In this guide to paying your employees, learn everything you need to know about payroll taxes, payroll forms, pay day laws, and more.

Wondering how to pay employees? As it takes knowledge of payroll taxes, pay day laws, percentage calculations, and much more, it’s no surprise that you may be a little out of depth when handling your business’s first few payroll runs. Fortunately, we’ve got you covered.
This guide breaks down everything you need to know to pay your employees, including choosing employee payment methods, setting a pay schedule, calculating employee earnings, payroll taxes, and much more. Let’s get started.
How To Pay Employees In 11 Steps
To pay employees, you’ll need to complete payroll administration tasks, calculate employee pay, make withholdings and deductions, and finally, submit your payroll run. Ready to make your first payroll run?
Here’s a step-by-step explanation of how to pay your employees in just 11 steps.
1. Handle The Legalities: Your Business EIN, Employee Tax Forms, & New Hire Reporting
There are several legal prerequisites you’ll need to handle before paying your employees, including:
- Getting an EIN for your business
- Completing and submitting employment forms
- New-hire reporting
- Employee classification
Until you fulfill each of these payroll prerequisites, you will not be able to legally pay your employees. Fortunately, most of these tasks aren’t time-consuming and can become the foundation of your business’s new-hire onboarding process.
Here’s a look at the legal prerequisites you’ll need to complete to run payroll for your business.
Get An EIN For Your Business
If you intend to hire and pay employees, you are legally required to get an Employer Identification Number (EIN) for your business. EIN’s are used to identify business entities and are typically used when filling out tax forms on behalf of your business.
It is completely free to apply for an EIN for your business, and the entire process can be completed online. You will receive your EIN immediately after completing the application, but it may take up to two weeks for the EIN to be registered in the IRS’s system. In the meantime, you can use your new EIN to open a bank account, apply for business licenses, and file tax returns via mail.
Have All New Employees Fill Out Pre-Employment Tax Forms
At the federal level, any newly hired employee is required to fill out both Form W-4 and Form I-9.
Form W-4 is used to determine an employee’s filing status and withholding information. Employers use Form W-4 to calculate federal withholding, including any adjustments made for number of jobs held concurrently, deductions, and credits. Employers must hold employee W-4s for at least four years after the employee completed the form.
Form I-9 is used to verify an individual’s employment eligibility. This form is filled out by employers using information provided by the newly hired employee. Employers are required to examine Form I-9 to ensure that the employee reasonably fulfills eligibility requirements.
Form I-9 must be held for at least three years after an employee’s hire date or one year after employment ends, whichever date is later.
If you will be hiring a 1099-contractor, the contractor is required to fill out Form W-9. Form W-9 is a request for a contractor’s taxpayer identification number and certification, and you’ll use the information provided on the form to report contractor payments. Keep Form W-9 for at least four years.
There may be state-level pre-employment forms that you’ll need to have completed for new hires, but those will vary by state. Be sure to review your state’s laws and regulations regarding pre-employment tax forms.
Complete New Hire Reporting
Employers are legally required to report new hires or rehires to their state’s State Directory of New Hires (SDNH) within 20 days of hire. The state agency will then forward the information to the National Directory of New Hires (NDNH).
New hire reporting is done to help facilitate child support payments, establish paternity, locate parents of children across state lines, and enforce child support orders. New hire reporting also helps to detect benefit fraud, including unemployment insurance fraud and workers’ compensation fraud.
Many businesses submit an employee’s completed Form W-4 to appropriate new hire reporting agencies, but state portals are the preferred method of submission.
Correctly Classify Employees & Contractors
When hiring employees for your business, you may be deciding between hiring 1099 versus W-2 employees. However, there is no such thing as a 1099 employee, as 1099 contractors are classified as small business owners under a sole proprietorship, while W-2 employees are classified as private individuals working for a business.
