How To Pay Employees

Paying employees involves more than issuing a paycheck. Employers need to choose a payment method, set a legal pay schedule, calculate wages, withhold payroll taxes, and keep accurate payroll records.

This guide explains how to pay employees, including payment options, payroll schedules, tax withholding, and key compliance requirements.

How To Pay Employees In 11 Steps

Here’s how to pay employees correctly, from payroll setup to payday.

1. Review Your Business’s Pay Rates

Before paying employees, confirm that their wages comply with federal, state, and local wage laws. Covered nonexempt employees must be paid at least the applicable minimum wage, and when both state and federal minimum wage laws apply, employees are entitled to the higher rate.

Also, review any rules that may apply to tipped employees, overtime, industry-specific wages, or local minimum wage requirements.

2. Review Your Business’s Payday Schedule

Before paying employees, confirm that your payroll schedule complies with state payday laws. Many states set rules for how often employees must be paid, and requirements may vary by worker type, industry, or pay structure.

Choose a schedule, such as weekly, biweekly, semimonthly, or monthly, that works for your business and meets your state’s requirements.

3. Choose Which Employee Payment Methods You’ll Offer

Choose which payment methods you’ll offer employees, such as direct deposit, paper checks, or payroll cards. Direct deposit is often the easiest option for employers and employees, while paper checks may require more time, supplies, and manual tracking.

Before choosing a payment method, check your state’s rules. Some states require employers to offer more than one payment option or get employee consent before using direct deposit or payroll cards.

4. Choose Whether To Use Payroll Software Or Process Payroll Manually

5. Calculate Gross Pay For Your Employees

Gross pay is the total an employee earns before taxes and deductions are withheld. This includes regular wages plus any supplemental earnings, such as overtime, tips, commissions, bonuses, awards, or back pay.

6. Calculate & Withhold Payroll Taxes

Employers are responsible for calculating payroll taxes, withholding employee-paid taxes, and paying any employer-paid payroll taxes.

Common payroll taxes include:

• Federal income tax
• Social Security tax
• Medicare tax
• Federal unemployment tax
• State unemployment tax
• State and local income taxes, where applicable

Use the employee’s Form W-4 and current IRS withholding guidance to calculate federal income tax withholding. You’ll also need to follow applicable state and local payroll tax rules.

Some payroll taxes are withheld from employee pay, while others are paid by the employer. Payroll software can help calculate the correct amounts and reduce the risk of errors.

7. Make Employee Payroll Deductions

After calculating payroll taxes, apply any required employee deductions. Payroll deductions may be voluntary, such as retirement contributions, insurance premiums, FSAs, or HSAs, or involuntary, such as wage garnishments.

Deductions may also be taken on a pre-tax or post-tax basis, depending on the type of deduction and applicable rules.

Employers are responsible for withholding the correct amounts and sending deducted funds to the appropriate providers, agencies, or recipients.

8. Calculate Net Pay For Each Employee

Net earnings, or net pay, is the amount an employee takes home after payroll taxes and deductions are withheld.

To calculate net pay, subtract total taxes and deductions from the employee’s gross pay for the pay period.

9. Review & Make Payroll Corrections

Before submitting payroll, review each employee’s pay details for accuracy. Check hours worked, gross pay, deductions, taxes, payment method, pay period dates, and the bank account used to fund payroll.

If you find an error, correct it before submitting the payroll run. This can help prevent late payments, incorrect paychecks, payroll tax issues, and extra correction work later.

10. Pay Your Employees

After reviewing and submitting payroll, pay employees using your chosen payment method, such as direct deposit, paper check, or payroll card.

For direct deposit, submit payroll early enough for funds to reach employees by payday. For paper checks, make sure checks are prepared, signed, and distributed on time.

11. Make Payroll Tax Deposits & Deduction Payments

After paying employees, deposit any required payroll taxes and send deduction payments to the appropriate agencies, providers, or recipients.

Federal payroll tax deposits are generally made on a monthly or semiweekly schedule, depending on your IRS deposit schedule. FUTA deposits follow separate rules and are generally due quarterly when your liability reaches the required threshold.

You’ll also need to follow state and local payroll tax deadlines, plus any payment deadlines for benefits, retirement contributions, garnishments, or other employee deductions.

Because payroll tax schedules and deposit rules can vary, check current IRS guidance, your state tax agency, or your payroll software before making payments.

The Bottom Line On How To Pay Employees

Paying employees is easier once you understand the basics: set a compliant pay schedule, calculate wages, withhold taxes and deductions, pay employees on time, and keep accurate payroll records.

Some very small businesses may be able to handle payroll manually, but payroll software can save time, reduce errors, and help with tax filings and compliance. If cost is a concern, check out our guide to the best cheap payroll software for affordable options that can still cover the payroll basics.