How to pay employees

Before the first payday

These are one-time steps. Skipping one is how first payrolls go wrong.

• Get an EIN from the IRS and register with your state for withholding (where the state has an income tax) and unemployment tax.
• Collect Form W-4, the state withholding form and Form I-9 from the employee, plus a direct deposit authorization if you pay that way.
• Report the hire to your state within 20 days, or sooner where the state requires (7 days in Alabama and Maine).
• Decide whether the person is exempt or non-exempt, which decides whether you track hours and pay overtime. See exempt vs non-exempt rules.
• Pick a pay schedule your state allows. California, for example, requires at least two paydays a month for most employees. See weekly, biweekly and semimonthly schedules.

The full setup order is in how to set up payroll.

How to pay an employee each payday

1. Total the pay for the period. Hours times rate for hourly staff, with overtime for non-exempt employees; the period's salary for salaried staff; plus tips, commissions or bonuses.
2. Take out pre-tax deductions. 401(k) deferrals (up to $24,500 for 2026), health premiums paid through a cafeteria plan, and HSA or FSA contributions.
3. Withhold taxes. Federal income tax from the employee's W-4, state and local income tax where they apply, and 7.65% FICA: 6.2% Social Security on wages up to $184,500 for 2026 and 1.45% Medicare with no cap. Supplemental pay such as a bonus can be withheld at a flat 22% federal.
4. Take out after-tax deductions, such as Roth 401(k) deferrals and wage garnishments.
5. Pay the net amount by direct deposit, check or pay card, and give the employee a pay statement.
6. Deposit the taxes. Monthly depositors pay by the 15th of the next month; semiweekly depositors within days of payday. Your schedule comes from the tax you reported in the lookback period ($50,000 or less means monthly).
7. Record it. Keep the payroll register, the deposit confirmation and the hours.

FICA example. On $2,000 of biweekly gross pay, you withhold $124 Social Security (6.2%) and $29 Medicare (1.45%), so $153, and you pay another $153 yourself. Federal income tax depends on the W-4 and the IRS tables, and state tax on the state. Our payroll taxes guide works through full-year examples.

Ways to pay employees: direct deposit, check, pay card and cash

If you pay by direct deposit, the speed of the deposit is a real cost line. On Gusto Simple, next-day pay is $15 a month plus $3 per person, same-day pay is $90 per payroll and instant pay is $100 per payroll; next-day is included on Gusto Plus. Roll by ADP lists same-day and next-day direct deposit options in its $39 plus $5 per employee plan.

What it costs to pay 1, 5 or 10 employees

Software fees are small next to the taxes: on a $50,000 employee in Texas, employer payroll taxes come to $4,110 a year ($3,100 Social Security, $725 Medicare, $42 FUTA and $243 SUTA at the 2.70% new employer rate). Put your own state and salary into the employee cost calculator, and see our payroll software rankings for how these plans score.

How to pay employees without payroll software

"Without payroll" can mean two different things, and only one of them is allowed.

Without a payroll service: allowed. You can run payroll by hand. You figure withholding from each W-4 with the IRS tables, track each wage base, make every deposit through EFTPS, and file each Form 941, Form 940, W-2 and state report yourself. It works for one or two salaried employees in one state. It gets hard with hourly pay, tips, bonuses, a second state or local taxes. Patriot Basic, at $17 plus $4 per worker, does the math and leaves the filing to you.

Without withholding at all: not allowed for employees. Paying an employee by cash, check or app with no withholding does not turn them into a contractor. Whether someone is an employee depends on control, not on how you pay. If the worker really is independent, pay them by invoice and file a Form 1099-NEC when you pay $2,000 or more for 2026 work; see W2 vs 1099.

Paying hourly, tipped and salaried employees

• Hourly. Pay at least the federal $7.25 or the higher state or city minimum for every hour, plus overtime for non-exempt staff. See 2026 minimum wage by state.
• Tipped. Federal law allows a cash wage as low as $2.13 an hour with a tip credit of up to $5.12, for employees who regularly receive more than $30 a month in tips. Many states set higher cash wages or ban the tip credit.
• Salaried exempt. At least $684 a week ($35,568 a year) under federal rules, with a fixed salary each period. California's floor is $72,384 from 2027.
• Bonuses. Withhold federal income tax at 22% if you use the flat rate (37% on supplemental wages above $1 million in the year).

Common mistakes when paying employees

• Paying first and setting up the state accounts later. Register for withholding and unemployment tax before the first payday.
• Missing the funding cutoff for direct deposit, which can delay pay or trigger a fee.
• Depositing tax on the return date instead of your monthly or semiweekly deposit date.
• Paying monthly where the state requires more often, such as California for most employees.
• Holding a final paycheck to the next cycle in a state that requires it at termination.
• No pay statement for cash or app payments.

More errors and their fixes are in common payroll mistakes, and whether to do it yourself or hand it off is covered in in-house vs outsourced payroll.