How to Pay Employees: For Small Businesses & Global Teams

Step-by-Step Guide to Paying Employees

1. Understand Payroll Basics

Let’s start with breaking down the basics of how payroll is structured, which consists of three key elements: the gross pay, deductions and net pay.

Gross pay is the total amount an employee earns before any deductions. Deductions include salary reductions from sources such as income tax, Social Security and Medicare, health insurance, and retirement contributions. Finally, net pay is the final amount an employee takes home after all deductions.  

For instance, if an employee earns $4,000 gross pay per month, and they have $800 deducted for taxes and benefits, their net pay would be $3,200. Understanding these structural components will help you calculate gross pay correctly and avoid costly payroll errors.  

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2. Gather Employee Details

The first step before processing payroll is collecting essential details about each employee. This includes their full legal name, tax identification number, pay period details, and banking information for direct deposits. 

Companies must also refer to country specific requirements, such as the W-4 tax form that employees need to complete in the U.S. 

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3. Ensure Compliance with Labor Laws

Each country has their specific payroll requirements, which can be complex to understand. These include minimum wage laws, overtime regulations, and tax obligations specific to their region. Companies need to do their due diligence before beginning the payroll process.

For instance, in the U.S., businesses must comply with the Fair Labor Standards Act (FLSA), which sets federal minimum wage and overtime rules. In contrast, European countries have their own tax codes and labor laws that must be followed. Non-compliance with these can result in hefty fines, or even legal action. 

Tip: Non-compliance can lead to significant financial penalties and legal consequences. Regularly review payroll regulations in your operating regions and consider using payroll software to ensure compliance.

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4. Determine the Type of Compensation You Offer Employees

When structuring employee compensation, businesses must decide whether to pay employees a fixed salary or an hourly wage.  Salaried employees receive a consistent paycheck and a more consistent work contract, while hourly employees are paid based on the number of hours worked and includes overtime calculations.  

Beyond base pay, companies may also offer bonuses, commissions, or profit-sharing to reward performance to boost employee retention. 

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5. Choose a Payment Method

Once the compensation structure is determined, the company needs to decide on how exactly to pay employees. There are several payment options to choose between depending on the structure and expectations of the company. Let’s break it down:

Direct deposit: This is the most common and convenient payment method, as it allows funds to be transferred regularly, automatically, and electronically to the employee’s bank account. This method is reliable and secure and ensures timely payment. 

Paper checks or pay cards: In the age of automation, this method can be slow, prone to delays, and may result in lost payments. In addition to direct deposit and paper checks, some companies offer pay cards as an alternative payment method. Pay cards can be convenient for employees who don’t have bank accounts, but they often come with high fees and limited accessibility. 

Digital wallet: This option has grown in popularity in recent years due to their speed and ease of use. However, they may not be accepted by all merchants, limiting their overall usefulness for some users.

For businesses operating internationally, managing multiple currencies and banking regulations can complicate payroll. Using a global payroll management solution can help centralize payments and ensure compliance across different regions.

Playroll’s global payroll solution centralizes multi-entity and vendor payroll data into one dashboard, enabling HR and finance teams to streamline controls and adhere to global compliance effortlessly.

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6. Set Up a Payroll Schedule

A well-defined payroll schedule helps businesses manage cash flow and ensures employees are paid consistently. The most common payroll frequencies are:  

• Weekly: Employees are paid every week.  
• Bi-weekly: Paychecks are issued every two weeks.  
• Semi-monthly: Employees are paid twice a month (e.g., the 15th and last day of the month).  
• Monthly: Employees receive one paycheck per month.  

Choosing the right schedule depends on business needs and employee expectations. Some industries, like retail or hospitality, prefer weekly payroll, while office-based jobs often opt for bi-weekly or monthly schedules. To understand the best option for your company, check out our guide here. 

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7. Calculate Employee Pay & Taxes

Of course, the most critical part of payroll is calculating the pay correctly. This entails three key components: determining gross pay, withholding the correct taxes, and accounting for employer contributions. 

Compliance with these regulations ensures a smooth running for your business. Let’s dive into these components in detail:

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Gross Pay and Deductions:

Gross pay is the total amount of salary an employee earns before tax deduction. The pay can be determined depending on the compensation structures used by the organisation. Here’s some common ways of calculating the gross pay: 

• Hourly Wage: This is calculated by multiplying the hours by an employee worked with the hourly rate.
• Salary: Fixed monthly or annual compensation that is divided into pay periods (monthly/ bi-monthly) 
• Commission-Based Pay: Compensation received on top of the salary, derived from sales or performance metrics.
• Bonuses and Overtime: Additional pay for extra work. This is calculated based on labor laws and company policies.

