How to Run Payroll for a Small Business in Five Procedures
To run payroll for a small business, you approve and lock time, calculate gross-to-net pay, review the payroll register, pay employees and deposit the taxes, and close each quarter and the year. Gross-to-net is the path from gross wages to an employee’s net pay. Whether you process payroll yourself, share the work, or have specialists run it, the employer remains responsible to the Internal Revenue Service (IRS) for deposits, returns, and Forms W-2 (IRS outsourcing page).
Approve and lock time before anyone calculates pay
This procedure produces a locked, manager-approved time record for the pay period.
What you need first.
* Collect hours worked each workday and total hours worked each workweek for every non-exempt employee (DOL Fact Sheet #21).
* Check each salaried employee’s exempt status with the Department of Labor (DOL) or your state labor agency.
* List approved exceptions, such as paid time off (PTO), overtime authorizations, and rate changes.
Steps.
1. Export the period’s time records. Pull hours from your time system or collect paper timesheets, since the Fair Labor Standards Act (FLSA) prescribes no particular form (DOL Fact Sheet #21).
2. Flag incomplete entries. Route missing clock-outs and unapproved absences to the responsible manager for correction.
3. Enter approved exceptions. Record approved PTO, overtime, bonuses, and rate changes against each employee.
4. Reconcile against the active roster. Confirm that no active employee is missing and no terminated employee appears.
5. Request manager sign-off. Send the record to each manager with a deadline set ahead of your submission cutoff.
6. Lock and archive the record. Close the period so no one edits hours, then save the signed-off record.
What a correct result looks like. Every non-exempt employee has hours for each workday, every manager has signed off, and no exception remains open. Keep payroll records at least three years and supporting time cards at least two years (DOL Fact Sheet #21), and confirm any state retention rule with your state labor agency.
Calculate gross-to-net pay from approved time and the Form W-4 on file
This procedure turns the locked time record into a payroll register, the line-item report of gross pay, every deduction, and net pay for each employee.
What you need first.
* Use the locked time record.
* Keep a Form W-4 on file for each employee, made effective with the first payment of wages (IRS Pub 15).
* Collect the benefit deduction schedule and any valid withholding orders.
Steps.
1. Calculate gross pay. Apply each rate to the locked hours and add approved bonuses. Overtime for non-exempt employees is set by the FLSA and your state, so confirm the rules with the Department of Labor or your state labor agency (DOL Handy Reference Guide to the FLSA).
2. Apply elected deductions. Subtract each deduction on your schedule, and confirm each one’s tax treatment with your benefits administrator or tax advisor.
3. Withhold federal income tax. Apply the Wage Bracket Method or Percentage Method in IRS Pub 15-T, or use an automated payroll system built on them, with each employee’s Form W-4 on file.
4. Withhold and match FICA at the 2026 rates. As of October 2026, Federal Insurance Contributions Act (FICA) tax is 6.2% social security each for employer and employee on wages up to $184,500 and 1.45% Medicare each with no wage base (IRS Pub 15). Employees also pay a 0.9% Additional Medicare Tax on wages above $200,000, with no employer share.
5. Leave federal unemployment tax out of pay. As of October 2026, the employer alone pays Federal Unemployment Tax Act (FUTA) tax, 6.0% on the first $7,000 per employee, less a credit of up to 5.4% for state unemployment tax paid in full and on time (IRS Pub 15). State unemployment tax varies by state (DOL state UI directory).
6. Apply state and local withholding. Follow your state tax agency’s rules, since withholding varies by state.
7. Honor valid withholding orders. Employers must honor valid withholding orders such as child support, with penalties in every state for not withholding and sending payments as ordered (Department of Health and Human Services Office of Child Support Enforcement).
8. Generate the payroll register. Produce the line-item register for every active employee.
What a correct result looks like. The register shows gross pay that matches approved time and net pay for every active employee. Deductions match your schedule and orders, and none is taken for FUTA.
Review the payroll register before you submit it
This review produces a signed-off register that is ready for submission. It is operational advice for confirming that the register matches your approved inputs before you submit it.
What you need first.
* Pull the current payroll register.
* Place the prior-period register beside it.
* Gather the log of headcount and rate changes for the period.
* Open the deposit calendar showing the federal deposit due date.
Steps.
1. Reconcile headcount to the change log. Compare the active employee count with the prior period and explain every difference from the log of hires, terminations, and rate changes.
