Operational Gaze:
How to Run Payroll in the US?

February 20th 2024

Payroll processing encompasses all aspects of compensating employees for their services. This includes calculating the overall wage earnings for each employee, identifying and subtracting deductions, filing reports, managing payroll tax procedures, and ultimately disbursing payments.

From minimum wage considerations to tax regulations and employment laws, effectively managing payroll in the US demands a comprehensive understanding of the local landscape.

This is why we’ve assembled a series of step-by-step instructions to assist you through each pay cycle. This article will equip you with fundamental insights into the workings of payroll business processes, ensuring you have a clear picture of your situation and recognizing areas where additional assistance might be necessary.

This Article Covers

Laws That Affect Payroll Procedures in the US
Worker Classifications in the US
Payroll Forms and Relevant Bodies in the US
Applicable Federal Taxes in the US
Key Pay Elements That Impact Payroll in the US
Step-by-Step Guide to Payroll in the US

Laws That Affect Payroll Procedures in the US

In the space of payroll procedures, certain legal regulations govern how employees are compensated and businesses must adhere to these rules. 

Federal Laws

There are three key pieces of federal legislation that will impact your payroll processing steps:

  • The Fair Labor Standards Act (FLSA): The FLSA sets benchmarks and criteria for minimum wage, overtime compensation, recordkeeping, exemption classification, and regulations concerning child labor within various sectors, including private businesses as well as federal, state, and local government entities.
  • The Federal Insurance Contributions Act (FICA): Under FICA, both employers and employees are obligated to contribute to Social Security and Medicare. Employers are responsible for deducting 6.2% for Social Security tax and 1.45% for Medicare tax from each employee’s paycheck. Furthermore, employers must match these deductions, resulting in a combined FICA payroll tax processing rate of 15.3% for each employee.
  • The Federal Unemployment Tax Act (FUTA): The FUTA mandates that employers pay unemployment taxes, which fund benefits for qualifying employees who experience job loss. While not precisely a payroll deduction, as it pertains solely to employers, FUTA contributions still necessitate recording in every payroll cycle. Exceptions might be applicable according to the industry, but generally, a 6% tax on the initial $7,000 paid to an employee annually is expected.

State Payroll Laws

  • Payday Schedules: Legislation mandates that employers set fixed dates for paying employees. These schedules differ due to factors such as corporate policies, US state labor laws, and employment categorization, encompassing options like weekly, biweekly, semimonthly, and monthly pay cycles.
  • Recordkeeping: Legal mandates underscore the importance of accurate recordkeeping, serving as a cornerstone for legal compliance, efficient financial administration, and the openness of transactions.
  • Minimum Wage: Numerous states have their own minimum wage laws, which may exceed the federal minimum wage requirement.
  • Overtime: Certain states enforce overtime regulations that are more generous than the federal law, granting additional benefits to eligible employees.
  • Income Tax Withholding: In most states, employers are obligated to withhold state income tax from employee paychecks.
  • Unemployment Insurance: Employers must contribute to state-specific unemployment insurance programs, which offer support to workers during periods of joblessness.

Local Payroll Laws

  • Wage Theft Prevention: In certain cities, employers must inform employees of their rights to minimum wage and overtime pay to counteract wage violations.
  • Fair Workweek: Specific urban areas necessitate that employers provide employees with prior notice of work schedules and, in some instances, offer extra compensation for abrupt schedule modifications.
  • Paid Sick Leave: Certain municipalities and states mandate that employers offer compensated sick leave to their workforce.
  • Predictive Scheduling: Certain municipalities require employers to provide timely notification of work schedules for hourly staff, promoting foresight and predictability.