Once gross pay is determined, there are some standard deductions that apply. While local taxation is the basis of deduction in every country, there may be more deductions depending on the location of the organisation. 

Here’s the deductions that could apply using the U.S. as an example:

• Income Tax: Federal, state, and local taxes deducted from employee wages.

• Social Security and Medicare (U.S.): Mandatory in the US, this deduction contributes to government programs.
• Retirement Contributions: This is a deduction for employer-sponsored pension plans or retirement accounts.
• Health Insurance Premiums: Employee contributions for employer-provided health insurance. 
• Other Deductions: There can be external deductions, for instance, garnishments, union dues, or voluntary benefits chosen by the employee. 

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Calculate The True Cost of an Employee

Get a breakdown of the taxes, fees, benefits & more you can expect to pay when hiring for a new role.

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Tax Withholding:

Tax withholding is the process undertaken by the organization where they deduct a portion of the employee’s earnings before paying their salary, to ensure that employees meet their tax obligations. The amount withheld depends on several (regional) factors. Here’s the tax holdings that could apply using the U.S. as an example:

• Employee Tax Forms: In the U.S., employees complete a W-4 form to determine withholding amounts. Other countries have equivalent tax forms.
• Local Tax Regulations: Businesses must adhere to federal, state, and local tax laws when calculating withholdings.
• Tax Brackets and Rates: Depending on the tax system in the country, high earning employees may be required to contribute more, affecting how much is deducted from each paycheck.
• Additional Withholdings: Employees may request extra withholdings to cover expected tax liabilities.

Employer Taxes and Contributions:

In addition to employee withholdings, employers must contribute to various taxes and programs. These usually include:

• Payroll Taxes: Employers pay a portion of Social Security and Medicare taxes in the U.S. or equivalent in other countries.

• Unemployment Taxes: Employers contribute to state or national unemployment programs that support workers during job loss.
• Social Insurance Contributions: In some countries, employers are expected to pay toward national healthcare, pension funds, or worker compensation schemes.

Properly managing tax withholdings prevents underpayment issues and ensures compliance with regulatory requirements. Employers must stay informed about changes in tax laws to ensure proper compliance.

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8. Recordkeeping and Reporting

Payroll records must be kept for compliance and audits. Most labor laws require businesses to maintain payroll records for several years. For small businesses, these records include

• Employee pay stubs
• Timecards and attendance records
• Tax filings and withholding details 
• Employee contracts and benefit deductions

Proper recordkeeping helps businesses track payroll costs, resolve disputes, and ensure accurate tax reporting. This process can be simplified by automation of the payroll system, reducing the administrative burden.

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 How to Avoid Mistakes When Paying Employees

Payroll errors can be costly and time-consuming, harmful to your company reputation, and increases your risk of employee churn if it happens often. It is important to stay ahead of the curve and anticipate these common mistakes:

• Misclassifying employees: It’s essential to differentiate between independent contractors and employees, as tax and benefits obligations differ. Check out our in-depth guide on avoiding employee misclassification here.
• Failing to stay updated on tax laws: Tax regulations frequently change, and failing to comply can result in significant penalties.
• Relying on manual payroll processing: Manual calculations increase the risk of errors. Payroll software automates the process, ensuring accuracy and efficiency.
• Inconsistent payroll schedules: Employees rely on timely paychecks. Delays can lead to dissatisfaction and legal issues.
• Incorrectly tracking overtime and benefits: Failure to monitor overtime pay and benefits accurately can cause compliance issues and employee disputes.
• Neglecting payroll audits: Regular payroll audits help identify discrepancies, prevent fraud, and ensure accurate reporting.

Regular payroll audits help businesses identify and fix potential issues before they become bigger problems.  Playroll’s Global Payroll Analytics feature provides real-time insights into your payroll costs, helping you make data-driven decisions, accurately report, and optimize spending across your business.

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Simplify Global Payroll Management with Playroll

Our intuitive software makes it easy for businesses of any size to consolidate multi-vendor payroll, automate payroll operations and stay globally compliant.

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Running payroll involves more than just cutting a paycheck. Companies need to adhere to tax laws, regional laws, creating the right payment structure and maintaining accurate records. Automating payroll can significantly reduce errors and save time, especially for companies with global teams.  

For business owners looking for a simplified global payroll solution, Playroll offers tools that centralize multi-country payroll data, automate tax calculations, standardize payroll and ensure compliance with international labor laws. Book a chat with our team to learn how we can help you make running global payroll truly simple, while integrating seamlessly with your existing operations.