How to Manage Payroll for Your Business (2026 Guide)

Payroll management rarely makes headlines. But when it does, it’s because something’s gone horribly wrong.

A teachers union in San Francisco filed a formal labor complaint after a payroll system upgrade left more than 100 teachers underpaid for months. The story made headlines. In Wales, a payroll clerk embezzled approximately $26,000 in wages by editing payee details and forging payslips. That one did too.

These aren’t cautionary tales about reckless companies. They’re examples of what happens when payroll systems have weak points that nobody caught in time. Payroll errors follow predictable patterns: manual steps, disconnected systems, and changes that don’t propagate. The task is routine. The stakes are not.

The payroll and HR services market reflects this reality. It’s on track to grow from $32.1 billion in 2025 to nearly $66 billion by 2035. Whether you’re paying your first employee or managing teams across multiple states, this guide walks you through exactly how to manage payroll for your business in 2026.

Why effective payroll management matters more than you think

Payroll is the total amount of wages you pay your employees for work completed within a set period. Most businesses run payroll weekly, biweekly, semimonthly, or monthly. But payroll is far more than issuing paychecks. You’re also responsible for collecting employee data, calculating net pay, reporting and remitting taxes, staying compliant with federal and state labor law, and maintaining detailed records that can survive an audit.

The consequences of getting this wrong are concrete and measurable. The SEC fined 12 firms a combined $63 million for recordkeeping failures. You may not be a public company, but if word spreads that you don’t pay people correctly or on time, that reputation sticks. In a 2024 survey by Remote, 47% of employees said a late paycheck triggered stress or anxiety, and 42% said their relationship with their employer deteriorated after a payroll mistake. Retention is already expensive. Payroll errors make it worse.

The financial hit compounds fast. A company with 1,000 employees could lose over $922,000 annually cleaning up payroll problems. For a 5,000-person operation, that number climbs past $4.5 million. Whether you’re doing $10K months or running a seven-figure Shopify store, those are costs you cannot afford to absorb.

Learn more: Retail Staff Management: Tips, Skills and Responsibilities for Managers

The seven steps to set up and manage payroll for your business

These seven steps apply whether you’re onboarding your first hire or standardizing payroll across a growing team. Work through them in order the first time. After that, your system handles the repetition.

Step 1: Register for an Employer Identification Number

Before you can hire and pay employees, you need an Employer Identification Number, or EIN. Think of it as the business equivalent of a Social Security number. The IRS uses it to track your tax filings, and you’ll need it for everything from opening a business bank account to filing quarterly returns.

The fastest route is the IRS online application, which validates your information in real time and issues your EIN immediately. If you prefer paper, you can fax or mail a completed SS-4 form to the correct IRS address. Fax takes four business days. Mail takes four weeks. Use the online option.

Step 2: Collect W-4s and employee information

Every employee must submit a Form W-4 no later than their first day of work. This Employee’s Withholding Certificate tells you how much federal income tax to withhold based on their marital status, dependents, and other income sources. Beyond the W-4, you’ll also need bank account details for direct deposit, full legal name and SSN or ITIN, state withholding forms where required, employment classification as a W-2 employee or 1099 contractor, start date and compensation details, voluntary deduction elections, and work eligibility documents such as Form I-9.

Depending on your state, industry, or benefits package, you may also need union membership status, wage garnishment orders, or insurance enrollment forms. Build a standardized onboarding checklist and collect everything before the first paycheck runs. Chasing documents after the fact is where errors start.

Step 3: Establish a payroll schedule

Your payroll schedule determines how often employees get paid: weekly (52 runs per year), biweekly (26 runs), semimonthly (24 runs), or monthly (12 runs). There is no federal mandate on pay frequency, but every state has its own minimum requirement. Arizona requires pay no more than 16 days apart. Oregon and North Dakota require at least one monthly payment. Check the Department of Labor’s state payday requirements before you commit to a schedule.

