How to Set Up a Payroll System for a Small Business

An effective payroll system is key to sustainable growth, keeping operations smooth, strengthening compliance, and making it easy to scale as you expand.

For small businesses moving into global payroll, having the right approach is essential. Meeting different countries’ requirements not only keeps you compliant but also helps create efficient processes that support your growth.

This article walks you through a practical guide to setting up payroll for small businesses, covering everything from registering your company to building scalable processes that grow with your team.

Understanding payroll basics for small businesses

Payroll is the process of compensating your workforce. As remote work becomes the norm, that frequently means managing payments for employees and contractors across various locations. Even if you have a very lean team, you can still expect to handle the following:

• Taxes: Payroll involves calculating and withholding the correct taxes for each employee. All countries set their own rate and adjust this annually
• Reporting: You must regularly file payroll reports to the relevant authorities, using specific forms and following a fixed schedule
• Contributions: Payroll covers any regular contributions you and your employees make, for example, Medicare and unemployment tax
• Variable compensation: If you award bonuses or commissions to workers, you must account for these in your payroll processing, tax calculations, and reporting
• Time tracking: Small businesses are more likely to have hourly workers, which requires you to accurately record the time worked and transfer the data into your payroll software
• Absences: You must track any paid time off (PTO), including vacations and sick days, and ensure employees still receive the correct pay
• Compliance: All countries have their own payroll, tax, and employment laws that influence how you operate your business. If you violate any of these laws, you could face a fine or legal action

See also: ​​Mastering Global Employment Laws with Deel: Startups Guide

As one of the top expenses for small businesses, managing payroll effectively is essential to keep operational costs low and avoid compliance penalties.

Many companies are turning to tech-enabled solutions to help set up their global payroll system. Using software and automating processes saves valuable time, especially for lean teams already stretched thin. In fact, a third of small businesses say they’re using technology to compensate for worker shortages and free up their existing staff for high-impact tasks.

Let’s explore how small businesses can set up global payroll effectively with the support of a global solution like Deel.

Register your business and obtain legal IDs

Most countries require you to register with the relevant authorities before you run payroll. This allows them to monitor your business activities and verify that you’re complying with the relevant payroll, tax, and employment laws.

Registration usually takes anywhere from a few days to several weeks, and it’s essential to complete it before paying any workers. Operating without official registration can lead to significant penalties. Many tax authorities, like the Internal Revenue Service (IRS) in the US and HM Revenue and Customs (HMRC) in the UK, impose monthly charges for unpaid taxes if you operate without proper registration.

The registration process varies between countries but follows the same general steps:

1. Prepare business details: Gather the information and supporting documents you’re likely to need for the application. This usually includes the owner’s tax ID number and your official business address
2. Discover where to apply: Learn which tax authorities your company needs to register with. You may need to apply for different services depending on your size and location
3. Submit forms: Complete the application and attach the supporting documents. Most services now have a dedicated website with an online portal
4. Receive your ID: Wait until the government sends you an online notification or letter with your business number

Besides tax registration, ensure your company isn’t subject to any other national or local requirements. You may need to obtain a regional business license.

Workers’ compensation is an often overlooked requirement. While some small businesses are exempt (typically teams of five people or less), most companies must still register for insurance to maintain compliance and protect their staff.

See also: Legal Entity Setup for SMBs: The Complete Guide for 2024

Classify your workers correctly

Many small businesses come to rely on a combination of employees and independent contractors. While permanent staff offer continuity by becoming deeply familiar with your processes, hiring freelancers allows you to easily scale your workforce size according to your labor needs.

See also: When Should You Move from Contractors to Full-Time Employees?

The challenge is classifying workers correctly in your payroll and HR system. Most countries have a strict definition of employment you must follow when hiring and paying staff.

While you should always verify your worker's local classification requirements before employment, here are the general differences between the two categories:

Employees are entitled to certain benefits and legal protections if they meet the legal classifcation. Misclassifying workers can have significant financial repercussions as you have to pay back taxes plus any fines and penalties. One Australian company recently had to pay almost $200,000 (AUS) for a case involving just three employees.

