This article is for informational purposes. It is not professional legal advice. See more at the end of this article.
Payroll management is the process of paying employees correctly and on time. It also means tracking withholdings, tax deposits, and records so the business stays compliant.
Every individual paycheck carries a compliance obligation, so accuracy is important. That’s why the payroll and HR services market is set to reach $66 billion by 2035.
This guide explains what payroll management means in 2026 and what to know before paying your employees.
What is payroll management?
Payroll management is the administrative system used to distribute employee wages. Store owners use it to track hours and calculate total earnings.
The process also handles tax withholdings and distributes payouts on a set schedule. Running payroll correctly fulfills legal obligations and protects the business.
Managing payroll requires you to:
- Collect employee data
- Calculate net pay
- Withhold and remit taxes
- Fulfill labor law requirements
- Maintain accurate payroll records
The importance of effective payroll management
Payroll processing performance affects business costs and employee retention in several ways:
- Worker respect. A 2025 HiBob survey found that 88% of employees say payroll performance reflects how much their company respects them.
- Employee trust. Payroll mistakes damage workplace relationships. The HiBob survey showed that 21% of workers lost trust in their company due to payroll errors.
- Retention rates. Mistakes cause workers to seek other employment. In the same survey, 53% of employees said recurring errors would make them consider leaving their jobs.
- Job focus. Financial stress affects daily performance. In the survey, 64% of employees experienced stress from payroll errors, and 45% said financial worry affects job performance.
- Cost control. Payroll is 40% to 60% of operating expenses for large companies. Research from UKG and KPMG shows companies lose 2% to 4% of total labor spend to payroll leakage from system limitations.
Errors carry high financial penalties. In fiscal year 2025, the US Department of Labor recovered more than $259 million in back wages for 177,000 employees. That’s an average of $1,465 per worker.
Operational losses extend past government fines. System mistakes damage workplace trust and create administrative burdens for finance teams. The UKG and KPMG study found that two in five large companies report $1 million to $5 million in annual payroll leakage.
Learn: Retail Staff Management: Tips, Skills & Responsibilities for Managers
How to manage payroll: 7 essential steps to follow
Whether your business is hiring its first employee or improving an existing HR process, follow these seven steps to manage payroll:
- Register for an employer identification number (EIN)
- Collect W-4s and other employee information
- Establish a payroll schedule
- Decide how you’ll pay employees
- Calculate employees’ gross pay per period
- Withhold and submit payroll taxes: Federal, state, and local
- File tax forms and submit employee W2s (and 1099s for contractors)
1. Register for an employer identification number (EIN)
Businesses use an employer identification number (EIN) to hire and pay employees. This unique federal tax identification number allows companies to report payroll taxes to the Internal Revenue Service (IRS).
The IRS online application validates business data and issues the EIN during the session. Alternative processing options include faxing or mailing the SS-4 form. Faxed applications require four business days to process while mailed forms take four weeks.
2. Collect W-4s from employees
Collect Form W-4 (also known as the Employee’s Withholding Certificate) for every employee. Employees submit the form by their first day of work.
The details—the employee’s marital status, dependents, and additional income—determine the correct federal income tax withholding for each paycheck.
Collect and secure additional employee information:
- Bank account details for direct deposit
- Full legal name, Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN), and mailing address
- State tax withholding forms if required (e.g., California’s DE 4)
- Employment classification (W-2 employee or 1099 contractor)
- Start date, job title, and compensation details
- Voluntary deductions for retirement contributions or health premiums
- Work eligibility documents (Form I-9 in the US)
Some industries, locations, or benefits also require union membership status, wage garnishment information, or insurance enrollment forms.
3. Establish a payroll schedule
A payroll schedule determines how often your employees get paid. Common payroll frequencies include:
- Weekly. Paid once a week, totaling 52 paychecks a year.
- Biweekly. Paid every other week, totaling 26 paychecks a year.
- Semimonthly. Paid twice a month, totaling 24 paychecks a year.
- Monthly. Paid once a month, totaling 12 paychecks a year.
Federal law doesn’t regulate payroll frequency, but individual states set minimum requirements.
For example, Arizona employers must pay workers at least once every 16 days. Oregon and North Dakota labor laws require at least one payment per month. Check your local state labor department to confirm compliance when setting your calendar.
4. Decide how you’ll pay employees
Direct deposit is the main way employees receive pay. PayrollOrg’s 2025 Getting Paid in America survey found that 92.65% of respondents receive pay by direct deposit, compared with 3.3% by paper paycheck.
Employers collect different documentation to process these payments. When setup requires electronic direct deposit, collect these items:
- Account numbers. The employee’s checking or savings account number and the nine-digit routing number.
