How to Set Up Payroll for Your Small Law Firm

Setting up payroll for a small law firm means accounting for billing cycles that don’t match your payroll schedule, a legal team that spans employees and independent contractors, and funding payroll with your operating accounts while keeping trust funds separate.

Paralegals and legal assistants are employees. Of counsel attorneys may be employees or independent contractors depending on how you structure the relationship. You typically run payroll for yourself. Each classification requires different handling. Classification determines withholding, filings, and tax obligations. Map each role before your first payroll run.

Your practice management software tracks client-billable hours, but payroll time tracking covers all hours worked, including non-billable time that counts toward overtime for non-exempt employees.

SurePayroll® By Paychex is built for small businesses paying employees and contractors from the same platform.

How law firm cash flow affects payroll timing

Federal and state payday laws require you to pay employees on your established schedule, regardless of when retainers clear or invoices get paid.

This means you fund payroll from your operating account as a fixed expense, not a pass-through from client receipts. Practically, that means maintaining sufficient operating cash to payroll obligations independently of your accounts receivable. Treat payroll like rent — it’s due on schedule, regardless of revenue timing.

Your IOLTA training established that boundary. Once you structure your operating account to support a regular payroll schedule, you’re ready to classify your team.

How to classify your legal team

Give every member of your legal team a specific payroll classification: paralegals, legal assistants, of counsel attorneys, and you as an active S corporation owner.  

Paralegals and legal assistants are generally employees and often classified as non-exempt. You direct their work, set their schedules, and provide their equipment and training. As non-exempt support staff, they’re entitled to overtime for all hours worked over 40 in a workweek, including non-billable time.  

Of counsel attorneys aren’t automatically independent contractors, even if they work remotely, set their own hours, or bring their own clients. Worker classification depends on the actual working relationship, not the title. The IRS and Department of Labor apply different standards when evaluating worker status. For tax purposes, the IRS control test determines classification considers three broad categories:  

• Behavioral control: Do you have the right to direct how they perform legal work?

• Financial control: Do you control how they’re paid or reimburse their business expenses?

• Type of relationship: Are they integrated into your ongoing client matters?  

If you’re directing the work or controlling the business relationship, they may be classified as employees.  

S-corp owner payroll: As both owner and employee, you run payroll for yourself on a reasonable salary subject to payroll tax, including Social Security and Medicare (FICA) withholding. Distributions alone don’t satisfy the IRS requirement for S-corp owners who perform more than minor services for the business.  

With your team classified, move on to your payroll schedule.

Choose your payroll schedule

Your cash flow pattern determines whether biweekly or semi-monthly payroll fits your firm best. Semimonthly may align more naturally with your monthly billing cycles and fixed overhead expenses. State payday laws set minimum pay frequency requirements that vary by jurisdiction, so confirm your state’s rules before you commit to a schedule.  

Once you’ve set your schedule, set up time tracking.

"I'm very happy with my SurePayroll services. As a single-member S-Corp, I needed a simple and affordable payroll solution that I could manage, and SurePayroll has worked just fine. "  — Brian K., Better Business Bureau review

Set up time tracking that covers payroll and billing

You already track billable hours in your practice management software. Payroll time tracking measures something different: all hours worked, not just time charged to a client matter.

Billable hours are time chargeable to a client matter. Payroll hours are all hours worked, including non-billable administrative time, internal meetings, training, and any other time your non-exempt employees spend on the job. Non-exempt employees are entitled to overtime for all hours worked over 40 in a workweek, not just billable hours. You can’t export your billing report and use it as your payroll hours record.

Some payroll systems offer integration with practice management software to pull time data directly, which can help minimize manual re-entry and data errors. Others require separate time tracking for payroll purposes.  

When you’re evaluating a payroll system for your law firm, confirm how it handles the billing-versus-payroll-hours distinction, specifically whether it captures total hours worked per week, independent of what’s tracked for client invoicing.

Confirm you have your federal EIN in place before your first payroll run.  

You confirm payroll on your schedule. SurePayroll calculates taxes, processes direct deposit, and submits required filings.

Decide whether to outsource payroll or handle it in-house

You can run payroll yourself using accounting software, or through a payroll module in your practice management platform. You can also opt for an online payroll service or outsource to a provider. How you want to allocate time and which tasks you want a service or provider to address will shape your decision.

What DIY payroll requires: You calculate wages, withhold taxes, make payroll tax deposits on schedule, and file quarterly returns (Form 941) and year-end W-2s and 1099-NECs. Managing a mixed team of hourly staff, of counsel relationships, and S-corp owner payroll means more moving parts every cycle.

Where DIY creates risk: Miss a payroll tax deposit deadline and the penalties compound. For law firms specifically, of counsel misclassification is a high-risk error. If you’ve been issuing 1099-NECs to an attorney the IRS or DOL classifies as an employee, you’re accumulating back payroll taxes, interest, and penalties for every pay period. The IRS control test, not your engagement letter, determines worker classification for federal tax purposes.

Your accountant or CPA can run it for you. If you're already paying your accountant for quarterly tax support, outsourcing payroll to them removes the execution layer — but it puts payroll on their timeline, not yours, and could add per-run fees on top of your retainer.

An online payroll service provider offers a middle ground. You stay in control of the schedule and decisions. Tax calculations, deposit timing, quarterly filings, and W-2s run on a defined process — not your memory or availability. Each payroll typically takes minutes for a single employee or small team.

"Payroll takes less than 5 minutes every other week to process — could not ask for a better product!"  — Tony, Trustpilot review

The trade-off: DIY saves on monthly fees but costs time each pay period, plus ongoing compliance work as tax rates and employment laws change. Outsourcing or a payroll service carries monthly fees but reduces your payroll workload and helps minimize compliance risk. For law firms with mixed teams, the complexity of running payroll typically increases faster than the cost of outsourcing. When comparing payroll solutions and evaluating pricing, look specifically at whether the provider handles mixed-classification teams, automates tax calculations and filings, and offers integration with the practice management platforms legal teams already use.

In a 2023 SurePayroll survey, 79% of CPAs and bookkeepers surveyed said they refer clients to online payroll services to help centralize tax documents and reduce administrative burden.  

Build a payroll system that fits your business

Payroll with a mixed team — hourly employees, contractors, and S-corp owner pay — runs on more variables than a single-employee setup. The decisions you make early: how you classify workers, how you structure your schedule, how you separate billable and payroll hours, determine how you run payroll.

Set those decisions up front, and payroll becomes a fixed process rather than a recurring task.

SurePayroll calculates taxes, processes direct deposits, and submits required filings — you set the schedule and confirm each run. Built for small businesses with 1 to 5 workers.

Get started with SurePayroll By Paychex