HR Laws

  • New Hire Reporting: Under federal regulations, employers are obligated to submit fundamental details about newly hired or rehired employees within 20 days of their hiring to the state where these employees are employed. A few states may have even earlier deadlines. This information is recorded in the National Directory of New Hires, a resource utilized by child support agencies to locate parents responsible for child support and to initiate income withholding orders.
  • Breaks, Lunches & Time Off Requirements: Paid time off (PTO) policies, though minimal federally, encompass different categories of leave such as sick leave, vacation, bereavement leave, and others. While certain PTO policies consolidate vacation and sick time into a unified pool of paid days off, it’s essential to note that numerous states mandate a distinct allocation of time exclusively for sick leave.
  • Disability Insurance: The Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs offer aid to individuals who satisfy the eligibility criteria for disability. Such programs may require purchasing from employers.
  • Child Labor Laws: The Fair Labor Standards Act (FLSA) sets forth guidelines governing the compensation, working hours, and safety protocols for minors (individuals under 18 years old) engaged in occupations covered by the law. The precise stipulations vary based on the minor’s age and the nature of the job. Broadly, the FLSA designates the minimum working age as 14 years old and restricts the work hours for those under 16 years old.
  • Employment Law Posters: Certain laws and rules overseen by the U.S. Department of Labor (DOL) mandate the provision of notices to employees and/or their display within the workplace. Such posters would display information about the current minimum wage rates, among other relevant information. The DOL offers complimentary digital versions of the obligatory posters, with some available in languages beyond English. Employers must ensure that the posters are up to date with wage increases or updated rights. 

Worker Classifications in the US

Each staff member in the US needs to be correctly classified as either an employee or an independent contractor. A worker’s status will determine which taxes they pay and if they’re entitled to certain employee privileges like overtime pay and paid time off. If you are unsure how to determine a worker’s status, you can submit Form SS-8 to the IRS.

Federal laws categorize workers based on economic dependence and overtime eligibility, while state laws refine classifications for government benefits. These categorizations include being an employee vs. contractor, full-time vs. part-time, or exempt vs. non-exempt (Download U.S. FLSA Exemption Salary Threshold 2024 Poster now). Employers can also tailor classifications for compliance and benefits. Proper classification ensures legal adherence and fair compensation. It also determines the taxes imposed on the employee.

Companies and employees submit Form SS-8 to seek a determination of a worker’s status concerning federal employment taxes and income tax withholding.

Submitting a Form SS-8 for a “worker status” determination entails requesting the IRS to ascertain whether the services rendered to the company are classified as those of an employee or an independent contractor.

Payroll Forms and Relevant Bodies in the US

Payroll Forms

Employers are required by law to submit various forms related to their employees’ payroll. Forms for Federal Payroll include:

  • W-4 Form: The W-4 Form aids employers in determining tax withholding from employee salaries.
  • W-2 Form: The W-2 Form is used to document the overall yearly earnings for each employee (individual form per employee).
  • W-3 Form: The W-3 Form is utilized to summarize total wages and taxes across all employees.
  • Form 940: Form 940 is submitted to the IRS to declare and compute unemployment taxes owed.
  • Form 941: Form 941 is used for quarterly filing to report income and FICA tax deductions from paychecks.
  • Form 944: Form 944 is used for yearly reporting of income and FICA tax deductions from paychecks.
  • 1099 Forms: The 1099 Forms furnishes the IRS with details about non-employee compensation, facilitating tax collection for contract work.

