Xero has changed how U.S. small businesses manage accounting and payroll. In August 2026, Xero launched Xero Payroll, powered by Gusto, bringing payroll directly into Xero instead of requiring businesses to manage it as a separate application.
This differs from the existing Gusto-Xero integration, where businesses run payroll in Gusto and sync the resulting transactions with Xero. With Xero Payroll, payroll expenses and liabilities flow directly into the Xero general ledger.
In this guide, we will look at how Xero Payroll works, what it includes, how much it costs, how setup works, and where it fits compared with other payroll options.
KEY TAKEAWAYS
- Xero Payroll, powered by Gusto, brings U.S. payroll into Xero, with payroll expenses and liabilities flowing directly to the general ledger.
- Key features include automated tax calculations and filings, direct deposit, multiple pay schedules, W-2s, 1099s, PTO, and employee self-service.
- Xero Payroll costs $36 per month plus $6 per employee or contractor and supports payroll across all 50 states.
Xero Payroll Powered by Gusto: What It Is and How It Works
Xero Payroll powered by Gusto is a U.S. payroll solution built directly into Xero. Gusto provides the underlying payroll infrastructure, while Xero provides the accounting environment where payroll transactions are recorded.
That distinction is important because Xero Payroll is different from simply connecting a separate Gusto account to Xero.
How Does Xero Payroll Powered by Gusto Work?
Eligible U.S. small businesses can use Xero to run payroll, manage employee and contractor payments, handle payroll taxes, and access payroll records. Payroll expenses and liabilities then flow directly into the Xero general ledger.
In practical terms, the workflow keeps the payroll run and its accounting impact connected. You don’t need to manually recreate the payroll accounting impact in Xero after each pay run.
Does Xero Integrate With Gusto?
Yes. Businesses can now choose between Xero Payroll powered by Gusto and the existing Gusto-Xero integration.
- Xero Payroll powered by Gusto: Payroll runs directly in Xero, while Gusto provides the payroll infrastructure. Payroll expenses and liabilities flow into the Xero general ledger.
- Existing Gusto-Xero integration: Payroll runs in Gusto, and completed payroll transactions sync to Xero as bills or manual journals, depending on the Xero plan and configuration.
Pro Tip: Review payroll account mappings before the first pay run so wages, taxes, and liabilities post to the correct Xero general ledger accounts.
Xero Payroll vs. the Existing Gusto-Xero Integration
The two options differ in where payroll is managed and how payroll data reaches accounting records. Here’s how their workflows compare for Xero users.
| Factor | Xero Payroll Powered by Gusto | Existing Gusto-Xero Integration |
| Payroll management | Xero | Gusto |
| Payroll technology | Gusto | Gusto |
| Accounting platform | Xero | Xero |
| Payroll workflow | Run within Xero | Run separately in Gusto |
| Payroll accounting | Flows directly into Xero | Synced from Gusto |
| Separate payroll application | Not required | Required |
| Best suited for | Businesses wanting payroll and accounting in Xero. | Businesses already using Gusto. |
With the existing integration, businesses also need to complete account mapping so payroll transactions are recorded in the appropriate Xero accounts.
How Does Xero Payroll Connect With Accounting?
Xero Payroll automatically brings payroll expenses and liabilities into the Xero general ledger. This connects the accounting impact of each pay run with the rest of the business’s financial records. The typical workflow looks like:
Employee data → Pay calculation → Taxes and deductions → Employee payment → Payroll liabilities → Xero general ledger → Financial reports
The main benefit is that the accounting impact of each pay run is recorded in Xero without requiring a separate manual payroll entry.
Does Payroll Automatically Update Accounting Records?
Yes. Payroll expenses and liabilities are automatically brought into the Xero general ledger. This reduces the need for manual payroll journals and can simplify reconciliation.
The accounting team still needs to review the resulting transactions and reconcile accounts, but the payroll data transfer itself is connected to the pay run.
How Does Payroll Integration Help With Month-End Close?
Payroll integration reduces manual bookkeeping by recording wages, payroll liabilities, and related transactions directly in Xero.
This keeps accounting records updated with payroll activity before the month-end closes and reduces the need for separate payroll entries, which is particularly useful for small business payroll.
What’s Included in Xero Payroll?
Xero Payroll covers key payroll software for small business needs, including payroll runs, tax filing, direct deposit, W-2s, 1099s, PTO, and employee self-service.