Three factors drive the right choice for your business. Cost matters because every payroll run has a price, and providers typically charge per run, so 52 weekly runs cost significantly more than 12 monthly ones. Employee preference matters because hourly workers generally favor weekly pay, while salaried employees tend to prefer biweekly. And payroll and accounting alignment matters because semimonthly and monthly schedules reduce administrative load and integrate more cleanly with benefits calendars and month-end reporting.

Step 4: Decide how you’ll pay employees

Direct deposit and paper checks are the two standard options. Most businesses offer direct deposit as the default and let employees choose their preference during onboarding. Whichever method you use, confirm the logistics before the first pay date. An employee’s first paycheck being late or wrong sets a tone that is very hard to reverse. Get the banking details, confirm the deposit schedule with your payroll provider, and run a test if your software allows it.

Step 5: Calculate gross pay per period

Gross pay is what employees earn before taxes and deductions. For salaried employees, divide their annual salary by the number of pay periods. For hourly employees, multiply total hours worked in the pay period by their hourly rate. If you have a mix of salaried staff, hourly floor workers, and part-time contractors, your payroll software should handle all three structures simultaneously. If it doesn’t, that’s a signal to find a different tool.

Step 6: Withhold and submit payroll taxes

Once payroll runs, you’re responsible for remitting the correct taxes to the right agencies on time. Most US businesses handle three categories of payroll taxes: federal income tax, Social Security and Medicare (FICA), and federal and state unemployment taxes (FUTA and SUTA). Depending on where your employees work, you may also owe state and local income taxes.

The IRS provides three resources worth bookmarking: the Income Tax Withholding Estimator, Publication 15 (specifically the chapter on withholding from employee wages), and the current withholding tables. Most US employers file Form 941 quarterly. Per the IRS, the 2025 Form 941 deadlines are April 30 for Q1, July 31 for Q2, October 31 for Q3, and January 31, 2026 for Q4.

Step 7: File tax forms and submit W-2s and 1099s

Use Form 941 to file your quarterly federal tax return, which covers income taxes and FICA contributions withheld from employees plus your employer share. Because the IRS updates this form regularly, always reference the current IRS instructions before filing. You’re also responsible for an annual FUTA return each year.

For the 2025 tax year, Form W-2 for employees and Form 1099-NEC for independent contractors were both due to the IRS and to recipients by January 31, 2025. If you missed a deadline or discovered an error after filing, address it immediately, either by submitting a corrected form or by getting professional tax advice on managing the penalty exposure. Ignoring it does not make it smaller.

The five payroll mistakes that cost merchants the most

In the 2024 Getting the World Paid survey, more than 50% of companies cited HR data entry errors as the primary cause of payroll inaccuracy. Lack of standardized processes came in at 31%, and messy integrations at 26%. These aren’t random failures. They’re predictable, and preventable.

Depositing employment taxes late

Late tax deposits cost you 2% to 15% of the unpaid amount, and the penalties escalate fast. Two percent for 1 to 5 days late, 5% for 6 to 15 days, 10% for over 15 days, and 15% once IRS notices go out. Federal employment taxes are due monthly or semiweekly depending on your deposit schedule. Monthly depositors owe by the 15th of the following month. Semiweekly depositors pay by the following Wednesday for paydays Wednesday through Friday, or by Friday for paydays Saturday through Tuesday.

The fix is straightforward: know your schedule, set recurring calendar reminders, and use payroll automation software to handle the timing for you. If you’re switching deposit schedules, you may qualify for a one-time penalty waiver, but only if you file Form 941 on time.

Misclassifying workers

Misclassification can cost you $50 per missing W-2, 1.5% of all wages paid to misclassified workers, and 40% of FICA not withheld. For intentional misclassification, the IRS adds 20% of total wages, 100% of FICA, criminal fines up to $1,000, and potential jail time.