2. Flag gross-pay variances. Investigate each employee whose gross pay moved from the prior period by more than a threshold you set, and record the approved source, such as a bonus, rate change, or different hours.
3. Spot-check deductions and orders. Compare deductions for a sample you choose, or for all employees if the team is small, against the current schedule, and confirm every valid withholding order on file was applied.
4. Check the pay date and deposit calendar. Confirm that the pay date fits your state’s payday rules and that the federal deposit due date is on your calendar (IRS due dates page).
5. Record a sign-off. Have the designated reviewer sign or digitally approve the register and file the approval with the time record.
What a correct result looks like. Each variance has an approved source and the reviewer’s sign-off is recorded. If your payroll software calculates pay automatically, you still review the register.
Pay employees on the regular payday and deposit the taxes
This procedure produces paid employees, delivered pay statements, and federal tax deposits that you have verified yourself.
What you need first.
* Have the signed-off register, and confirm in writing the funding schedule your processor or provider sets.
* Identify your deposit schedule, monthly if your four-quarter lookback taxes were $50,000 or less and semiweekly if more, regardless of how often you pay (as of October 2026, IRS Pub 15).
* Register for your own Electronic Federal Tax Payment System (EFTPS) PIN or, if your business is eligible, an IRS Business Tax Account.
Steps.
1. Release the approved register. Send it to your payroll software or provider by its cutoff, and keep the submission confirmation.
2. Pay on the regular payday. The FLSA requires wages to be paid on the regular payday for the pay period covered (DOL Handy Reference Guide to the FLSA), and payday rules vary by state (DOL state payday requirements).
3. Keep the cash-or-check option. The DOL Field Operations Handbook treats direct deposit as acceptable provided employees can choose cash or check directly from the employer, and states may add rules (DOL FOH Chapter 30).
4. Confirm pay-statement requirements. Ask your state labor agency what a pay statement must include.
5. Deposit federal taxes electronically. Use EFTPS, IRS Direct Pay, an IRS Business Tax Account, or a payroll service acting on your behalf (IRS Pub 15).
6. Meet the deposit deadline. As of October 2026, monthly depositors deposit by the 15th of the following month, and semiweekly depositors deposit by the following Wednesday or Friday, depending on the payday (IRS Pub 15). Deposit by the next business day once $100,000 or more accumulates on any day.
7. Verify the deposits yourself. Check your own EFTPS or IRS Business Tax Account to confirm each deposit posted, even when a provider deposits for you (IRS Business Tax Account).
8. Watch for provider problems. Treat a provider’s first missed payment as a red flag. Keep the business’s own address as the IRS address of record, and file Form 14157 if you suspect improper provider activity (IRS outsourcing page).
What a correct result looks like. Employees are paid on the regular payday, pay statements are delivered, and every deposit appears in your own IRS account.
Close each quarter and the year with Forms 941, 940, W-2, and 1099-NEC
This procedure produces filed returns and a reconciled year-end record. As of October 2026, Q3 2026 Form 941 is due Monday, November 2, 2026, or November 10, 2026 if all deposits were made on time. Q4 2026 Form 941 and Form 940 are due Monday, February 1, 2027, or February 10, 2027 for Form 941 if all deposits were on time (IRS Form 941 instructions; IRS due dates page).
What you need first.
* Collect the full-year payroll registers, the deposit records, and each contractor’s 2026 payment total, keeping contractors apart from employees.
* Confirm your filing frequency, since an employer the IRS notified to file Form 944 files annually, and seasonal, household (Schedule H), and agricultural (Form 943) employers follow different rules (IRS Form 941 instructions).
* Check your state tax agency for its own W-2 filing rules.
Steps.
1. File Form 941 each quarter. It is due the last day of the month after the quarter ends, with 10 extra days if all taxes were deposited on time. File one per quarter for each employer identification number (EIN) (IRS Form 941 instructions).
2. Correct errors with Form 941-X. Correct underreported tax by the due date of the return for the quarter in which you find the error, paying what you owe when you file. Correct overreported tax within three years of filing or two years from payment, whichever is later, and use the claim process for corrections in the last 90 days of that period (IRS Form 941-X instructions).
3. Reconcile and verify year-end data. Forms W-2 report wages paid in the calendar year (IRS W-2 and W-3 instructions). As advice, compare year-end payroll totals with the four Forms 941 and check each employee’s name, Social Security number, and address against your records before generating them.