Here are the key features included with Xero Payroll.
| Feature | What It Does |
| Unlimited pay runs | Supports regular and additional payroll runs. |
| Tax calculations | Calculates applicable federal, state, and local payroll taxes. |
| Tax filings and payments | Files and pays applicable payroll taxes. |
| Direct deposit | Supports 2-day and 4-day direct deposit options. |
| Multiple schedules | Supports weekly, biweekly, semimonthly, and off-cycle pay runs. |
| Multiple pay rates | Supports different employee pay rates. |
| W-2s | Handles year-end employee tax reporting. |
| 1099s | Supports contractor payments and 1099 reporting. |
| Benefits | Supports payroll-related benefits calculations. |
| PTO | Manages paid-time-off accruals. |
| Employee self-service | Gives employees access to payroll information. |
| Xero Me | Provides web and mobile access to pay stubs and tax documents. |
Does Xero Payroll Offer Employee Self-Service?
Yes. Employees can use Xero Me to access pay stubs and tax documents, receive payday notifications, and update their own information. Xero also supports employee self-onboarding.
This reduces the amount of personal and payroll information administrators need to enter manually during employee setup.
Does Xero Payroll Calculate and File Taxes?
Yes. Xero Payroll calculates, files, and pays applicable federal and state payroll taxes. It also supports year-end W-2 and 1099-NEC reporting.
The setup still depends on accurate employer and employee information.
Xero’s onboarding process collects details such as the employer identification number, business addresses, and federal and state tax information before payroll can be activated.
Does Xero Payroll Support Direct Deposit?
Yes. Xero Payroll supports direct deposit with 2-day and 4-day options. It also supports weekly, biweekly, semimonthly, and off-cycle payroll schedules.
The initial setup starts with one pay schedule, with additional schedules available afterward.
Can Xero Payroll Pay Contractors and Employees?
Yes. Xero Payroll supports both employees and contractors, including contractor payments and 1099 reporting.
One setup detail matters for businesses moving to the service: contractors cannot be added during the initial setup and must be added afterward.
How Much Does Xero Payroll Cost?
As of October 2026, Xero Payroll costs $36 per month plus $6 per employee or contractor in the U.S. market. These are standard prices in USD, excluding applicable taxes, and the Xero accounting subscription is billed separately.
Here’s how Xero’s monthly base fee and per-worker charges work.
| Employees/Contractors | Monthly Payroll Cost |
| 1 | $42 |
| 5 | $66 |
| 10 | $96 |
| 20 | $156 |
| 50 | $336 |
These figures cover the payroll add-on only. The total monthly software cost also depends on the Xero accounting plan.
Limited-Time Offer: Xero currently offers two months of Xero Payroll for free, allowing eligible businesses to try the service before paying the regular subscription charges. Eligible new U.S. customers may also qualify for promotional discounts on Xero accounting plans. However, accounting plan discounts do not apply to payroll add-on charges. Offers are subject to eligibility and may change.
Is Xero Payroll Affordable for Small Businesses?
Yes. Xero Payroll can be a practical option for small business payroll, particularly for businesses already using Xero for accounting. The pricing is $36 per month plus $6 for each employee or contractor.
The cost also covers payroll functions that would otherwise require a separate payroll workflow, including tax calculations and filings, direct deposit, employee self-service, and the connection between payroll and the Xero general ledger.
Is Xero Payroll Easy to Set Up?
Yes. Xero Payroll has a guided setup process that Xero estimates can take around 15 minutes. The setup is designed to help businesses configure payroll within their existing Xero organization.
Xero also reviews the account before payroll can be processed. This review typically takes a few minutes but can take up to three business days if additional information is required.
What Do You Need to Set Up Xero Payroll?
To set up Xero Payroll, you will need:
- Federal Employer Identification Number (FEIN).
- Legal business and entity details.
- Business and worksite addresses.
- Federal and state tax information.
- Company bank account.
- Employee personal, tax, compensation, and banking details.
- Pay schedule.
- Authorized company signatory.
The company bank account must also be verified before payroll can be processed. Xero supports verification through Plaid or manual verification.
Pro Tip: Verify every worksite and remote employee address before setup. State tax obligations depend on accurate employee and work location data.
Can Employees Enter Their Own Information?
Yes. Employees can be invited to self-onboard and enter their personal, tax, and banking information. This reduces manual data entry during setup and gives employees a direct way to provide their payroll information.
Is Xero Payroll Suitable for Small Businesses?
Yes. Xero Payroll is designed as payroll software for small businesses, supporting teams of 1–20 people or more and payroll across all 50 states.
How Many Employees Can Xero Payroll Support?
Xero does not publish a maximum employee count on its current payroll page. Instead, it describes the service as supporting teams of 1–20 people or more.
