HR for Small Business: 9 HR Basics to Manage

9 HR basics for small business owners

Finding time to build out formal HR policies isn’t easy, especially when you’re running a small team and wearing multiple hats. Still, even businesses with just a few employees are responsible for covering core human resources functions. Skipping the basics can lead to confusion, compliance issues or avoidable problems down the line.

These are the nine HR essentials every small business owner should have on their radar:

• Legal compliance
• Workers’ compensation coverage
• Employee handbook
• Recruiting and onboarding
• Employee compensation and benefits
• Payroll
• Performance management
• Terminations
• HR reporting

1. Legal compliance

First and foremost, small business owners need a working understanding of federal and state labor laws that govern wages, hours worked, overtime, recordkeeping and required workplace postings. Many HR compliance issues tend to surface in the same areas, including:

• Employee recruitment
• Workplace harassment and discrimination
• Worker classification and compensation
• Payroll and timekeeping
• Medical coverage requirements

Compliance can get complicated quickly because rules often vary based on where your business operates and how many employees you have. Knowing which requirements apply to your company — and when — is essential. Common federal thresholds include:

• 15 or more employees: Must comply with:
  • Title VII of the Civil Rights Act
  • Equal Employment Opportunity Commission (EEOC) regulations
  • Americans with Disabilities Act requirements
• 50 or more employees: Subject to Family and Medical Leave Act (FMLA) rules and the Affordable Care Act employer mandate
• 100 or more employees: Required to file EEO-1 reports annually with the EEOC

Beyond employee headcount thresholds, worker classification is another area where small businesses often run into trouble. It’s also one of the most closely watched by regulators. To determine whether someone should be treated as an employee or an independent contractor under the Fair Labor Standards Act, federal agencies use a multi-factor analysis based on long-established principles. Because guidance and enforcement priorities can shift over time, it’s important for employers to stay current and be thoughtful about how workers are classified, especially since misclassification can affect payroll, taxes and benefits.

The Department of Labor’s Wage and Hour Division provides guidance for small businesses on federal labor law compliance, including wage payment, recordkeeping and employee notice requirements. State and local laws may impose additional obligations or stricter standards, and in some cases apply at much lower employee counts than federal rules.

2. Workers’ compensation coverage

In most states, employers are required to carry workers’ compensation insurance for their employees. Premiums are typically based on factors like an employee’s role, industry risk classification and pay rate, which all influence workers’ comp rates. Here’s what small business owners should know:

• Workers’ comp is state-regulated: Because workers’ compensation is governed at the state level, requirements can vary widely. Each state sets its own rules around coverage thresholds, benefit levels and exemptions. Texas is a notable exception. Unlike most states, workers’ compensation coverage is generally optional for private employers there, though businesses that opt out still face other legal obligations and risks if an employee is injured on the job.
• Some workers may not need coverage: Depending on the state, certain workers may fall outside standard coverage requirements under workers’ comp exemptions. Common examples can include independent contractors, certain agricultural workers or employees of very small businesses. 
• Purchase options vary: Most employers purchase workers’ compensation insurance through private carriers or state-run funds. In some cases, larger or well-capitalized companies may qualify to self-insure if they meet state requirements.

Failing to carry the required workers’ compensation coverage can be costly. Penalties may include fines, civil liability and, in some states, criminal charges. Employers may also be held personally responsible for medical costs and lost wages related to workplace accidents and injuries.

3. Employee handbook

A clear, well-written employee handbook helps set expectations from day one. At a minimum, it should outline your at-will employment relationship, equal opportunity policies, discrimination and harassment standards, employee benefits information and paid time off (PTO) policies.

In today’s work environment, many handbooks also cover topics that didn’t always make the cut in the past, such as:

• Data security measures
• Acceptable use policies regarding company equipment
• Remote work plans and hybrid work policies
• Artificial intelligence (AI) usage guidelines

If writing a comprehensive employee handbook feels overwhelming, you don’t have to start from scratch. Resources like the Society for Human Resource Management offer sample handbooks that small businesses often adapt to fit their own policies.

Before distributing your handbook, have a business lawyer review it to ensure it reflects current federal, state and local laws. Once it’s ready, give employees time to review the document and collect a signed acknowledgment. As your business grows or policies change, revisit the handbook regularly and redistribute updated versions as needed.

4. Recruiting and onboarding

Recruiting can feel like a full-time job on its own. One of the most effective ways to keep a steady pipeline of qualified candidates is through networking and involvement in your local or industry community. Many small businesses also lean on employee referral programs, rewarding team members who refer candidates who end up getting hired. Creating a LinkedIn Business profile and joining other business-focused social platforms can also be valuable tools for reaching candidates across a wide range of roles and industries.

Small businesses continue to play an outsized role in job growth. According to the SBA’s Office of Advocacy, small businesses created a net increase of 1.2 million new jobs from March 2023 to March 2024, accounting for about 88.9 percent of net new jobs over that period. With that level of hiring activity, taking shortcuts in the hiring process can be costly. A bad hire often creates far more disruption than the time and effort spent hiring carefully in the first place.

As you recruit and onboard new employees, it’s also critical to follow equal employment opportunity guidelines and apply your hiring criteria consistently.

5. Employee compensation and benefits

A thoughtful employee compensation plan can make a real difference when it comes to both recruiting and employee retention. According to Payscale’s 2025-2026 Salary Budget Survey, U.S. employers projected an average salary increase of 3.5 percent for 2026. Using salary benchmarking helps small businesses set pay that’s fair, competitive and aligned with market expectations for each role.