- Authorization forms. Signed direct deposit authorization forms that verify account ownership.
When processing payroll with physical checks, verify these details:
- Mailing address. The current physical mailing address for delivery and tax distribution.
- Full legal name. The employee’s identification to ensure the name matches government records.
The Shopify pay stub generator calculates stubs using company information, employee hours, and tax rates. Use the tool to generate summaries for electronic or physical payments.
5. Calculate gross pay per period
Gross pay is an employee’s total compensation before taxes and deductions. Calculate salaried gross pay by dividing the annual salary by the total annual pay periods. For standard hourly employees, multiply the regular hours worked by the hourly wage.
The Fair Labor Standards Act (FLSA) mandates overtime pay for hourly workers. Federal law requires employers to pay 1.5 times the regular hourly rate for all hours worked beyond 40 in a single workweek. Follow this formula:
Gross pay = (Regular hours x Regular rate) + (Overtime hours x Overtime rate)
State guidelines sometimes impose stricter calculations. For example, according to the California Department of Industrial Relations, employers must pay overtime after eight hours of work in a single day.
Review local state labor department mandates to align with regional legal requirements in your area.
6. Withhold and submit payroll taxes: federal, state, and local
Payroll tax compliance is a documented challenge for small businesses during early growth stages. According to the November 2025 Shopify Merchant Survey,* businesses earning less than $100,000 in revenue were more likely to cite navigating government regulations and taxes as a year one challenge compared to higher-revenue businesses.
Total payroll taxes include corporate tax obligations as well as employee withholdings. Employers calculate and remit multiple tax components:
- Federal Insurance Contributions Act (FICA) matching. Employers match employee contributions for Social Security and Medicare taxes.
- Unemployment taxes. Businesses pay into both Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) systems.
- Local withholdings. Revenue departments require state and local income taxes depending on the physical location of the business and its staff.
The IRS provides online documentation to calculate and manage these payroll taxes:
7. File tax forms and submit employee W2s (and 1099s for contractors)
Use Form 941 to file federal tax returns each quarter. This form details income taxes, Social Security tax, and Medicare tax withheld from wages, along with the employer-matched portions.
Mark these deadlines on a payroll calendar:
- First quarter (January 1–March 31, 2026). Due April 30, 2026.
- Second quarter (April 1–June 30, 2026). Due July 31, 2026.
- Third quarter (July 1–September 30, 2026). Due October 31, 2026.
- Fourth quarter (October 1–December 31, 2026). Due February 2, 2027.
Review IRS instructions before filing. The IRS says the March 2026 revision of Form 941 is expected to apply to all four quarters of 2026 unless later law changes require another update.
Employers also file Form 940 annually to report Federal Unemployment Tax Act (FUTA) tax on wages paid. For the 2026 tax year, Form 940 is generally due February 1, 2027 (because January 31, 2027, falls on a Sunday). Employers that deposited all FUTA tax on time may have until February 10, 2027, to file.
Submit 2026 W-2 forms to the Social Security Administration (SSA) and distribute copies to employees by February 1, 2027. The standard deadline is January 31, but it moves to the next business day if it falls on a weekend or legal holiday. The SSA’s Business Services Online portal handles electronic W-2 filings.
Also, file Form 1099-NEC with the IRS and issue statements to independent contractors for qualifying nonemployee compensation. IRS instructions list Form 1099-NEC for nonemployee compensation payments of $2,000 or more.
Common payroll mistakes (and how to avoid them)
In ADP’s 2025 Global Payroll Survey, the three most common causes of payroll inaccuracies were data inaccuracies (37%), time-entry errors (33%), and lack of automated processes (33%).
Most payroll mistakes happen in these areas:
Depositing employment taxes late
Late tax deposits cost between 2% and 15% of the unpaid amount.
The IRS charges 2% for payments one to five days late, 5% for six to 15 days late, and 10% for payments late by more than 15 days. The penalty increases to 15% after the agency issues official notices.
Avoid late payments by establishing a clear tracking system:
- Monthly schedules. Remit taxes by day 15 of the following month.
- Twice-weekly schedules. Pay by the following Wednesday for paydays falling on Wednesday, Thursday, or Friday. Pay by the following Friday for paydays falling on Saturday, Sunday, Monday, or Tuesday.
- Automation tools. Use payroll software to set recurring calendar alerts and process payments.
Employers who change deposit schedules can qualify for a one-time penalty waiver. To receive the waiver, meet the Form 941 filing deadline.
Misclassifying hires
The IRS penalizes employers $50 for each missing Form W-2, 1.5% of all wages paid to misclassified workers, and 40% of uncollected FICA taxes.