For larger teams, headcount alone should not determine suitability. Payroll complexity, employee locations, pay schedules, compensation structures, and other requirements also matter.
Is Xero Payroll Suitable for 5–20 Employees?
Yes. For teams of this size, Xero is one of the best payroll software options, with support for multiple pay schedules, direct deposit, tax filings, PTO, benefits, and employee self-service.
Can Xero Payroll Support 20+ Employees?
Yes. Xero describes the service as supporting teams of 1–20 people or more, so 20 employees is not a stated maximum.
For larger teams, assess payroll complexity alongside headcount, including the number of states, pay schedules, employee and contractor types, benefits, and reporting requirements.
How Does Xero Payroll Handle Multi-State Payroll?
Xero Payroll supports payroll across all 50 states and automatically applies the appropriate tax rate for the jurisdiction. Xero states that there is no additional cost for state support.
Does Xero Payroll Support All 50 States?
Yes. Businesses can run payroll across all 50 states, with Xero calculating, filing, and paying applicable federal and state payroll taxes.
What Information Is Needed for Multi-State Payroll?
Accurate business and employee information is important when running multi-state payroll. The setup process includes business addresses, worksite locations, and federal and state tax information.
For remote employees, keep work locations and tax information current. The software handles the applicable calculations and filings based on the information provided, but employers remain responsible for supplying accurate information.
Should Existing Gusto Customers Switch to Xero Payroll?
Existing Gusto customers can continue using the established Gusto-Xero integration or migrate to Xero Payroll powered by Gusto. The better option depends on how the business currently handles payroll and accounting.
Can I Keep Using Gusto With Xero?
Yes. The existing Gusto-Xero integration remains available. Businesses can run payroll in Gusto and send the resulting transactions to Xero. Depending on the Xero plan and configuration, those transactions can be recorded as bills or manual journals.
If the existing workflow works well, there is no requirement to move to Xero Payroll.
Can Existing Gusto Customers Migrate to Xero Payroll?
Yes. Xero offers free historical payroll data transfer and access to Payroll Specialists for onboarding support. Existing Gusto customers can migrate their payroll records into Xero Payroll.
Businesses moving during a tax year should also transfer the relevant payroll history so year-to-date records remain complete.
When Should a Business Stay With Gusto?
The existing integration can remain a good fit when:
- Payroll is already working well.
- Existing payroll-to-accounting mappings meet bookkeeping needs.
- Employees are familiar with the current workflow.
- The business relies on Gusto capabilities outside its core payroll process.
- There is little need to change the current accounting workflow.
When Should a Business Consider Xero Payroll?
Xero Payroll is worth considering when:
- The business wants to run payroll directly from Xero.
- Payroll expenses and liabilities flowing directly into the general ledger would simplify bookkeeping.
- Xero is already the primary accounting platform.
- The business is implementing payroll for the first time.
- The business is replacing its existing payroll system.
For an existing Gusto customer, switching is mainly a workflow decision. If the current integration works well, staying with it is an ideal choice. If keeping payroll and accounting together in Xero is the priority, Xero Payroll provides that structure.
Expert Advice: Compare your current Gusto-to-Xero account mappings with Xero Payroll’s direct GL workflow before migrating to avoid changing established reporting structures unnecessarily.
Xero Payroll vs. Standalone Payroll Software
Choosing payroll software for small business requires comparing where payroll is managed and how payroll data reaches the accounting system.
Here’s how Xero compares with standalone payroll platforms.
| Factor | Xero Payroll | Standalone Payroll Software |
| Accounting | Built into Xero | Connected through integration. |
| Payroll processing | Built into Xero | Core function |
| General ledger | Payroll expenses and liabilities flow to Xero. | Requires accounting integration. |
| Tax filing | Supported | Depends on provider |
| Direct deposit | Yes | Usually available |
| Employee self-service | Yes | Common |
| HR capabilities | Payroll-focused | Varies by provider |
| Best fit | Businesses using Xero for accounting. | Businesses with specific payroll or HR requirements. |
For businesses looking specifically for accounting software with integrated payroll, Xero Payroll’s main advantage is the direct connection between the two functions.
Standalone payroll software may be worth comparing when payroll or HR requirements extend beyond what the Xero accounting and payroll workflow provides.
What Do Reviews and Early Customer Signals Say?
Xero Payroll powered by Gusto has shown encouraging adoption since its 2026 launch.
During the beta period, Xero reports that more than $7 million in payroll payments were processed and 86% of customers ran subsequent payrolls. These figures provide an early indication of continued usage among beta participants.
