The Easiest Way to Handle Payroll for a Small Team

Managing payroll for a small team can feel overwhelming, but it doesn't have to be complicated or expensive. With the right approach and tools, you can handle payroll efficiently while staying compliant with tax laws and regulations. Let's explore the simplest strategies for small business payroll management.

Understanding Payroll Basics

Core Payroll Components:

Gross wages represent total employee earnings before deductions. This includes regular hourly wages, salaries, overtime pay, bonuses, and commissions. Calculating gross wages correctly is the foundation of accurate payroll.

Federal income tax withholding is based on each employee's W-4 form. The IRS provides withholding tables that show how much to withhold based on filing status, number of dependents, and other factors. Getting this wrong means your employees will either owe taxes or receive smaller refunds.

FICA taxes include Social Security (6.2% of wages up to the annual wage base) and Medicare (1.45% of all wages). Both employee and employer pay these taxes, so the total FICA burden is 15.3%. Employees with high wages also pay an Additional Medicare Tax of 0.9% on wages over $200,000.

State income tax varies by state—some states have no income tax (like Florida, Texas, and Washington), while others have rates exceeding 10% (like California and New York). You must withhold based on each employee's state W-4 or equivalent form.

State unemployment tax (SUTA) is paid by employers, with rates varying by state and depending on your "experience rating" (your history of laying off employees). New businesses typically pay a standard new employer rate until they develop a history.

Federal unemployment tax (FUTA) is 0.6% on the first $7,000 per employee annually (after taking the credit for SUTA payments). This tax funds unemployment benefits for workers who lose their jobs.

Compliance Requirements:

Maintaining accurate records is non-negotiable. You must keep detailed payroll records for at least three years, including time cards, wage calculations, tax withholdings, and payment records. The IRS and Department of Labor can audit these records at any time.

Timely tax deposits are critical. Depending on your total tax liability, you may need to deposit payroll taxes monthly or semi-weekly. Missing deposit deadlines results in significant penalties—up to 15% of the amount due if you're more than 10 days late.

Quarterly reporting includes filing Form 941 (Employer's Quarterly Federal Tax Return) and similar state reports. These reconcile the taxes you withheld and deposited during the quarter.

Annual reporting includes providing W-2s to employees by January 31 and filing various annual tax forms with federal and state agencies.

New hire reporting requires reporting new employees to your state agency within 20 days of hire. This helps prevent fraudulent unemployment and workers' compensation claims.

DIY Payroll: When It Makes Sense

Good Candidates for DIY:

Small businesses with 1-5 employees, especially if everyone is on simple hourly or salary pay structures without complex commissions or bonuses. Single-state operations are much simpler than multi-state businesses. The business owner must have time and attention to detail—payroll mistakes can be expensive. Strong organizational and record-keeping skills are essential.

DIY Payroll Tools:

QuickBooks Payroll offers three tiers ranging from $45-$125/month plus $4-$10 per employee. It provides automated tax calculations, direct deposit, mobile app access, and integrates seamlessly with QuickBooks accounting. If you're already using QuickBooks for your books, adding payroll makes sense because everything flows together automatically.

Gusto (formerly ZenPayroll) costs $40/month plus $6 per employee and is known for its user-friendly interface. It includes HR tools like offer letters and onboarding, benefits administration for health insurance and 401(k)s, and excellent customer support. Many small businesses love Gusto because it's designed specifically for non-experts.

ADP Run charges $59/month plus $4 per employee and brings the reliability of an established provider with a strong compliance track record. It includes payroll processing, tax filing, and HR support. Some businesses prefer ADP because of their long history and comprehensive support.

Patriot Payroll is the budget option at $10-$20/month plus $4 per employee. It offers basic payroll processing and tax filing without bells and whistles. For very small businesses watching every dollar, Patriot provides essential payroll services at rock-bottom prices.

Payroll Service Providers: The Outsourced Approach

When to Consider Outsourcing:

Once you reach more than 10 employees, outsourcing often makes sense. Complex pay structures involving commissions, bonuses, and tips are error-prone when handled manually. Multi-state operations face complicated tax compliance requirements. If you have limited time or expertise for payroll management, outsourcing lets you focus on running your business. If you want to eliminate compliance risk entirely, full-service providers take on the liability.

Full-Service Payroll Providers:

ADP Workforce Now is best for growing businesses with 10+ employees. It provides full payroll, HR functions, benefits administration, and time tracking. Pricing is custom based on services and employee count, typically starting around $100-$150/month for small businesses.

Paychex serves small to medium businesses with comprehensive payroll, HR, benefits, and workers' compensation services. They offer strong support and compliance expertise. Pricing varies by services but typically runs $25-$100+ per month base fee plus per-employee charges.

OnPay targets small businesses wanting simple, affordable service. At $36/month plus $4 per employee, they include full payroll service with HR tools, unlimited payroll runs, and excellent customer service. Many small businesses find OnPay offers the best balance of features, ease of use, and price.

Professional Employer Organizations (PEOs)

How PEOs Work:

PEOs become a co-employer with your business. They handle all HR, payroll, benefits, and compliance, while you maintain operational control of your business. Your employees technically become employees of the PEO for administrative purposes, which allows them to be part of a larger group for benefits.

Benefits of PEOs:

Access to enterprise-level benefits like health insurance and 401(k) plans typically available only to large companies. Dramatically reduced HR and compliance burden—the PEO handles everything. Potential cost savings on benefits through group purchasing power. Professional HR expertise without hiring an HR department.

Considerations:

PEOs cost more than basic payroll services—typically 2-12% of total payroll. You have less direct control over HR processes. Long-term contracts are often required. You need to evaluate whether the benefits justify the higher cost for your specific situation.

Making Your Decision

For 1-3 employees with simple pay structures, DIY with basic software works well and keeps costs low. For 4-10 employees with simple structures, payroll software with good support provides the right balance. For 10+ employees or complex needs, full-service payroll providers or PEOs offer peace of mind and compliance security. For rapid growth or multi-state operations, PEOs or comprehensive payroll services can scale with you.

Remember, payroll errors can result in penalties, upset employees, and compliance problems. Choose a solution that fits your capabilities and gives you confidence that payroll will be handled correctly every time.