Protect against these penalties by applying three IRS classification criteria:
- Behavioral control. Review if the employer dictates how the worker completes tasks through instructions, training, or direct oversight.
- Financial control. Determine who manages business operations, including payment terms, tool expenses, and profit opportunities.
- Relationship type. Evaluate written agreements, employee benefit eligibility, and the integration of core services.
Worker duties determine exempt or non-exempt status under the Fair Labor Standards Act (FLSA). Non-exempt workers receive overtime pay. Exempt workers do not qualify for overtime pay if their regular job tasks meet the FLSA duties criteria.
Paying from the wrong state
US states mandate regulations for income tax, minimum wage, overtime pay, and employee leave.
Employers must apply the labor laws of the physical location where the worker performs tasks. Corporate registration locations do not alter these regional requirements.
Skipped overtime
Non-exempt employees receive overtime pay when they work more than 40 hours in a workweek under federal law. Violations result in civil penalties up to $1,000 per occurrence, plus additional state fines.
Use a time-tracking system, such as PTT, to record staff hours. Check overtime hours each week to resolve errors before the payroll cycle closes.
Best practices to manage payroll effectively
Here are common payroll best practices to keep you compliant:
- Share a payroll calendar
- Maintain comprehensive employee and payroll records
- Stay updated on tax and labor laws
- Appoint a payroll manager
- Implement payroll security measures
Share a payroll calendar
A payroll calendar tracks pay periods, deadlines, and holidays. It tells employees:
- When they’ll get paid
- The period the payment is for
- Potential delays or changes in pay dates
- Their deadlines for submitting time cards
“Your financial health depends on how you manage payroll,” says Courtney Quigley, business reputation consultant at Rize Reviews.
“Manage it with a payroll calendar so you can keep track of important dates, holidays, paid time off. It also helps your staff determine cut-off dates and payday. Share the calendar with supervisors and managers of your store or stores so they can transparently share it with their teams.”
Maintain comprehensive employee and payroll records
Store employee documents using physical copies or secure digital payroll software. Track these required records for each worker:
- General information. Employee name, address, Social Security number (SSN), and date of birth.
- Tax forms. W-4 forms, state withholding selections, and filed tax documents.
- Pre-hiring records. Job applications and interview notes.
- Time and attendance logs. Time cards, total hours worked, and time-off tracking.
- Payroll records. Pay rates, total earnings, deductions, and pay stubs.
Federal law states you need to keep payroll records for three years, and payroll tax records (like unemployment taxes) for four years. Some documents, like retirement income and 401(k) plan details, must be kept for six years.
According to a November 2025 Shopify Merchant Survey,* 69% of respondents review their finances at least weekly. This routine recordkeeping and profit and loss (P&L) review correlates directly with hitting revenue milestones and avoiding cash flow challenges.
“Organization is key. It’s critical you maintain squeaky clean payroll records,” says Will Lopez, head ambassador to accountant partners and customers at Gusto. “Dedicate a secure place to keep up to four years of employee I-9 forms, W-2s, W-4s, and state new hire forms.”
Different states have different requirements when it comes to record-keeping. Keeping your records clean and well-maintained makes audits run smoothly. It also helps you spot issues before they arise.
Stay updated on tax and labor laws
Hiring remote workers or employing a mix of full-time staff and independent contractors changes a business’s tax withholding rules.
Regular compliance checks ensure that a business:
- Files and pays taxes according to statutory deadlines
- Processes payroll under current federal and state labor laws
- Calculates accurate overtime compensation
- Retains correct payroll records
To stay up to date, make a routine to check in with:
- The IRS website
- Individual state tax authority portals
- Public accounting firm tax hubs like Deloitte
Appoint a payroll manager
Payroll execution structures scale with business size. Small operations can assign these duties to an existing employee as a hybrid role or use a part-time freelancer. When scaling, it’s an option to hire a full-time payroll manager, an external accountant, or a payroll service.
“The key players to involve in your payroll process are [your] payroll provider, [an] accountant, and [a human resources ] business partner,” says Will at Gusto.
Implement payroll security measures
A report by People Management magazine states that employee information is the highest value asset for cyber criminals today. Securing HR data requires retail software protocols and restricted user permissions.
Implement these data security practices when managing payroll:
- Software integration. Select a payroll provider that syncs with existing point-of-sale (POS) software. Systems like Gusto or QuickBooks connect to Shopify stores to transfer hours, pay data, and contractor invoices securely.
- Role-based permissions. In Shopify, give each employee their own staff account and assign only the permissions they need in the admin. Review third-party app permissions separately.
- Cloud storage. Save payroll records in encrypted, backed-up cloud storage environments rather than local desktop folders.
- Data protocols. Prohibit the transmission of unencrypted pay stubs, dashboard screenshots, and shared credentials.