As an employer, you must determine whether a new hire is classified as a W-2 employee or a 1099 contractor for legal and tax purposes. The difference between a 1099 contractor and W-2 employee comes down to how much control you have over the employee’s work, financial control your business holds over the worker, and what type of business relationship you have with the worker.
Employers are required to withhold taxes on behalf of W-2 employees and labor laws typically apply only to W-2 employees. Conversely, employers are not required to withhold any taxes from 1099 contractors. Additionally, most labor laws do not apply to 1099 contractors.
Learn Payroll & HR Laws
For small business owners, payroll and HR laws can be difficult to learn and keep up with. However, unless your business has the budget to hire an HR professional, you’ll need to ensure that you’re staying up-to-date with and adhering to payroll and HR laws. Here’s a non-exhaustive list of federal and state payroll and HR laws your business needs to know:
- Your state or locality’s minimum wage
- Social security tax rates
- Medicare tax rates
- Unemployment tax rates
- Location-specific payroll taxes/deductions
- Child labor laws
- Public transit payroll tax rates
- Sick leave laws/regulations
- Jury duty laws
- Family leave laws and payroll taxes
- Workers’ compensation laws
- Disability insurance laws
- Equal opportunity employment laws
2. Set A Payday Schedule According To Your State’s Payday Laws
When it comes to choosing a pay schedule, it’s essential to consider your state’s payday laws. Most states have existing payday laws that dictate the maximum period between employee payments allowed based on a variety of factors, including the type of worker you’re paying, the employee’s annual salary, and whether the employee is earning supplemental pay.
However, you should also consider your business’s cash flow when deciding on a pay schedule. Your business’s payroll budget can take up a significant portion of your business’s revenue. So, it’s best to plan around your business’s cash flow (ie. when you regularly have money in the bank) when deciding on your business’s payday.
Finally, be sure to consider the industry standard paydays. If your industry typically pays employees biweekly and you’re paying once a month, you’ll likely scare off prospective employees — even if you’re in compliance with your state’s payday laws.
3. Choose Which Employee Payment Methods You’ll Offer
When choosing employee payment methods, you’ll need to consider which options fit your budget, are the most convenient for your employees, and are best for record-keeping. Generally, the most popular payment methods in the US are direct deposit and paper checks.
Both direct deposit and paper check payments organically generate a record trail when you use them, so they’re great for tax and accounting record-keeping. Direct deposit costs are usually less than a dollar per payment, depending on your business’s bank.
However, paper checks can be a little more costly and time-consuming, as you have to decide where to order business checks, keep a stock of business check paper, and potentially subscribe to a checking printing software.
Other Less Popular Payment Methods
- Cash: Although it’s legal to use cash, the IRS generally discourages businesses from paying employees in cash because it’s much harder to keep records of cash payments.
- Pay Cards: Pay cards or payroll cards are increasingly offered as options from payroll software providers. These cards work like reloadable debit cards and are great for employees without bank accounts.
- Cryptocurrency: Cryptocurrency is a sort of fringe payment option, as it’s a newer payment method that isn’t yet completely regulated. If you want to pay employees in cryptocurrency, speak to a tax professional to better understand cryptocurrency tax laws and accounting regulations.
4. Choose Whether To Use Payroll Software Or A DIY Payroll Process
Regardless of whether you choose to use payroll software or process payroll manually, the payroll processing method remains the same. Still, deciding between using payroll software or DIY payroll processing is a major decision with an impact on a business’s owners finances, time, and record-keeping processes.
Keep reading for a comparison as to when you should choose payroll software or DIY payroll processing for your business.
When You Should Consider Payroll Software
Pros
- Saves time running payroll
- Handles payroll taxes
- Walks users through the payroll process
- Bonus features (HR, time-tracking, benefits administration, etc.)
