Determining Pay & Payroll Options in Small & Entrepreneurial Firms

Instructor: A. Casey Carr-Jones

Casey Carr-Jones holds a Bachelor's degree in English & Psychology. She is currently a PHR-certified Human Resources Consultant.

There are many different options for pay and payroll, especially for small businesses. This lesson will briefly review a payroll process, and discuss the options and legal considerations for payroll in small and entrepreneurial companies.


Small businesses and entrepreneurial companies may have a small number of employees, but their payroll needs, options, and legal considerations are still complex.


Prior to processing a payroll, the employer needs to determine how it is paying its employees. Employees need to know their rate of pay, which could be an hourly rate or an annual salary. This should be communicated clearly, in writing, and is usually found in the offer letter.

At a high level, payroll processing contains four main steps. The first step in processing a payroll is to confirm the number of hours worked by the employees. The person handling payroll will verify logged working hours and paid time off. The second step is for the person processing payroll to update the company's master payroll file with any new hires, terminations, or salary adjustments. This step includes calculating severance pay or vacation payouts. The third step is to have a payroll software perform any necessary pay calculations, like overtime and tax withholding calculations. The fourth step is to review any generated reports for accuracy and confirm the payroll submission.

Options for Small Businesses

The first payroll option for a small business is to perform payroll in-house, usually by purchasing a payroll software. This software, called a payroll system, is a type of software that has the ability to pay the employees as well as the appropriate taxes. The functionality normally includes tracking hours worked, tracking time off, and calculating tax withholding and other deductions.

In a small business, there might be a dedicated payroll administrator, or this responsibility might fall onto someone in the finance department, an office manager, or administrator. The software is primarily online-based, and there are many different brands of software available to process a payroll. They vary in cost and features, so a small business or entrepreneurial firm should evaluate the software options based on the size of the company, how complex or robust their payroll needs are, and how automated the company wants the process to be.

Another option is to use a third party payroll vendor to process payroll. A third party payroll vendor is an organization whose sole focus is to service clients who wish to outsource all or part of their payroll process. Third party payroll companies can handle calculating hours and overtime, deducting vacation time, commission payments, state and federal taxes, and printing checks or utilizing direct deposit. The main benefit to using a third party payroll vendor is that they are familiar with taxes and other deductions, and can keep the company in compliance with state and local laws. Similar to selecting payroll software, companies have many different options when choosing a third party payroll vendor. And, as with the software selection, considerations should be made based on automation and payroll complexity, and size of the company.

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