The IRS evaluates classification across three dimensions: behavioral control (does your business dictate how the worker does the job), financial control (does your business control payment method, tools, and expense coverage), and relationship factors (is there an ongoing agreement, benefits, or integration into your regular operations). Separately, exempt versus non-exempt status under the Fair Labor Standards Act determines overtime eligibility. Non-exempt workers must be paid overtime. Exempt workers don’t qualify, but only if they pass the FLSA duties test.

Paying from the wrong state

Every US state has its own rules around income tax, minimum wage, overtime, and leave. As the employer, you must apply the laws of the state where the employee physically works, not where your business is registered. This catches merchants off guard when they hire remote workers or expand into new markets.

Collect work location at onboarding and update it whenever an employee moves or shifts to a remote or hybrid arrangement. Register for a state tax ID and comply with local labor law in every state where your employees work. Platforms like Gusto, QuickBooks Payroll, and other Shopify-integrated tools support location-based payroll automation. Use that feature. It’s not optional at scale.

Skipping overtime

If a non-exempt employee works more than 40 hours in a workweek, overtime pay is required by federal law. Civil penalties run up to $1,000 per violation, plus whatever your state adds on top. Some states require overtime after eight hours in a single day, not just 40 in a week.

Use a time-tracking system that logs hours precisely. Paper timesheets and estimates won’t hold up in an audit. Audit overtime weekly, not just at payday. And pay attention to off-the-clock work. If someone clocks out but keeps responding to messages or closing out the register, that time counts and must be compensated.

Missing or sloppy payroll records

W-2s and 1099s are not optional, and they’re not flexible on timing. The IRS penalty for late or incorrect forms ranges from $60 to $330 per form depending on how late you file and whether the agency determines you ignored the requirement entirely. Store all payroll and tax records in one secure digital system: W-4s, I-9s, time logs, pay stubs, benefits deductions, and signed contracts. Go paperless wherever possible. Audit your records quarterly. A 10-minute check every three months is far cheaper than $3,000 in missed W-2 penalties.

One internal control worth implementing immediately: a four-eyes check. One person enters payroll data, a second person reviews it before it runs. This catches errors before they become filings. SOX and SOC 2 compliance frameworks require it, and it’s good practice regardless of your size.

Best practices that keep payroll running cleanly

Accuracy and timeliness are the baseline. The merchants who stay out of trouble long-term build systems around these practices.

Share a payroll calendar

A payroll calendar is a shareable document that maps pay periods, pay dates, timecard submission deadlines, and key filing dates. More than 50% of employers don’t give employees any tools to understand their payslips. A payroll calendar closes that gap. It reduces confusion, cuts down on back-and-forth emails, and helps your team plan around pay dates.

“Your financial health depends on how you manage payroll,” says Courtney Quigley, business reputation consultant at Rize Reviews. “Manage it with a payroll calendar so you can keep track of important dates, holidays, PTOs. Share the calendar with supervisors and managers of your store or stores so they can transparently share it with their teams.”

Maintain comprehensive payroll records

Federal law requires you to keep payroll records for three years and payroll tax records for four years. Retirement and 401(k) plan records must be kept for six years. Some states require longer. New York, for example, mandates six years for payroll records. Know your state’s requirements and build your retention policy around the longer of the two.

Records to maintain for each employee include general information, W-4 and state withholding forms, pre-hiring records, time and attendance logs, total hours worked, payroll records including pay rate, overtime, bonuses, deductions, and pay stubs. “Be sure to dedicate a secure place to keep up to four years of employee I-9 forms, W-2s, W-4s, state new hire forms, copies of all your filed tax forms, and always maintain the dates and amounts of all tax deposits, timesheets, and pay stubs,” says Will Lopez, head of accountant community at Gusto.

Stay current on tax and labor law

Payroll mistakes cost hundreds to thousands of dollars in penalties. The law changes constantly, and compliance during growth is especially difficult. Expanding into new states, hiring remote workers, or mixing full-time employees with part-time contractors each introduces new compliance requirements. Build a routine around checking the IRS website, your state tax authority (for example, taxes.ca.gov for California or comptroller.texas.gov for Texas), and resources like Deloitte’s tax hub at least quarterly.