Cons
- Subscription costs
- Susceptible to tech issues
- Some options lack flexibility
As a business owner, you should consider using payroll software if you:
- Are inexperienced with the payroll process
- Are reasonably comfortable using a computer
- Want to save time running payroll
- Don’t want the responsibility of keeping up with payroll regulations
- Are willing to pay for experts to handle your payroll taxes
- Willing to pay for payroll software subscription costs
- Are willing to research the best payroll software options for your business
When You Should Consider DIY Payroll Processing
Pros
- Free
- Completely customizable payroll process
- Control over payroll data
Cons
- More room for error
- Full payroll tax liability
- Time-consuming
Generally, as a business owner, you should consider using a DIY payroll process if you:
- Are reasonably knowledgeable about payroll laws and regulations
- Are confident in your ability to keep payroll records
- Are willing to manually run payroll
- Work with a tax professional to handle your business’s payroll taxes
- Have the means to securely store payroll information
5. Calculate Gross Pay For Your Employees
To begin processing payroll, you’ll need to calculate the gross pay for your employees.
An employee’s gross pay is the total of all their earnings before any payroll taxes are withheld or deductions made. Gross pay includes earned wages for salary and hourly employees, plus any supplemental earnings, such as tips, overtime pay, bonuses, commissions, awards, back pay, and more.
How To Calculate Hourly Wages For Your Employees
Employees who are paid on an hourly basis earn a set rate for every hour worked during a single pay period. Hourly pay may result in variable earnings each pay period, as an employee may miss time due to illness, come in late, leave early, work overtime, or experience another event that disrupts their scheduled work hours.
To calculate the total hourly earnings per pay period for an employee, you’ll need to multiply the number of hours they worked in the pay period by their hourly rate. It’s very straightforward.
For example, if an employee worked a total of 74 hours in a single pay period and earns $30/hour, the employee’s gross earnings total $2,220 for the pay period (74 x 30=2,220).
If that same employee worked an additional six hours of overtime in the same pay period (total 80 hours worked) and earned time and a half for that time ($45/hour for six hours), their gross earnings would total $2,490.
How To Calculate Salary Wages For Your Employees
Calculating gross wages for salaried employees is a matter of division. As most salaried employees are paid on an annual basis, you’ll simply need to divide their total annual salary (pre-tax) by the number of pay periods in the year.
For example, let’s consider an employee earning $84,000 annually and being paid twice a month (24 total pay periods). This employee grosses $3,500 per pay period (84,000/24=3,500).
6. Calculate & Withhold Payroll Taxes
Employers are responsible for calculating and withholding payroll taxes on behalf of their employees. The following taxes are the most common taxes withheld by employers:
- Medicare taxes
- Social Security taxes
- Federal Unemployment Tax Act Taxes (FUTA)
- State Unemployment Taxes
- Income Taxes
To calculate payroll taxes, you’ll need to manually multiply each individual tax by the employee’s gross earnings.
Example Of How To Calculate Payroll Taxes
We can use FUTA taxes as an example. FUTA taxes are taxed at a rate of 6% of the first $7,000 paid to an employee annually.
First, we’ll convert the 6% to a decimal — 0.06 out of 100. From there, you’ll multiply the tax rate by the gross earnings taxed, so 0.06 x 7,000 = $420. In this example, the employer is responsible for paying $420 in FUTA taxes each year for each employee earning at least $7,000 in gross wages.
Once you have calculated payroll tax liabilities from your employee’s gross pay, you can withhold that amount for their paycheck and note the withholdings when you create your employee’s pay stubs.
7. Make Employee Payroll Deductions
In addition to payroll taxes, employee earnings are also reduced by payroll deductions. Payroll deductions may be voluntary or involuntary. Additionally, payroll deductions may be taken from pre-tax and post-tax earnings.
Here’s a quick rundown of some of the most common payroll tax deductions:
- Retirement account contributions
- Garnishments
- Insurance premium payments
- FSAs and HSAs
- Union Fees
As an employer, you’re responsible for making payroll deductions on behalf of your employees and ensuring that the deducted funds are properly allocated.
For example, if funds are deducted to cover an employee’s payment toward their employer-sponsored health insurance, you’ll need to make that payment with the funds you deducted from your employee’s paycheck.