Federal Payroll/ Tax Bodies

  • Fiscal Data: Fiscal Data is a centralized platform for federal financial information that offers accessible and modern data practices, providing financial data in formats suitable for machines through file downloads and APIs. The creation of Fiscal Data was led by the Office of the Chief Data Officer within the Bureau of the Fiscal Service, a part of the U.S. Department of the Treasury. This Bureau oversees public debt, payment systems, and government accounting, and its team includes data analysts, developers, and UX designers focused on providing reliable data to the public.
  • Internal Revenue Service (IRS): The IRS, or Internal Revenue Service, is the revenue service of the United States federal government. It operates under the authority of the Department of the Treasury and is responsible for administering and enforcing federal tax laws and regulations. The IRS collects taxes, processes tax returns, provides taxpayer assistance, and oversees various tax-related matters, including audits and investigations. Its primary mission is to ensure that individuals and businesses comply with the tax laws and fulfill their tax obligations.
  • The Wage and Hour Division (WHD): The objective of the Wage and Hour Division of the United States Department of Labor is to ensure adherence to labor standards that safeguard and enhance the well-being of the country’s workforce. The WHD enforces the Fair Labor Standards Act’s provisions concerning federal minimum wage, overtime compensation, recordkeeping, and regulations related to child labor. Additionally, WHD enforces laws like the Migrant and Seasonal Agricultural Worker Protection Act, the Employee Polygraph Protection Act, the Family and Medical Leave Act, as well as wage garnishment rules from the Consumer Credit Protection Act, along with various worker protections outlined in immigration-related statutes. Furthermore, the WHD administers and enforces the prevailing wage requirements found in the Davis-Bacon Act and the Service Contract Act, along with other regulations pertaining to federal contracts involving construction and the provision of goods and services.
  • Employee Benefits Security Administration (EBSA): The goal of the Employee Benefits Security Administration (EBSA) is to ensure the safety of the retirement, health, and other employment-related benefits provided to American workers and their families. EBSA achieves this objective by formulating impactful regulations, offering guidance and education to workers, plan sponsors, fiduciaries, and service providers, and rigorously enforcing the relevant laws.
  • Employment and Training Administration (ETA): The Employment and Training Administration‘s objective is to enhance the effectiveness of the labor market in the United States. It achieves this by delivering job training, employment services, labor market data, and income support primarily through state and local workforce development systems.
  • The Federal Personnel and Payroll System (FPPS): The Federal Personnel and Payroll System (FPPS), created by the Department of the Interior and utilized by various Federal agencies, is a centralized human resources and payroll system used by various federal government agencies in the United States. It is designed to manage and streamline various HR and payroll processes for federal employees, including personnel records, benefits administration, time and attendance tracking, payroll processing, and more.
  • The Social Security Administration (SSA): The Social Security Administration (SSA) offers economic security for American citizens, providing assistance during every phase of their lives. The SSA manages programs related to retirement, disability, survivor benefits, and family support, in addition to enrolling people in Medicare. Moreover, the SSA issues Social Security Numbers, which are distinct identifiers essential for employment, financial dealings, and establishing eligibility for specific government services.
  • The Office of Personnel Management (OPM): The Office of Personnel Management (OPM) is responsible for providing staff support to the Federal Salary Council and Presidents Pay Agent. It takes a leadership role in establishing pay systems for civilian Federal employees by developing and maintaining Government wide regulations and policies. This includes areas such as General Schedule locality pay, the Federal Wage System, special rates, and compensation for employees in non-foreign areas. Each Federal agency is ultimately accountable for complying with regulations and following OPM’s policies to effectively administer pay policies and programs for their respective employees. This encompasses various aspects of pay administration, including basic pay setting, locality pay, special rates, premium pay, retention incentives, and more.

Applicable Federal Taxes in the US

Employers are responsible for both depositing and reporting employment taxes. Various taxes apply in the US federally and for various types of employers. These include:

  • Federal Income Tax: Employers are typically required to deduct federal income tax from the earnings of their employees. To determine the appropriate amount to withhold, Form W-4, known as the Employee’s Withholding Certificate is used, along with the relevant method and withholding table provided in Publication 15-T, which outlines Federal Income Tax Withholding Methods. Employers might also encourage their employees to use the Tax Withholding Estimator tool to get an estimate of the federal income tax that should be withheld from their paychecks.
  • Social Security and Medicare Taxes: As per the Federal Insurance Contributions Act (FICA), employers generally need to subtract taxes for old-age, survivors, and disability insurance (commonly referred to as social security taxes) and as well as hospital insurance (known as Medicare taxes) from the wages of employees and also cover the employer’s portion of these taxes. Distinct rates are applicable to each of these tax components. Only the Social Security tax has a maximum wage limit. The wage base limit represents the highest income amount that is eligible for taxation during the year. Employers compute the withholding for Social Security and Medicare taxes by multiplying each payment by the employee’s tax rate. For the current year’s details on the Social Security wage base limit, Social Security tax rate, and Medicare tax rate, consult Publication 15, also known as the Employer’s Tax Guide (Circular E).
  • Additional Medicare Tax: Apart from Medicare tax, employers must withhold an extra 0.9% for the Additional Medicare Tax on any employee wages and earnings exceeding $200,000 in a calendar year. Employers begin withholding the Additional Medicare Tax in the pay period where wages surpass $200,000 and continue this withholding until the calendar year ends. The Additional Medicare Tax doesn’t require an employer match. More information can be found in the question and answer section for the Additional Medicare Tax as well as Publication 15.
  • Federal Unemployment (FUTA) Tax: Employers must separately report and pay FUTA tax, which is distinct from federal income tax, Social Security tax, and Medicare tax. FUTA tax payments come exclusively from the employer’s own funds; employees are not responsible for this tax, nor is it withheld from their wages. For further details on FUTA tax, consult Publication 15 and Publication 15-A, which is the Employer’s Supplemental Tax Guide.
  • Self-Employment Tax: Self-Employment Tax (SE tax) primarily applies to individuals who work for themselves, serving as a Social Security and Medicare tax equivalent to what most employees have withheld from their pay. It functions similarly and is aimed at individuals who are self-employed.