4. Furnish and file Forms W-2 and W-3. As of October 2026, give each employee a Form W-2 and file Forms W-2 and W-3 with the Social Security Administration, both by February 1, 2027. E-filing is required if you file at least 10 information returns in total (IRS W-2 and W-3 instructions; IRS due dates page).
5. Issue Form 1099-NEC to contractors. First check each contractor’s classification under the IRS common-law control test (IRS common-law employee page). Then, as of October 2026, issue Form 1099-NEC for 2026 payments of $2,000 or more (up from $600 for earlier years, indexed after 2026), due to the recipient and the IRS on February 1, 2027 (IRS 1099-NEC instructions).
6. File Form 940. File the annual federal unemployment return by Monday, February 1, 2027, with 10 extra days if you deposited all FUTA tax on time (IRS Form 940 instructions).
What a correct result looks like. Form 941 is filed for every quarter, and Form 940, Forms W-2 and W-3, and Forms 1099-NEC are filed with recipient copies furnished by the dates above. Keep employment tax records at least four years (IRS Pub 15).
Who does each step in self-managed, hybrid, and fully managed payroll
Choosing who does each step is a division-of-labor decision, not a liability decision. The IRS states, “The employer is ultimately responsible for the deposit and payment of federal tax liabilities” (IRS outsourcing page), and IRS Pub 15 and the IRS W-2 and W-3 instructions say the same for returns and Forms W-2. A contract with a provider cannot alter that liability (Internal Revenue Manual 5.1.24), and the business remains the common-law employer under the IRS test.
Step
Self-managed
Hybrid
Fully managed
Approve time
Your managers approve time before payroll.
Your managers approve time before payroll.
Your managers approve time before payroll.
Gross-to-net calculation
Your team runs it in your software.
You and the provider split it in writing.
Your service terms say who prepares it.
Pre-submission review
Your designated reviewer signs off.
You and the provider agree who signs off.
You confirm in writing who signs off.
Payroll submission
You release payroll to your processor.
You and the provider agree who releases it.
Your service terms say who processes it.
Federal tax deposits
You deposit through EFTPS or your Business Tax Account.
You and the provider agree who deposits.
Your service terms say who deposits; you still verify in EFTPS or your Business Tax Account.
Quarterly and year-end filings
You prepare and file the returns and Forms W-2.
You and the provider split filing in writing.
Your service terms say who prepares and files them.
Responsibility to the IRS
You remain responsible for deposits, returns, and Forms W-2.
You remain responsible for deposits, returns, and Forms W-2.
You remain responsible for deposits, returns, and Forms W-2.
AsureCentral is software-led payroll and HR for growing employers, with a primary range of 25 to 500 employees and reach to 1,000-plus for multi-state, multi-location, or hourly-workforce complexity. AsureWorks is a managed service that runs on AsureCentral, with Asure specialists doing the work, including payroll tax filing and reporting. It is a PEO alternative with no co-employment. You remain the employer of record and stay responsible to the IRS for deposits and returns.
Frequently Asked Questions
What happens if my payroll provider misses a tax deposit?
The IRS may assess penalties and interest on your account, because the employer remains liable for all taxes, penalties, and interest due (IRS outsourcing page). Verify deposits in your own EFTPS account and contact the IRS promptly about any related bill or notice.
What are the penalties for a late payroll tax deposit?
As of October 2026, the IRS charges 2% of the unpaid deposit for one to five calendar days late, 5% for six to 15 days, 10% for more than 15 days, and 15% when still unpaid more than 10 days after the first IRS notice or on the day of a demand notice. Tiers replace each other, reasonable-cause relief may apply, and interest accrues (IRS failure-to-deposit page).
What is the penalty for filing Form W-2 late?
As of October 2026, for filings due after December 31, 2026, the late-filing penalty is $60 per Form W-2 filed correctly within 30 days after the due date, $130 if filed correctly more than 30 days late but by August 1, and $340 if filed after August 1 or not filed. Amounts are indexed annually (IRS W-2 and W-3 instructions).
Can I pay employees by direct deposit only?
Not unless employees can choose cash or check directly from the employer. The DOL Field Operations Handbook treats direct deposit as acceptable on that condition (DOL FOH Chapter 30). States may add their own rules, so confirm yours with your state labor agency before requiring direct deposit.
Start with your weakest procedure
Check your last cycle against each correct-result list and note where it falls short. Pricing for AsureCentral and AsureWorks is a custom quote based on employee count, setup (self-service, hybrid, or fully managed), the plan chosen, and the modules added. Talk to an Asure expert about which setup fits how you run payroll.