Independent review volume is still developing because the product is new. Xero also points to Gusto’s G2 ratings as additional context about the underlying payroll technology.
Overall, these early usage signals support Xero Payroll as a promising option for small businesses that want payroll and accounting connected within the same platform.
What Are the Pros and Limitations of Xero Payroll?
A payroll platform should be evaluated against both its capabilities and business requirements. Here are the main strengths and limitations to consider.
Xero Pros
- Payroll runs directly within Xero.
- Gusto provides the underlying payroll infrastructure.
- Payroll expenses and liabilities flow into the Xero general ledger.
- Federal, state, and local payroll tax calculations and filings are supported.
- Direct deposit is available with 2-day and 4-day options.
- Employees can self-onboard and access pay stubs and tax documents through Xero Me.
- Employee and contractor payments are supported.
- W-2 and 1099 processing is included.
- Payroll supports all 50 states.
- Unlimited payroll runs are included.
Xero Limitations to Consider
- Xero Payroll is currently a U.S. payroll offering.
- Payroll is an additional Xero subscription add-on at $36 per month plus $6 per employee or contractor.
- Businesses moving from another payroll system need to plan the migration and transfer relevant payroll history.
- Businesses with extensive HR or workforce-management requirements should evaluate whether they need additional capabilities beyond payroll.
Who Should Use Xero Payroll?
Xero Payroll is designed as payroll software for small businesses, with support for teams of 1–20 people or more and payroll across all 50 states.
Xero Payroll Is a Good Fit If You:
- Already use Xero for accounting.
- Are setting up payroll for the first time.
- Have a small U.S. workforce.
- Pay both employees and contractors.
- Need automated payroll tax calculations and filings.
- Have employees working across multiple states.
- Want employee self-service.
- Want payroll expenses and liabilities to flow directly into the general ledger.
When Should You Consider Other Payroll Options?
Compare other payroll platforms if you:
- Need extensive HR or workforce-management capabilities.
- Have specialized payroll requirements.
- Need international payroll capabilities beyond the U.S.
- Already have a Gusto workflow that meets your needs with minimal accounting work.
- Need capabilities outside the payroll and accounting functions provided by Xero Payroll.
For businesses already using Xero, Xero Payroll is a practical choice when keeping payroll and accounting within one platform is a priority.
If your payroll or HR needs extend beyond this workflow, compare the specific capabilities before making a decision.
The Bottom Line
Xero Payroll powered by Gusto is a compelling payroll software option for small businesses in the U.S. that want payroll and accounting managed within the same platform. Its biggest advantage is the direct connection between payroll activity and the Xero general ledger, which reduces repetitive bookkeeping work after each pay run.
At $36 per month plus $6 per employee or contractor, businesses get payroll processing, tax calculations and filings, direct deposit, employee self-service, contractor payments, and 50-state coverage.
If your business already uses Xero and keeping payroll and accounting in one platform is a priority, Xero Payroll should be your first choice. It brings the core payroll capabilities small businesses need into the same system they already use for accounting.
FAQs
1. Does Xero have its own payroll or does it use Gusto?
Xero Payroll is built into Xero and powered by Gusto. Xero provides the integrated payroll and accounting environment, while Gusto provides the underlying payroll infrastructure.
2. Is Xero Payroll included with Xero accounting?
No. Xero Payroll is an optional add-on to a Xero accounting subscription. It costs $36 per month plus $6 per employee or contractor, while the Xero accounting subscription is billed separately.
3. What does Xero Payroll cost for a small business?
Xero Payroll costs $36 per month plus $6 for each employee or contractor. The Xero accounting subscription is separate, so the total software cost depends on the Xero accounting plan and payroll headcount.
4. Can I use Gusto payroll with Xero accounting?
Yes. Businesses can continue using the existing Gusto-Xero integration. Payroll is processed in Gusto, and the resulting payroll transactions are transferred to Xero for accounting.
5. Can existing Gusto customers migrate to Xero Payroll?
Yes. Xero offers historical payroll data transfer and migration support for businesses moving from Gusto or another payroll provider to Xero Payroll.
6. Does Xero Payroll support all 50 states?
Yes. Xero Payroll supports payroll across all 50 states and applies the appropriate tax rates for each jurisdiction.
7. Can Xero Payroll pay both employees and contractors?
Yes. Xero Payroll supports both employee and contractor payments, including 1099 processing for contractors.
8. Does Xero Payroll offer direct deposit?
Yes. Xero Payroll supports direct deposit with 2-day and 4-day payment options for employees.