In general, you’re required to deposit the federal income tax, employer and employee portions of Social Security and Medicare taxes, and FUTA taxes that you’ve withheld. The specifics of depositing, as outlined in Publication 15, vary based on your business and the amount you withhold.

Key Pay Elements That Impact Payroll in the US

Workers’ Compensation

Employers are under a legal obligation to reasonably ensure the safety of their workplaces. However, accidents are still a possibility. In such instances, workers’ compensation insurance comes into play. The purpose of workers’ compensation insurance is two-fold: Firstly, it guarantees that injured workers receive medical treatment and compensation to cover a portion of the income they miss out on during their inability to work. Secondly, it generally shields employers from legal actions brought by workers injured while on the job. Regardless of fault in the accident, workers are entitled to benefits through this insurance. In case a worker loses their life while on duty, workers’ comp (as it’s commonly called) extends death benefits to the worker’s dependents.

Workers’ compensation premium calculation takes into account annual payroll. A higher payroll would indicate higher workers’ compensation premiums. Payroll here would include the total compensation the employees receive, which includes items like bonuses, commissions, vacation pay, and sick pay, among others. Typically, employers would provide their insurers with an estimate of the expected payroll for the upcoming year, and they use this figure to calculate the projected premium. At the end of your policy year, the insurer conducts an audit to ascertain the employer’s actual payroll for that year. If it was overestimated, the employer will be issued a credit or a refund. Conversely, if underestimated, the employer will be required to pay additional premiums.

The Office of Workers’ Compensation Programs (OWCP), a division of the U.S. Department of Labor, manages four primary programs for disability compensation. These programs cater to federal employees (or their dependents) as well as certain defined groups who sustain workplace injuries or contract occupational illnesses. The services offered include:

  • Reimbursement for lost wages
  • Medical care coverage
  • Support for vocational rehabilitation
  • Miscellaneous additional benefits

Minimum Wage & Tips

As per the Fair Labor Standards Act (FLSA), the federal government’s established minimum wage for the year 2023 remains at $7.25 per hour.

Note: Due to the fact that the federal minimum wage has not increased since July 2009, specific states and localities have taken the lead in augmenting their own minimum wage levels.

The FLSA does not have specific protocols for collecting regular wages or commissions that exceed the FLSA minimum wage benchmarks. Nonetheless, certain states have introduced legislation enabling employees to file claims for such payments, and in certain cases, these claims might encompass supplementary benefits beyond wages, commonly referred to as fringe benefits.

In the United States, employers are permitted to pay a lower minimum wage to employees who receive tips. According to the U.S. Department of Labor, a tipped employee is an individual who consistently obtains over $30 per month in tips as a component of their job. In these circumstances, federal employers are obliged to provide a minimum direct wage of $2.13 per hour, as long as the amalgamation of tips received and this direct wage equates to or surpasses the federal minimum wage of $7.25. Should the employee’s tips, in conjunction with the employer’s direct wage of at least $2.13 per hour, fall short of the federal minimum wage, the employer must bridge the gap. It’s worth highlighting that various states impose higher minimum wage requirements for tipped employees.

Download U.S. Minimum Wage 2024 Poster now.

Overtime

The regulations concerning federal overtime provisions are encompassed within the Fair Labor Standards Act (FLSA). Unless they meet the criteria for an exception, employees who fall under the scope of this Act are required to receive compensation for working beyond regular hours, which is defined as exceeding 40 hours within a workweek, at a rate not less than one and a half times (1.5x) their standard pay. The FLSA does not impose a restriction on the number of hours employees aged 16 and above can work during a designated workweek.