Appoint a payroll manager

If you’re keeping the business small, payroll management can be a hybrid role for an existing employee or a part-time freelance engagement. If you’re scaling, hire a full-time payroll manager, an external accountant, or a managed payroll service. “The key players to involve in your payroll process are: your payroll provider, an accountant or other financial professional, and an HR business partner,” says Will Lopez. Professionals stay current on law changes so you don’t have to. Offload the tasks, but stay informed enough to ask the right questions.

Ask for employee feedback

Payroll affects everyone in your company. Ask employees directly whether they have questions about their payslips, whether the payroll calendar is clear, whether they have suggestions about pay schedules, and whether submitting timecards is straightforward. Use the feedback to create internal documentation and a FAQ that explains your payroll process. This reduces confusion, builds trust, and surfaces problems before they become complaints or compliance issues.

Implement payroll security measures

Four in five data breaches involve employee information, according to People Management magazine. About half of small business owners still run payroll off a shared spreadsheet or unencrypted folder. Use a payroll provider that integrates with your existing tech stack and offers SOC 2 or ISO 27001-level compliance. Restrict payroll access by role. Store payroll files in the cloud with encryption and access logging. Run quarterly access audits to clean up permissions after team turnover. Educate your team: no emailing unencrypted pay stubs, no screenshots of payroll dashboards, no shared passwords.

Integrate payroll with your business systems

Payroll should not live in isolation. It needs to sync with HR, accounting, and time-tracking platforms to eliminate double-entry and reduce error. Accounting tools like QuickBooks and Xero pull Shopify sales, fees, and expenses automatically. Apps like Link My Books and A2X bridge Shopify’s POS and online store data with your accounting books. Time-tracking tools built into Shopify POS, like EasyTeam, PTT: POS Time Tracker, and ClockedIn, let your team clock in and out at the register with records that flow directly into payroll. HR tools like Gusto integrate with Shopify to onboard new hires, track benefits, and sync pay changes without manual edits.

Read: How to Do Small Business Accounting in 2025 (and the Best Tools)

Choosing the right payroll system for your stage

Payroll is not one-size-fits-all. What works at five employees breaks down at 50. Here’s how to match the solution to your actual situation.

Manual payroll

Best for micro-businesses, early-stage startups, or teams of one. A spreadsheet and a calendar reminder can work when you have a single employee and a tight budget. But the cost of manual payroll is not just the time it takes to run it. It’s the risk of errors you don’t catch, the tax deadlines you miss, and the hours you spend staying current on regulations instead of running your business.

“DIY works when you have a small team, but it gets unmanageable as you grow. Not just because it’s time-consuming, but it opens up room for error,” says Lanai Moliterno, CEO and founder of Sozy. As your team grows or your tax situation gets more complex, DIY payroll becomes more stress than it’s worth. The money you think you’re saving, you’re paying for in time, anxiety, and potential fines.

Payroll software

Best for businesses with multiple employees, hourly teams, or anyone who wants to eliminate manual errors and save time. Good payroll software automates tax calculations and filings at the federal, state, and local level, handles direct deposit, integrates with your POS and scheduling tools, gives employees self-service access to pay stubs and W-2s, and flags compliance issues before they become IRS problems.

“Using payroll software puts so much into automated mode and safeguards your time and business from lawsuits and expensive mistakes. It’s a small extra expense, but it pays off in the long run,” says Lanai. Many options are priced under $40 per month. When evaluating tools, ask four questions: Does it support your pay structures (hourly, salaried, commission)? Can it handle taxes across every state where your team works? Does it integrate with your accounting, time-tracking, and HR stack? And what is the total cost per employee per month as you scale?