Small businesses often lack the expertise or the resources to navigate worker classification. The best strategy is to outsource compliance. Services like Deel Contractor of Record can correctly categorize workers, produce contracts, and collect the necessary documentation.

Choose payroll software that fits small business needs

When selecting payroll software for a small business, it’s important to find a solution that fits your current needs while setting you up for future growth. The right software should be user-friendly, budget-conscious, and adaptable as you expand. Here’s what to look for:

• Ease of use: Software should be intuitive so you can manage payroll efficiently without requiring outside help or investing in extra training
• Transparent pricing: Look for a solution with clear pricing structures for each product or service, so you can anticipate upcoming costs and budget accordingly
• Scalability: As you expand your operations, payroll software should allow you to gradually build on your existing tools
• Automation: Streamlining operations makes you more efficient while reducing the risk of common payroll mistakes. Each error costs an average of $291 to fix, which small businesses may struggle to cover
• Self-service: By letting employees access and manage some profile information, you can significantly reduce admin time
• Choice of integrations: The software should connect seamlessly with your existing tools and offer a range of popular integrations to meet future needs

Steer clear of payroll software designed exclusively for small businesses. While they may provide a quality service, they don’t typically have the infrastructure to support global operations.

Instead, look for global software like Deel that caters to a range of sizes and industries. Choosing a scalable solution allows you to grow without needing to switch providers later, avoiding potential operational disruptions. Many of Deel’s customers joined our service as a small business and grew into the established companies they are today.

For example, MELD has hired over 50 employees in 10 countries using Deel’s global payroll services. "It doesn't matter where in the world our talent is based. Deel has removed all the pain points around contracts, onboarding, and paying our team. We're now more efficient, and we can focus on building our app as opposed to dealing with hundreds of employment matters," said Lavinia Radu, Head of Human Resources at MELD.

Set up payroll processing

Before you run payroll, configure the system to align with your business processes and streamline operations. While our payroll implementation template covers the entire process, here are the basic features and functions that most small businesses need to establish:

Time tracking

Ensure you’ve connected your payroll software to a time tracker, whether that’s a native tool or an integration. This setup enables you to automatically record hours worked and paid time off. You can convert this data into timesheets and transfer it to your payroll to guarantee all payments are correct.

Payroll schedules

See how often you need to run payroll. Jurisdictions often require you to follow a specific schedule depending on your business size, industry, and structure. For example, most Canadian provinces state you must pay workers at least twice a month.

Biweekly is the most common payroll schedule for small businesses. You can pay employees regularly and maintain a steady cash flow without overloading your finance team.

Payment methods

Determine which payment methods are the most manageable, compliant, and cost-effective to run. Direct deposit is now the global standard—95% of companies use it and it reduces the need for physical documents and cards.

Digital wallets are also growing in popularity. Consider whether to transfer funds to worker accounts through a trusted service like Coinbase or Payoneer. There’s no need to add more apps to your tech stack—solutions like Deel support a range of these apps for independent contractor payments.

Calculate and withhold payroll deductions

Understand which payroll deductions you must withhold from your team’s wages. Regardless of location, most employees will be subject to at least some of the following:

• Federal, state, and local payroll taxes
• Social security contributions
• Health insurance premiums
• Retirement plan contributions
• Disability or life insurance
• Wage garnishments (for debt or child support)
• Voluntary deductions (like saving plans or charitable contributions)

Payroll software can automate most of these deductions to save you time. Just input the relevant employee information such as their location, contract type, and hours worked. Leading payroll solutions like Deel stay up to date with the most recent laws and contribution rates for you.

Stay compliant with payroll regulations

Maintaining compliance with international payroll requirements minimizes your risk of fines and legal complications—but it requires staying on top of labor and employment laws in every country you hire in.