Benefits matter just as much. For many employees, the overall benefits package plays a major role in deciding where to work and whether to stay. The most common employee benefits typically fall into five broad categories:

• Health and wellness
• Financial well-being
• Work-life balance
• Professional development
• Diversity, equity and inclusion

Paid time off often sits at the center of those conversations. While there’s no federal requirement to offer PTO, rules can apply once you do. In many states, accrued PTO may be treated as earned wages, which means employers need to understand how their state regulates accrual, use and payout.

6. Payroll

Running payroll is one of those HR functions that has to be right every single time. Paying employees accurately and on schedule isn’t just about trust; it’s a legal obligation. Taxes, withholdings, garnishments and benefit deductions all need to be calculated correctly, and small mistakes can snowball quickly.

A smoother payroll process usually starts with clean, up-to-date employee records. That includes clearly documenting who you employ, how they’re classified and how they’re paid. Getting those details right makes it much easier to process payroll consistently and avoid payroll discrepancies and other problems that may crop up later. 

As noted earlier, worker classification plays a major role here. Misclassifying employees as independent contractors can trigger back taxes, penalties and retroactive corrections that are costly and time-consuming. For many small businesses, using one of the best online payroll services can help reduce errors, stay aligned with current requirements and free up time better spent running the business.

7. Performance management

Performance management helps you understand how your team is doing and where support or adjustment may be needed. When you track performance consistently, it’s easier to see how individual employees are progressing in their roles and contributing to broader business goals.

Today’s approach looks very different from the once-a-year review cycle many employees dread. More businesses are moving toward ongoing feedback in the form of regular check-ins, goal updates and informal feedback, rather than relying solely on annual evaluations. This kind of cadence makes it easier to address issues early, recognize strong performance and keep expectations clear.

Used well, performance data can guide decisions around raises, development opportunities and who to promote from within. It also helps managers support employees who may be struggling by identifying gaps early and offering coaching, training or clearer direction. 

8. Terminations

Terminating employees is never the easiest part of management, but this task is often unavoidable. Whether an employee resigns or is let go for cause, how you handle the exit matters. There are specific steps employers need to follow to stay compliant and reduce the risk of disputes or wrongful termination claims, including having clear documentation.

Issues surrounding final pay can be particularly tricky. Every state handles timing differently, and some are far less forgiving than others. California and Massachusetts, for instance, are known for strict final paycheck rules that can require payment right at separation. What counts as final pay can vary, too, often including earned wages and, in some states, unused paid time off unless your policy clearly states otherwise.

9. HR reporting

HR reporting turns day-to-day employee data into something you can actually use. When information about hiring, performance and compensation is pulled into clear reports, it becomes easier to spot patterns and make better decisions about how your business operates.

Common HR reports often cover:

• Recruiting activity
• Performance management
• HR administration
• Compensation and pay trends
  

Today, most HR software solutions include tools for tracking these and other metrics automatically. The real value comes from paying attention to what the data is telling you. Used consistently, HR reports can help you move beyond putting out fires and start planning ahead with more confidence.

Defining HR management

HR management is the day-to-day work of supporting employees while keeping your business on solid footing. It includes how you hire, manage, pay and develop people, along with how you handle policies, performance and compliance. At its core, it’s about setting clear expectations and creating a work environment that allows both employees and the business to function well.

Every business with employees — whether full-time or part-time — needs some level of HR management. For small businesses especially, effective HR practices can help prevent common problems like high turnover, workplace disputes or compliance issues before they become costly distractions.

Good HR management balances two priorities at once: supporting employees and protecting the business. With clear policies and fair treatment, teams tend to be more engaged and productive, and owners spend less time putting out fires.

How to manage HR for small businesses

Small businesses face a different set of HR challenges than larger companies, but the goal is the same: stay compliant while keeping day-to-day operations manageable. Administrative demands add up quickly, and surveys from the National Federation of Independent Business consistently show that finding and retaining qualified workers remains a top concern for small business owners. That pressure makes having a clear HR approach more important, not less.

There’s no single right way to manage HR. Most small businesses fall into one of three models: handling HR in-house, outsourcing specific functions or fully outsourcing HR through a co-employment arrangement.

In-house HR management

Some businesses choose to keep HR management internal by hiring an HR person or building a small HR team as they grow. Internal teams often rely on one of the best HR software solutions to handle tasks like onboarding, time tracking and benefits administration. Popular platforms include BambooHR, Gusto and Paycor. (Check out our review of BambooHR, our Gusto review and our review of Paycor to learn more.)

Managing HR in-house gives you direct control over employee data, policies and processes. The tradeoff is cost. As your workforce grows, hiring and supporting enough HR staff to cover compliance, payroll and employee relations can become expensive.

Outsource to an HRO

Another option is working with an HR outsourcing (HRO) provider. Many of the best HR outsourcing services offer à la carte support, allowing you to outsource specific functions like payroll, benefits administration or compliance support without handing over everything. ADP is an excellent example of such a provider (see our ADP TotalSource review for details). 

This model offers flexibility, but many businesses still keep some HR responsibilities in-house. Tasks like managing company culture, handling sensitive employee issues or supporting managers day to day often work better with an internal point person.

Outsource to a PEO

For businesses that want more comprehensive support, a professional employer organization (PEO) can take on most HR responsibilities through a co-employment arrangement. The best PEO service providers, such as Rippling and Insperity, handle payroll, benefits, compliance and HR administration, while the business continues to manage daily operations. (Read our detailed Rippling review and review of Insperity for more information.)

Because PEOs aggregate employees across many companies, PEO employee benefits can be much more competitive, including health insurance plans typically reserved for larger employers. This approach works best for small businesses that want to offload HR complexity and are comfortable sharing employer responsibilities with a third party.

Skye Schooley contributed to this article.