- Access audits. Review user permissions every three months to remove unneeded administrator access.
Choosing the right payroll system for your business
Review these payroll system options to choose the right one for your business:
Manual/DIY payroll
Suited for: Micro-businesses, early-stage startups, or single-operator teams
Small retailers often begin with spreadsheets and calendar reminders. Manual tracking works for single-employee businesses with limited budgets, but scaling a team increases administrative tasks.
Manual payroll comes with trade-offs:
- Zero software costs. Processing tasks internally eliminates platform service fees.
- Direct visibility. Manual entry provides clear tracking of business cash flow.
- Increased labor. Adding workers increases the manual administrative workload.
- Compliance liability. Errors can result in regulatory fines, requiring the owner to track tax code updates.
“DIY works when you have a small team, but it gets unmanageable as you grow,” says Lanai Moliterno, CEO and founder of Sozy. “It opens up room for error.”
Payroll software
Suited for: Businesses with multiple employees, hourly teams, or operators seeking automated compliance
Standard payroll applications have these capabilities:
- Automated tax compliance. Systems calculate and file federal, state, and local taxes.
- Direct deposit. Platforms distribute funds to bank accounts on specified dates.
- Time-tracking integration. Software connects to POS systems or scheduling applications.
- Employee portals. Workers access pay stubs, tax forms, and account details independently.
- Error alerts. Built-in compliance tools flag mistakes prior to IRS submission.
- Worker classification. Systems manage payments for both salaried employees and independent contractors.
- Multicurrency processing. Platforms calculate localized currency distributions for international teams.
- Mobile access. Administrators and teams manage payroll records through mobile applications.
“Using payroll software puts so much into automated mode and safeguards your time and business," says Lanai.
Testing platforms through trial periods verifies system compatibility before entering a contract. If you’re on Shopify, use an app like Easyteam to track hourly shifts, calculate retail commissions, and process employee payroll data.
An accountant (in-house or external)
Suited for: Retailers seeking specialized financial oversight and managed accounting ledger systems
Business owners can contract an external professional or hire an in-house accountant to oversee payroll and financial records. Consider these factors before making a hire or signing a contract:
- Dedicated management. Professionals handle compliance obligations and regulatory reporting requirements.
- Reduced administrative oversight. Delegating payroll operations reduces internal task lists.
- Lower data control. Outsourcing transitions direct record handling to a third party.
- Increased overhead. Full-time internal staff salaries increase fixed business expenses.
Payroll services
Suited for: Growing enterprises requiring full-service tax filing, payroll processing, and compliance management
Payroll service companies manage end-to-end payroll operations. These providers execute tax filings, calculate deductions, deposit employee payments, and process new-hire documentation.
Payroll services offer hands-off management, but costs grow with your business:
- Comprehensive delegation. Providers handle all specialized execution steps and administrative details.
- Scaling support. Agencies manage complex regulatory requirements for multistate or international workforces.
- Service costs. Comprehensive management fees increase operational expenses as a workforce grows.
*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with more than two years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.
Please consult independent legal advice for information specific to your country and circumstances. Shopify is not liable for your use of this content.
This post is for information purposes only. You are responsible for reviewing and using information appropriately. This content doesn’t contain and isn’t meant to provide legal, tax, or business advice.
Legal requirements are updated frequently and you should make sure to do your own research and reach out to professional legal, tax, and business advisers, as needed. Your local state, province, or county will have different steps and requirements.
To sell products using the Shopify platform, you must comply with the laws of the jurisdiction of your business and your customers, the Shopify Terms of Service, the Shopify Acceptable Use Policy, and any other applicable policies.
How to manage payroll FAQ
How do I manage my payroll myself?
Follow these steps:
- Get an EIN (employer identification number)
- Classify your workers
- Set a pay schedule
- Withhold and pay taxes
- File tax forms like W-2s and 941s
If you’re running a Shopify store, look into integrated payroll tools that sync with your team’s hours and roles.
What’s the best way to do payroll for a small business?
The “best” way is what’s accurate, compliant, and doesn’t consume an excessive amount of your time. For small businesses, that means payroll software that handles calculations, taxes, and filing.
If you’re on Shopify, you can connect to payroll partners right from your admin dashboard.
Does Shopify have a payroll system?
Shopify does not have its own native standalone payroll system, but it connects with dedicated payroll platforms. Merchants can use integrated third-party applications like Easyteam, Gusto, or QuickBooks.
How do you get a paystub from Shopify?
You can quickly create and access pay stubs by using Shopify’s built-in pay stub generator tool. Enter your business details, employee working hours, and required tax rates, and the system will automatically calculate accurate summaries that include year-to-date income and deductions.