For example, many countries limit the number of work hours in a workweek and set minimum overtime rates. If workers occassionally pick up extra shifts, or swap shifts with coworkers, you may pay workers incorrectly and violate labor laws.

Correctly fling forms is another key challenge for small businesses. Some countries require you to submit different paperwork depending on your size and annual revenue, adding uncertainty to the process. For example, the IRS allows employers with less than $1000 in income taxes to file Form 944 annually instead of Form 941.

Consider:

• Have the requirements changed since you last filed?
• Which forms are you required to submit?
• Who is responsible for completing these forms?
• What are the deadlines for submission? OR How frequently should you submit these forms?
• Who gets a copy of each document?

Global payroll services like Deel often take care of filing forms. We generate forms based on your workforce data and send them to the relevant authorities. If needed, you can review the documents or download them in advance.

Global payroll services like Deel handle form filing by using your data to generate the necessary documents and sending them to the relevant authorities. You can review or download these documents in advance if needed.

Staying current with changing payroll laws can strain your resources. Managing compliance often requires either in-house research or hiring local tax specialists. By outsourcing compliance, you gain specialized expertise and stay up-to-date without overextending your budget. Deel’s global payroll service includes localized support, delivering regulatory updates through our Compliance Hub and connecting you with experts for complex compliance issues.

Maintain accurate and up-to-date payroll records

Securely store all payroll records and keep these files organized in case of audits, legal complications, or employee inquiries. That includes any employee data, tax forms, and time sheets. Here’s a list of the typical requirements:

• Retention: Store payroll records for the length of time required by each worker’s country. You must usually retain the data for three to four years but it’s as high as seven in some places
• Accuracy: The employer is responsible for ensuring all records are accurate and complete. However, you can ask workers to help you verify their information
• Accessibility: You should be able to easily retrieve payroll records upon request. Technical issues can lead to audits and employee inquiries
• Data privacy: Store all digital payroll records securely to comply with international laws, namely the General Data Protection Regulations (GDPR) in the EU. Any breaches or leaks could lead to up to €20 million in penalties
• Backups: Regularly back up any digital payroll records to avoid losing them during system failures, cyberattacks, or other disasters

Global payroll software can handle most of these requirements. For example, Deel automatically stores and organizes records for the required length of time. We secure all our customer data according to the highest international standards, including the GPDR and CCPA.

Employees can easily view and update payroll records by logging into their Deel account. However, granular permissions prevent them from accessing other team members’ sensitive data.

Plan for future growth

As your small business grows, so will your payroll needs. Plan ahead to ensure your company is equipped to handle any new challenges without overwhelming your system.

The key is to incorporate your payroll process into your strategy. Consider your company’s current trajectory and its long-term objectives. How does your system fit into these plans or even support them?

If you’re intending to expand your customer base by capturing new markets, you might be looking at a specific country or region. Your business must estimate how many employees, locations, and currencies you must add to your payroll system.

Once you have these insights, you can begin scoping out projects and assessing your payroll system’s capacity, identifying process adaptations needed to support the strategy.

Often, global payroll support specialists can advise you on what’s possible and which steps to take. For instance, Deel provides customers with a customer success manager, who can adjust your plan and guide you through its features. If you need more targeted advice, they can connect you with local payroll, accounting, and legal experts.

Less than 16% of global companies agree their payroll is highly strategic. By incorporating your system into your strategy, you can gain an immediate competitive advantage.

Make payroll simple and ready to scale with Deel

Setting up an effective payroll system is essential for any small business, especially when operating across different countries. It’s the only way to keep operations running smoothly while maintaining compliance with various requirements.

Deel Global Payroll can support your small business through the setup process and beyond. Our software is intuitive and customizable, making it the perfect fit for lean teams looking to scale. With Deel’s competitive pricing and wide coverage, it’s also easier to capitalize on opportunities abroad, as you can hire and pay a variety of worker types around the world, all in one platform.

Book a 30-minute with Deel to explore our software and learn more about our services.