If you’re on Shopify, tap into the Shopify app ecosystem to manage payroll without adding disconnected platforms. Need to generate a paycheck quickly? Shopify’s free pay stub generator creates professional pay stubs in minutes for small teams or one-off payments.

An accountant

Best for retailers who want expert oversight and tailored financial advice without doing the number crunching themselves. You can hire in-house or work with an external contractor. Either way, you get someone who manages payroll daily, stays current on law changes, and handles the compliance calendar for you. The tradeoff is cost and reduced direct control over your filings. If you go this route, take time finding the right person. Ask for recommendations from other store owners, check references, and confirm the fit before you hand over the keys to your financial records. This hire has outsized impact on your business.

Payroll services

Best for busy store owners who want to outsource all payroll, tax filing, and compliance to a dedicated team. Payroll service providers calculate payroll, file tax statements, deposit payments to employees, and process new hires on your behalf. The cost is higher than software, and it scales with your headcount and complexity. These services are typically best suited to medium and large operations that have outgrown software-only solutions or that operate across multiple states and countries with complex compliance requirements.

Create pay stubs quickly: Use Shopify’s pay stub generator to instantly create accurate paychecks for your employees, including year-to-date income and deductions.

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Frequently Asked Questions

How do you manage the payroll process?

Start with a clear payroll schedule and accurate employee records collected at onboarding. Track hours precisely, calculate gross pay for each employee, withhold the correct federal and state taxes, and pay your team on time every pay period. Then file quarterly tax forms with the IRS using Form 941 and submit annual W-2s and 1099s by January 31 each year. If you’re on Shopify, payroll software that integrates directly with your store handles the calculations, tax remittance, and filing automatically, which removes most of the manual risk from the process and is especially useful as you scale past a handful of employees.

How do I manage my payroll myself?

To run payroll yourself, you’ll need to complete five steps in sequence: get your EIN from the IRS, classify every worker as an employee or independent contractor, set a pay schedule that meets your state’s minimum frequency requirements, calculate and withhold the correct taxes each pay period, and file quarterly Form 941 returns plus annual W-2s and 1099-NEC forms by the IRS deadlines. It’s doable with a small team, but the time cost and error risk grow with every hire. If you’re running a Shopify store, integrated payroll tools that sync with your team’s hours and roles can save you several hours per pay run and significantly reduce your exposure to penalties.

How to manage HR payroll?

HR payroll combines standard payroll processing with compliance and people operations: benefits administration, PTO tracking, wage classification, bonus calculations, and labor law requirements across every state where your team works. The complexity grows fast when you have a mix of full-time employees, part-time staff, and contractors. Many HR and payroll tools that integrate with Shopify handle team permissions, location-based tax rules, and PTO balances in a single system, so you’re not cobbling together answers across three different apps when a question comes up at 9pm before a payroll run.

What’s the best way to do payroll for a small business?

The best payroll method is the one that’s accurate, compliant, and doesn’t consume your entire week to run. For most small businesses, that means payroll software that handles calculations, tax withholding, and quarterly filings automatically. Options priced under $40 per month exist and integrate directly with Shopify, so your time-tracking, accounting, and payroll data live in one connected system rather than scattered across spreadsheets. Manual payroll can work at one or two employees, but the risk-to-reward ratio flips quickly as your team grows. If you’re on Shopify, connect to trusted payroll partners directly from your admin dashboard and let the integration do the heavy lifting.

Can I do my own payroll for free?

Yes, but free payroll is not risk-free payroll. You’ll need to manually track hours, calculate withholdings, remit taxes to federal and state agencies on schedule, and file quarterly and annual returns yourself. Every step is a point where an error can generate a penalty. As your team grows, so does the complexity: more employees means more tax deposit schedules, more state registrations, and more forms to file. Low-cost payroll tools that integrate with Shopify and include automatic tax filing typically run $20 to $40 per month and are far cheaper than a single IRS penalty for a missed deposit or a misclassified worker. The math almost always favors the software.