Quick Answer: Payroll involves calculating wages, withholding taxes, and issuing payments on schedule. According to the IRS, you track hours, compute gross pay, deduct federal and state taxes, and maintain compliant records. For small businesses with hourly teams, payroll typically runs weekly or bi-weekly. Getting it right matters because one mistake triggers costly penalties.
Getting payroll right protects you from costly mistakes. Late tax deposits cost you 2-15% penalties plus interest. Misclassifying workers runs $6,000+ per person. Wage violations under FLSA mean back pay spanning years, plus penalties up to $1,000 per violation.
How Does the Payroll Process Work?
Payroll runs the same way every cycle: you collect the right forms, track hours, run the calculations, pay your team, and file your taxes. The steps aren’t complicated on their own, but they get messy fast when you’re juggling overtime, tips, or multiple pay rates. Knowing the basic flow helps you stay accurate and avoid avoidable penalties.
- Set up: Collect Form W-4 from each person on your team and register for electronic tax payments
- Each pay period: Track time and attendance, calculate gross pay including overtime hours, process required deductions and tax withholdings, and calculate net pay
- Payment execution: Issue payments on your payday and deposit withheld taxes electronically
- Quarterly filings: Submit Form 941 by the deadline
- Record retention: Maintain complete records for at least four years
Your pay frequency must comply with state requirements. California mandates semi-monthly minimum. New York requires weekly pay for hourly teams. Missing these requirements triggers immediate violations.
For restaurants and retail businesses, accurate time tracking becomes critical. Manual timesheets create errors, especially with overtime calculations.
Here's a real scenario: Your server works 44 hours, including prep work at different rates. You must calculate the weighted rate for overtime purposes. This blended rate includes all compensation: hourly wages, non-discretionary bonuses, and shift differentials. Missing these calculations triggers DOL violations costing thousands per person.
What Taxes Come Out of Paychecks?
Three mandatory federal withholdings apply to every paycheck: federal income tax, Social Security, and Medicare.
Federal income tax varies by person based on their W-4 form. Social Security and Medicare rates stay constant. In 2025, you withhold 6.2% for Social Security on wages up to $176,100 per person. You withhold 1.45% for Medicare on all wages with no limit. Combined, that's 7.65% in FICA taxes from every paycheck.
Here's what catches restaurant and service business owners off guard: you owe matching employer taxes, too.
Your server earns $2,000 in wages this pay period. Here's the complete cost breakdown:
- Employee FICA withholding: $153 (you deduct this from their paycheck)
- Your matching employer FICA: $153 (you pay this from your business)
- True total cost: $2,153, not just $2,000
- FUTA tax: Typically $420 annually per person for federal unemployment
- State unemployment: Varies by state, typically $2,000-$4,000 per person annually
This matching requirement catches many first-time business owners by surprise.
State and local taxes add complexity. Seven states prohibit tip credits entirely. California requires $16.50/hour, and Washington requires $16.66/hour, with no tip credit allowed. Meanwhile, states like New York mandate weekly pay for hourly teams.
What's the Easiest Way to Run Payroll?
The easiest way to run payroll is to automate the parts that cause mistakes: totaling hours, applying overtime rules, deducting breaks, and calculating taxes. Manual processing can work for very small teams, but once you’re managing several hourly people, different shifts, or varying pay rates, the math becomes time-consuming and error-prone.
And then you reach 5+ team members: Most small businesses switch to an automated system or start dealing with overtime, tips, or multiple locations. Automation pulls time-tracking data directly into payroll, applies the right federal and state rules, calculates pay correctly, and handles tax filings — turning a multi-hour task into a quick review and approval.
How Does Homebase Help with Payroll?
Sunday night scheduling marathons and Friday afternoon payroll panic don't define your life anymore. We connect time tracking directly to payroll processing, automatically calculating regular and overtime hours. We maintain the detailed records required for compliance.
When your team clocks in via mobile app, their hours flow seamlessly into payroll calculations. No manual entry. No math errors. No missed overtime.
Our automated systems work while you focus on growing your business. We handle the compliance complexity. You confidently pay your team and protect your business from costly violations.
Get Homebase free for six months.
Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article reflects accurate guidance for small business owners. We start with primary information from official government agencies, verify details using current tax and payroll regulations, and use reputable industry insights only to supplement—not replace—official rules.
For this piece, we referenced guidance from the U.S. Department of Labor, IRS publications and tax brackets, the American Payroll Association, HR Morning case studies, and Homebase’s own payroll and time-tracking resources.