enter the hours, just approve them! And if you have benefits like PTO that are based on a number of hours worked, then payroll software may be able to track those benefits for you.

Bottom Line: While you can run payroll manually, software minimizes errors, ensures compliance, and saves time.

Why Can’t I Just Pay Employees Through CashApp or Zelle?

It might seem convenient to send employees money via CashApp, Venmo, Zelle, etc., but this approach comes with major risks, such as:

1. Tax & Compliance Issues

Payroll isn’t just about sending money—it’s about withholding and remitting taxes correctly. Cash apps don’t automatically:

Withhold federal/state income tax
Deduct Social Security & Medicare (FICA)
Handle unemployment contributions

If you don’t report these payments properly, you could face penalties from the IRS or state agencies.

2. Lack of Documentation

CashApp and Zelle transactions don’t generate pay stubs or year-end tax forms (like W-2s). Employees need these for their own tax filings, and you need them for compliance.

3. No Record of Wage Deductions

If employees have benefits (like health insurance or retirement contributions), payroll software tracks these deductions. Cash apps don’t.

4. Potential Legal Risks

Paying employees "under the table" (even accidentally) can lead to audits, fines, or legal trouble. The IRS and state labor boards require proper payroll records.

Bottom Line: Cash apps are great for personal payments, but they don’t replace a real payroll system for businesses.

What Factors Can Make Payroll Complicated?

Payroll isn’t just about cutting checks—it involves multiple moving parts that can trip up small business owners. Here are some common complications:

1. Multiple Tax Jurisdictions

If your employees work in different states (or cities with local taxes), you may need to withhold taxes for each location. Some states have unique rules, like:

Different minimum wage laws
Required paid sick leave
Specific tax withholding forms

2. Benefits & Deductions

If you haven’t managed payroll before, you might have never thought about how many factors can determine a paycheck. But every single paycheck needs to account for many possible factors including:

401(k) contributions
Health Savings Accounts (HSA) contributions
Employee advances
Splitting deposits between multiple bank accounts
Legally mandated wage garnishments
Deductions for health insurance, dental insurance, etc.
Overtime
Taxes
& More!

A single paycheck can get complicated fast! You need a dedicated payroll software to make sure that things don’t get out of hand.

3. Insurance Issues

Some types of insurance premiums, specifically Workers’ Compensation (WC) insurance premiums, are typically determined by the number of hours that each employee worked. The premium is also dependent on the WC classification code for each employee. Payroll software can automatically calculate and pay WC insurance premiums on your behalf. On top of that, WC plans often require an audit at the end of their term. For the audit, you will need to provide specific forms and reports based on payroll. Payroll software makes this process far easier than it would be otherwise.

4. Employee Turnover & On-boarding

Every new hire requires tax forms (W-4, I-9), and departing employees need final paychecks (sometimes immediately, depending on state laws). Missing a step can result in penalties. Payroll not only makes it easy to pay these employees, but also acts as a one-stop digital storage center for this kind of sensitive employee information.

Bottom Line: Payroll is more than just paying employees—it’s a compliance-heavy process that requires attention to detail.

So What Software Should I Use?

This is entirely up to you. As a bookkeeper, I can work with clients using any payroll software. I encourage clients to shop around and determine what works best for them. Prices change, so look into what the best deals might be. However, I personally have the most experience with ADP, Paychex, and QuickBooks Payroll. I’ll give a quick overview of each.

1. ADP

This is a reliable option for sure. The software isn’t particularly intuitive but the customer service is top-notch in my experience. Just be wary as the sales team can be somewhat pushy.

2. Paychex

I really like the user interface for Paychex. However, I have spent a lot of time on the phone with Paychex customer support in the past, and I have to admit it can be a frustrating experience. It often feels like one department has no ability to communicate with the other departments, so you may need to be persistent in contacting them to get something resolved.

3. QuickBooks Payroll

The best thing about QB payroll is definitely the integration capabilities. It not only syncs straight to QuickBooks, but it also comes with QuickBooks Workforce (aka QuickBooks Time) which is a great time tracking tool for hourly employees.

A previous downside of using QB payroll was that it would file taxes quarterly, instead of the industry standard per paycheck withdrawal. That meant big withdrawals from bank accounts every quarter that companies needed to prepare for. But recently they’ve switched to withdrawing for taxes with each paycheck processed, which I think is a big improvement.

OK, I Got Payroll Software. Now What?

Congratulations on enrolling! Now that you have such a powerful tool at your disposal, how about hiring someone with the expertise to use that tool effectively? I do offer some service packages that include payroll services.

Here’s why outsourcing payroll to a bookkeeper makes sense:

1. Fewer Errors

Mistakes in payroll can lead to unhappy employees or IRS penalties. A bookkeeper who is experienced with payroll ensures accuracy while avoiding the headaches. k of costly mistakes.

2. Time Savings

As a small business owner, your time is valuable. Between managing operations, sales, and customer service, payroll can become a burden. By hiring a bookkeeper to run payroll, you can focus on revenue-generating activities.

3. Independence and Confidentiality

A special benefit of working with an independent bookkeeper to run payroll is that sensitive wage-related information doesn’t circulate among employees. If you hire an assistant to run payroll then you are giving them access to all their coworkers’ financial information. If the assistant finds out that their coworker is making more money than them, they are likely to ask for a raise. And in the worst case, they may reveal the wages to their other coworkers. As an independent bookkeeper who works with business owners rather than employees, this isn’t a risk for my clients.

4. Integration with Accounting

Even if you have payroll software, you still need to account for payroll expenses in your QuickBooks. Letting your bookkeeper handle payroll also streamlines the process for them to record payroll expenses in QuickBooks.

Final Thoughts

Final Thoughts: Payroll is complex, but you don’t have to do it alone. Investing in payroll software or hiring a bookkeeper ensures compliance, saves time, and keeps your employees paid accurately and on time. If you’re a small business owner struggling with payroll, consider working with a bookkeeper and using a trusted payroll service. The upfront cost is often far less than the penalties (or headaches) of doing it wrong.

Omar Helal