Given that the standard federal minimum wage is $7.25 per hour, the federal minimum wage for overtime stands at $10.87 per hour (equivalent to one and a half times the minimum wage).

In most instances, overtime earnings accrued within a given workweek are typically paid on the usual payday for the corresponding pay duration during which those earnings were garnered.

Payment method

For the majority of cases, multiple choices are available for compensating employees, including checks, direct deposit, pay cards, cash, mobile wallet, and payroll cards. Each approach has its own advantages and disadvantages.

Alternately, payment can also be made using vouchers, punch-outs, tickets, tokens, or similar instruments in place of cash, provided these items are fully redeemable within the United States.

The optimal payment method relies on your business’s adherence obligations, your employees’ inclinations, and the tools employed for payroll management.

Nonetheless, employees must be able to access their wages without any deductions. Therefore, practices such as using platforms that incur a transaction fee for recipients, are not permissible.

It’s worth noting that numerous states have enacted regulations regarding pay cards, specifying their operational requirements. For instance, employers are not permitted to enforce mandatory direct deposit for all employees across every state.

Pay Stub Laws

While the Fair Labor Standards Act (FLSA) mandates the maintenance of precise records detailing employees’ work hours and remuneration, it doesn’t impose an obligation on employers to furnish pay stubs to employees.

Minimum Pay Frequency

There is no federal statute dictating the frequency with which employers are required to compensate employees. This matter is determined by state payday requirements. Nevertheless, maintaining a consistent pay schedule is imperative.

Diverse pay frequencies can be applied based on departments, locations, or payment types (such as salaries or hourly wages). However, it’s essential to uphold fair and uniform payment practices for all employees.

It is impermissible to modify an employee’s payment frequency arbitrarily. For instance, transitioning from weekly to monthly payments without valid grounds is not allowed.

Nonetheless, there are situations in which altering the pay schedule is permissible. A change in frequency may be acceptable if:

  • There exists a valid business justification.
  • The alteration is permanent.
  • The objective isn’t to evade minimum wage or overtime obligations.
  • Compensation isn’t being excessively delayed.

Paycheck Deduction Rules

Payroll deductions involve subtracting a portion of an employee’s total earnings to cover taxes, garnishments, and various benefits such as health insurance. These deductions represent the difference between gross pay and net pay and can encompass:

  • Income tax
  • Social security tax
  • Contributions to a 401(k)
  • Wage garnishments
  • Child support payments

Certain payroll deductions are voluntary and can be taken from a paycheck either before or after taxes, provided the employee has given written authorization. Conversely, taxes and wage garnishments are compulsory, and employers who do not accurately withhold these deductions might be held responsible for the uncollected amounts.

The FLSA outlines further both acceptable and prohibited deductions. 

Final Paycheck Laws

According to federal regulations, employers are not obligated to provide departing employees with their last paycheck right away. However, certain states might demand immediate remittance. 

Final paychecks are generally required to be given on the next scheduled payday if a briefer interval is not specified by state rules. 

If the usual payday for the employee’s final work period has passed and payment hasn’t been received, it’s advisable to reach out to the Department of Labor’s Wage and Hour Division (WHD) or the relevant state labor department.

Step-by-Step Guide to Payroll in the US

Outlining and following a regular procedure for payroll is essential to ensure that it is done right every pay cycle. We list down the essential steps for successful payroll processing below:

  • Step 1: Determine the Payroll Regulations that Pertain to Your Company: Prior to commencing payroll operations in the US, it is vital to recognize the regulations that influence your business, including minimum wage, overtime, and tax laws. Neglecting this aspect may lead to audits, penalties, and fines. The relevant payroll regulations for your business are contingent on factors such as business size, geographical location, industry, and the employment status of your workers, be it full-time, part-time, or contractors.
  • Step 2: Establish Your Business as An Employer: At the federal level, this involves obtaining your Employer Identification Number (EIN) and creating an account within the Electronic Federal Tax Payment System (EFTPS). For new businesses, obtaining an Employer Identification Number (EIN) is a prerequisite before embarking on designing a personalized, step-by-step payroll process flowchart. The EIN is a nine-digit identifier utilized by the Internal Revenue Service (IRS) to monitor a company for tax purposes. The application for an EIN can be submitted online through Form SS-4.
  • Step 3: Examine Obligations of Employers: At the federal level in the US, employer payroll responsibilities include obtaining an EIN, proper worker classification, withholding taxes, reporting new hires, maintaining accurate payroll records, distributing Form W-2, depositing and reporting taxes, complying with wage and hour laws like FLSA, adhering to employment laws such as FMLA, and preparing for payroll tax audits. These ensure compliance, accurate payments, and adherence to federal regulations, alongside considering state-specific requirements.
  • Step 4: Apply the Four Federal Payroll Taxes: While state-specific payroll tax laws are overseen by the respective state’s government agency responsible for employment and taxation, federal payroll taxes are managed by the Internal Revenue Service (IRS). Taxes that apply and are elaborated above include the Federal Income Tax, Social Security Tax, Medicare Tax, and Federal Unemployment Tax Act (FUTA) Tax.
  • Step 5: Gather Employee Information: Collect essential details such as personal information, Social Security numbers, and tax filing statuses of all employees. Forms including Form W-4, Form I-9, and Form W-9 should be completed upon hiring new employees. Additionally, other crucial data like bank details, medical insurance forms, and retirement plan authorizations need to be acquired.
  • Step 6: Develop a Record Management System: Maintain up-to-date documentation for each employee, whether in paper files or an online system. This includes contracts, tax forms, medical and retirement plan documentation, agreements, employee handbooks, compliance forms, training records, etc.
  • Step 7: Establish a Payroll Cycle: Choose a pay schedule that suits both employer and employee needs, considering options like weekly, bi-weekly, semi-monthly, or monthly payroll. Various factors such as costs, employee preferences, insurance premiums, overtime calculations, and cash flow rhythms should be taken into account.
  • Step 8: Observe Due Dates and Filing Requirements: All businesses that employ individuals and provide compensation for their services are required to inform the IRS about wage payments and associated employment taxes periodically with various Reporting Due Dates. This encompasses income tax deductions, social security contributions, Medicare contributions, and, if relevant, Additional Medicare tax.
  • Step 9: Monitor Time and Attendance: Accurate payroll necessitates meticulous timekeeping. Implement a well-defined time and attendance system encompassing workweeks, overtime, breaks, paid time off, and sick leave entitlements. Utilize software-based solutions, including timesheet software, a payroll hours tracker, or even a time off tracker to reduce errors. 
  • Step 10: Calculate Gross Pay: Determine gross pay based on annual salary divided by pay cycles for salaried employees, and hours worked multiplied by hourly rate for hourly employees. Include additional components like commissions, bonuses, overtime payments, and expense reimbursements.
  • Step 11: Calculate Deductions and Take-Home Pay: Calculate take-home pay (net pay) using the formula: Take-home pay = Gross pay – Payroll taxes – Other deductions. Apply deductions in the correct order, including pre-tax deductions, standard tax deductions, and post-tax deductions.
  • Step 12: Process Employee Payroll: Provide wage statements, whether printed or electronic, to ensure transparency. For direct deposit, consider a separate account for payroll withdrawals. Implement a process where employees acknowledge receipt of each payment through pay periods and approvals.
  • Step 13: Maintain Records and Fulfill Tax Obligations: Keep comprehensive records of timesheets and reports, pay stubs, payroll taxes withheld, and bank transactions related to tax payments and deductions. Maintain transparency with the IRS and state legislators by having accurate payroll records in place.

Final Thoughts

In conclusion, the multifaceted nature of payroll processing, covering employee compensation calculations, deductions, tax procedures, and payment distribution, underscores its significance in the employment realm. Navigating through minimum wage guidelines, tax protocols, and labor legislation is imperative for successful payroll management in the US. In this day and age, various tools exist to assist you with such a process, we have compiled a list of the 6 best apps to simplify your payroll process in the US. Alternatively, if you already have a system in place, here are 10 tips to streamline your payroll in the US.

Important Cautionary Note

When making this guide we have tried to make it accurate but we do not give any guarantee that the information provided is correct or up-to-date. We therefore strongly advise you seek advice from qualified professionals before acting on any information provided in this guide. We do not accept any liability for any damages or risks incurred for use of this guide.