Small Business Payroll Software: Accurate Payroll Made Easy

Published Monday 22 December 2025

Table of contents

• Why small businesses need payroll software
• What is payroll for small businesses
• How to choose the right payroll software
• Getting started with payroll software
• Understanding payroll compliance requirements
• Managing payroll changes and growth
• Record keeping and payroll archives
• Streamline your payroll with the right solution
• FAQs on small business payroll

Key takeaways

• Implement payroll software to automate calculations and reduce manual work from hours to minutes, as small businesses typically spend 26 hours per year on PAYE tasks alone and around 100,000 employers make at least one error annually.
• Choose integrated payroll software that works with your existing accounting system and can scale from one to 50+ employees, prioritising online solutions that provide automatic updates and instant record synchronisation.
• Maintain comprehensive payroll records for each employee including hire dates, wage payments, tax forms, and benefit details, as most countries require keeping these records for the current tax year plus the previous three years.
• Establish clear processes for handling different payment types including salaries, hourly wages, commissions, and bonuses, ensuring all new employees complete proper tax documentation before their first pay period.

Why small businesses need payroll software

Running a business takes time, and manual payroll can eat into your day. A 2024 study found that small businesses spent a median of 26 hours per year on pay as you earn (PAYE) tasks alone.

Payroll software automates calculations, helps you stay compliant with tax rules, and ensures your team is paid accurately and on time. It simplifies a complex job, giving you more time to focus on what you do best.

What is payroll for small businesses

Payroll for small businesses is the process of paying employees and managing the associated taxes and compliance requirements. This includes calculating wages, withholding taxes, and reporting payments to government agencies.

Payroll matters to your business for two main reasons:

• Legal compliance: accurate payroll helps you meet tax rules and avoid costly adjustments, such as the $1.2 billion in adjustments New Zealand's Inland Revenue made in a single year
• Employee retention: paying your team correctly and on time builds trust and helps you keep valuable employees

Here’s what you need to know about payroll for your small business.

How to choose the right payroll software

Payroll software comes in two main formats: integrated accounting solutions and standalone applications.

Choose payroll software based on your business size, complexity and existing systems:

• Check whether your current accounting software includes payroll so you do not have to manage separate systems
• Select payroll accounting software that you and your accountant can navigate easily
• Choose online software (now the most widely used method for processing wages) so you can access it anywhere, get automatic updates and reduce IT maintenance
• Choose software that scales from 1 to over 50 employees without needing a system change
• Use software that updates records instantly so you stay compliant and avoid manual tracking
• Ask your accountant, bookkeeper and other business owners for recommendations based on their experience, as 91% of businesses use professional services such as tax agents and accountants
• Make sure the software creates all the tax forms and reports your business needs

You can also look for features such as automated tax calculations, direct credit or bank transfer management, and timesheet handling. Think about what you need now and as you grow so you can choose a payroll system you can use for the long term.

Getting started with payroll software

Once you've chosen your software, getting set up is straightforward. You'll start by entering your business details, like your tax number. Then, you'll add your employees' information, including their tax forms, pay rates, and bank details. Finally, set your pay schedule (whether it is weekly, fortnightly or monthly) and you will be ready to run your first pay.

Understanding payroll compliance requirements

Payroll compliance requires following specific legal obligations that apply to most small businesses. Key requirements include:

• Tax withholding: Deduct income tax and social contributions from employee wages, then remit these payments to government agencies on schedule
• Employee benefits: Calculate and contribute to social security, healthcare, and retirement schemes as required by local regulations
• Meeting deadlines: File and pay on time so you avoid penalties and keep your cash flow predictable
• Reporting obligations: Submit payroll reports to tax authorities and provide pay slips to employees according to local filing schedules
• Employee classification: Payroll covers direct employees only, not contractors or freelancers who invoice through their own businesses

You may have other obligations too, such as paying funds towards unemployment cover, or checking that each employee is legally allowed to work in your country.

Managing payroll changes and growth

Your payroll isn't fixed; it will vary as you hire new employees. Whenever a new employee joins your business, make sure all the correct government tax documentation is completed and, if required, filed.

Payments to the people on your payroll will vary too and you'll need to include them in your system in different ways. Your payroll may need to handle different types of payments, including:

• salaried pay: a fixed salary each pay period
• regular hourly or casual pay: an hourly rate for the hours worked each week
• commission: a percentage of the value of products or services sold
• bonuses: extra pay for performance above agreed levels
• supplementary wages: other payments such as commissions, overtime, severance pay, awards, back pay, retrospective pay increases and non-deductible moving expense payments

Record keeping and payroll archives

In many countries you must keep payroll records for several years. For example, in the United States (US) and the United Kingdom (UK) you must keep records for the current tax year and the previous three tax years. These records should include the following information for each employee:

• name, address and any national or welfare identification number required in your country
• date of hire
• date of termination, if they have left your business
• amounts and dates of all wage and pension payments
• copies of all relevant forms supplied to and by the employee
• details of sickness or injury payments, including dates, amounts and who made the payments
• dates and amounts of tax deposits you made
• copies of returns filed and any confirmation numbers
• records of fringe benefits and expense reimbursements you provided

There may also be other information that you're legally obliged to keep. Check with your local tax office to find out.

Streamline your payroll with the right solution

Getting payroll right can be straightforward. With a clear process and the right tools, you can manage payments with confidence, save valuable time, and focus on growing your business. Run your business, not your books. It is that easy with Xero. Try Xero for free.

FAQs on small business payroll

Here are answers to some common questions about small business payroll.

How much does payroll software cost for a small business?

The cost of payroll software varies depending on the provider and the number of employees you have. Many providers offer tiered plans, with basic options starting at a low monthly fee per employee. It's a good idea to compare plans to find one that fits your budget and business needs.

Can I do payroll myself without software?

You can do payroll manually, but it takes time and increases the risk of errors. Even tax professionals find some rules challenging. One survey found 70% of tax agents considered the rules for correcting minor pay as you earn (PAYE) errors to be complex and time-consuming. Using software helps ensure accuracy, saves time, and keeps you up-to-date with changing regulations, which is why most businesses find it to be a worthwhile investment.

What's the difference between payroll and accounting software?

Accounting software helps you manage your business's overall finances, like tracking income, expenses, and creating financial reports. Payroll software is specifically designed to manage employee payments, taxes, and compliance. Many platforms, such as Xero, bring accounting and payroll together in one system so you can see your finances in one place.