8. Calculate Net Earnings For Each Employee
Once you have made all payroll tax and additional payroll deductions, it’s time to calculate your employee’s net earnings. An employee’s net earnings are the total wages an employee takes home after taxes and deductions have been made.
To calculate an employee’s net earnings, simply subtract the total amount of payroll taxes and deductions from their gross earnings for the pay period.
Example Of How To Calculate An Employee's Net Earnings
For example, let’s consider an individual whose gross earnings total $3,500 for a single pay period. Let’s say a total of $454 was taken out of the employee’s paycheck to cover payroll taxes and deductions. In this example, the employee’s net earnings total to $3,046 for the pay period (3,500 – 454 = 3,046).
9. Review & Make Payroll Corrections
Once you’ve finalized all the math for your employees’ paychecks, it’s time to double-check it. Save yourself the time and money it takes to correct an erroneous payroll run. Here are some details to check for when reviewing your payroll run before submission:
- Accuracy of employee earnings
- Which payment methods are selected for each employee
- Which bank account are the funds coming from
- Correctly reported employee hours
- Correct pay period dates
Once you’ve gone back and corrected any errors in your payroll run, you can submit your payroll.
10. Pay Your Employees
Once payroll is submitted, it’s time to pay your employees. Depending on the type of payment method you use to pay your employees, this process may look different.
If you pay your employees using direct deposit, you must remember to submit the transactions to your bank on time to ensure that employees aren’t paid late.
If you pay your employees by check, you can simply print checks on payday and distribute them your to employees.
11. Make Payroll Tax Deposits & Deduction Payments
Now it’s time to make payroll tax deposits to the federal and state government with the money you withheld from your employees’ paychecks and your own contributions.
Additionally, you’ll need to send out payments for any other deductions you made to your employee paychecks.
Employment taxes, including social security, medicare, and income taxes must be deposited on a monthly or semi-weekly basis, depending on the total tax liability you reported on line 9 of Form 944 or on line 12 of Form 941.
It is mandatory to make federal tax deposits via electronic funds transfer through the government’s Electronic Federal Tax Payment System or EFTPS.
FUTA tax deposits are due on April 30th, July 31st, October 31st, and January 31st during each tax year.
State payroll tax deposit due dates and payroll deduction due dates vary, but you’ll need to get that information to ensure that your deposits and payments are made on a timely basis.
The Bottom Line On How To Pay Employees
Fortunately, understanding how to pay your employees is pretty straightforward once you learn payroll basics and handle all set up tasks.
Many small business owners find that the most challenging part of paying employees is getting payroll taxes right, as payroll tax laws and HR regulations can vary greatly depending on where you’re located. Fortunately, we have several state payroll tax resources to help business owners who are new to payroll and HR get their bearings.
Check out our state payroll tax guides:
How To Pay Employees FAQs
How to pay payroll taxes?
To pay payroll taxes, including FICA and income taxes, business owners must submit payroll tax deposits via the federal EFTPS system on a monthly or semi-weekly basis, depending on your business’s previously reported tax liabilities.
FUTA taxes must be paid on April 30th, July 31st, October 31st, and January 31st. While state payroll tax deposit dates and deadlines vary.
What are some employee payment methods?
The most popular employee payment methods are direct deposit and paper check payments. However, other employee payment methods, including cash, cryptocurrency, and pay card payments are also used across the US.
How do I set up pay for my employees?
To set up pay for your employees, you must first ensure that you have completed all the necessary payroll legal requisite, including getting an EIN for your business, having employees fill out required pre-employment forms, and completing new hire reporting.
Once you have completed these steps, you may begin the process of running payroll for your employee.
Can I do payroll myself?
It’s possible to complete payroll manually, but it is generally more efficient to use payroll software to run payroll for your business.
What is the most popular payment method for employees?
Direct deposit is by far the most popular payment method for employees across the US.