Employee or contractor?
Before you run payroll, make sure the person really is an employee. Hiring a freelancer or contractor means they send you an invoice and handle their own tax, and you simply pay it like any other supplier bill. An employee is different: you are responsible for withholding tax from their pay, paying employer contributions and reporting to the authorities. The line between the two is drawn by law, not by what you call the arrangement. Tax authorities typically look at factors such as whether you control how and when the work is done, whether the person works only for you, and whether they use your equipment. Getting this wrong can mean back taxes and penalties. Rules differ by country, so if the role is borderline, check with your tax office or an accountant before the first day.
Register as an employer
In most countries you have to register as an employer before you pay your first salary. This is usually done with the tax authority, and sometimes also with a social insurance agency, a pension provider or a workplace accident insurer. Registration gives you an employer reference number that you will use on every payroll report. Some countries require registration before the employee starts work, others before the first payday; find out which applies to you, as late registration can bring fines. While you are at it, check whether you need anything else as a new employer, such as mandatory insurance, a written employment contract in a particular form, or a workplace pension scheme. Your tax office website usually has a checklist for first-time employers, and it is worth reading in full.
Collect the employee's details
Before the first pay run, gather what you need from the new hire. That normally includes their full legal name and address, date of birth, tax identification or social security number, bank account details for salary payments, and any tax information they are required to give you, such as a tax code, withholding certificate or declaration form. In some countries the tax authority sends you the withholding details directly. You will also want a signed employment contract that states the salary, working hours, start date, holiday entitlement and notice period. Store all of this securely, since it is personal data and in many places is protected by privacy law. Keep a copy of everything you used to calculate pay; you will need it if a figure is ever questioned.
From gross pay to net pay
Payroll comes down to one calculation done correctly every pay period. Gross pay is the salary you agreed, say €3,200 a month. From that you deduct the employee's income tax withholding and the employee's share of social contributions, such as pension or social insurance, at rates set by your country and sometimes by the employee's personal tax details. What remains is net pay, the amount that actually lands in the employee's bank account. For illustration only, if total deductions came to 30 percent, the employee would receive €2,240, and you would send the €960 withheld to the authorities on their behalf. Some countries also have deductions for things like union fees or student loans. The rates are the part you must get exactly right, so use official tables, payroll software or an accountant.
What an employee really costs you
Gross salary is not the full cost of an employee. On top of it, most countries charge employer contributions, such as employer social security, payroll taxes or mandatory pension payments, which you pay from your own pocket and which are not deducted from the employee. Depending on where you are, these can add a noticeable percentage on top of gross pay. Then there is paid holiday, sick pay, any benefits you offer, insurance, equipment and the time you spend managing payroll. A rough rule many small businesses use is that the true cost of an employee is well above their gross salary, often by 20 to 40 percent once everything is included, but your figure depends entirely on local rules. Work out the real number before you agree a salary, and make sure your prices cover it.
Running a pay run, step by step
Each pay period follows the same routine. First, confirm the hours or days worked and any changes since last time, such as overtime, unpaid leave, sick days or a pay rise. Second, calculate gross pay, deductions, net pay and employer contributions. Third, check the figures, ideally against the previous period, and look into anything that changed unexpectedly. Fourth, pay the net salary to the employee on the agreed date. Fifth, give the employee a pay stub. Sixth, report the payroll to the authorities and pay over the withheld tax and contributions by the deadline. Seventh, record the whole pay run in your books: gross salary and employer contributions as expenses, and the amounts owed to the tax office until you pay them. Doing it the same way every month makes mistakes rare.
Pay stubs: what to include
A pay stub, also called a payslip, tells the employee how their pay was calculated. In many countries giving one is a legal requirement, and some specify what it must contain. A good pay stub shows the employer name, employee name and identifier, the pay period and payment date, gross pay broken into its parts (basic salary, overtime, bonuses), each deduction with its amount, net pay, and often year-to-date totals for gross pay and tax. Some countries also expect holiday balance, employer contributions or the tax code used. Clear pay stubs prevent a lot of questions. An employee who can see exactly why their net pay changed in a month with overtime or unpaid leave is far less likely to worry that something went wrong. Keep a copy of every stub you issue.
Reporting, deadlines and records
Every payroll system has a reporting side. You will usually report each pay run, or each month's payroll, to the tax authority and pay the withheld tax and contributions by a fixed date. Many countries now use real-time or monthly electronic reporting, and some also require an annual summary for each employee. Deadlines are strict, and late payment of withheld tax is treated seriously in most places because the money belongs to the employee and the state, not to you. Write the deadlines into your calendar the day you register. Keep payroll records, including contracts, timesheets, pay stubs and reports, for as long as your country requires; see our guide on how long to keep business records for how retention rules vary.
Run payroll alongside your books
Payroll for one or two people does not need a separate system. Kelvo Books includes payroll pay runs and pay stubs on the Pro plan, so you can record each pay period with gross pay, deductions and net pay, issue a stub to your employee, and see salary costs flow straight into your live profit and loss and cash flow. Because payroll sits next to your invoices, expenses and ledger, the export you send your accountant includes everything in one file. You still use your country's official rates and file your reports with the authorities, but the record-keeping is handled. Pro is €7 a month and also adds unlimited invoices, reminders and recurring billing. Start at books.kelvo.app and make your first hire a smooth one.