How To Pay Employees

Master the essentials of payroll with our comprehensive guide on how to pay employees, covering everything from setting up payment systems to understanding legal requirements and tax implications.
Streamline your payroll process and ensure compliance with our expert tips on how to pay employees effectively, including best practices for calculating wages, handling deductions, and staying up-to-date with employment laws.

By Brad Nakase, Attorney

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Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. How do you pay employees?

2. Attorney Required for Employee Compensation and Payroll Compliance

3. How Much You Should Pay an Employee

4. Step by Step instruction: How a Small Company Should Pay Employees

5. Payroll Solutions for Small Businesses: The Best Way to Pay Employees

6. How to Use a 1099 to Pay a Worker

How do you pay employees?

It may seem difficult to learn how to pay your staff if you’re a new business owner. You can’t just take a wad of cash out of your bank account, after all. Every dollar that moves from your possession to theirs must be legally documented.

Thankfully, doing so isn’t as difficult as it first appears.

Types of compensation

There are three main methods that companies pay their workers:

Hourly pay
Annual fixed salary
Commission
Hourly Wage

The basis for hourly earnings is an hourly rate. The amount of time an employee works throughout a pay period determines how much they get paid.

An associate could be paid $20 per hour, for instance, for their labor. They are due $1,600 if they work 80 hours during a pay period.

For a part-time worker or someone without a set schedule, such as a restaurant server, an hourly rate is ideal. Hourly employees are typically considered “non-exempt,” which entitles them to overtime compensation. If you’re just starting out in business and figuring out how many staff you need and how often, you may choose to pay a new hire an hourly wage.

Salaried Income

Salaried workers receive a set amount of money each year. They receive a fixed amount every payday, which is calculated by dividing their yearly wage by the total number of pay periods.

For instance, an employee with a biweekly pay period and a $60,000 yearly income will get $2,307 in pre-tax pay each payday.

Corporate occupations with predictable time input from employees are best suited for higher salaries. Generally speaking, salaried workers are not entitled to overtime compensation.

Commission-Based Pay

Employees may also be paid commission-based. They might be paid a low base rate, which could be hourly or salaried, with extra money if they meet pre-set sales targets.

For instance, the base yearly compensation of a full-time salesperson at your organization might be $35,000. In addition, they get paid a commission that is calculated as a percentage of the sales they close.

For sales positions, commission-based pay is the best option because it motivates staff to achieve predetermined objectives.

If you want to make sure that you are paying your employees appropriately and complying with minimum wage and overtime regulations, consult the Fair Labor Standards Act (FLSA).

Attorney Required for Employee Compensation and Payroll Compliance

Attorneys who help the employers and companies with the employee compensation and related issues typically specialize in labor law and/or employment law. Here are some of the main ways they can help:

Advise on wage and hour compliance – A wage an hour attorney for employers ensures compensation practices adhere to the minimum wage, overtime, and also other wage and hour regulations. This includes properly classifying the employees as exempt vs non-exempt from the overtime.
Review/draft compensation policies – Helping to craft legal and fair policies related to salaries, bonuses, commissions, raises, and more. Ensuring compensation does not legally discriminate.
Counsel on the incentive plans – Assisting in designing and reviewing the short-term and long-term incentive pay programs like bonuses, stock options, and profit sharing that comply with the law.
Interpret compensation regulations – Staying up-to-date on the many new and evolving federal, state, and local wage rules and guidance and helping decode how they apply to the employer.
Represent in compensation disputes/ lawsuits – Defending the employers if an employee or a group of employees takes legal actions over an alleged compensation issue like unpaid wages or discriminatory pay. Please contact our employer class action defense attorney in California to defend against a wage and hour lawsuit.
Advise on pay equity compliance – Guiding employers in conducting the compensation audits and analyzing the pay data to uncover the inequities and comply with the equal pay laws.
Bargain collective agreements – Representing employers in negotiations with labor unions regarding the compensation and benefits for the members under a collective bargaining agreement.

The goal is to keep the compensation and benefits policies and practices fair, competitive, incentivizing, and also compliant with all applicable regulations. Qualified employment attorneys are the essential partners for HR in this area.

How Much You Should Pay an Employee

Here are a few key considerations for how much a small company should pay its employees:

Industry standards and averages. Research typical pay ranges for the roles you are hiring for in your geographic area and in your industry. While you may not be able to match the bigger companies, you’ll want to be as competitive as possible.
Budget. As a small business, you likely have limited resources, so the employee salaries need to fit within your overall budget. Factor in not just the base pay but costs like benefits, employment taxes, insurance when deciding what you can afford per employee.
Value added. Consider the value each role brings to your business in terms of the revenue generated, critical operations covered, and also customer service provided. Balance paying the market rates with what you can sustain.
Growth potential. Small businesses can highlight many opportunities for employees to take on much more responsibility and grow professionally. This enables you to start smaller salaries but increase them according to your performance.
Employee expectations. Transparency about the company size, funding and long-term projections helps set the expectations. Offer other perks like casual culture, flexible schedules.
Benchmark goals. Set clear revenue and also growth targets, and tie employee pay to performance in meeting the benchmarks. This rewards the top performers as the company succeeds.

The most sustainable approach is to balance all these factors – not overextending the budgets but still being competitive enough to attract and retain the talent you need to operate and expand. Keep communicating with the employees around the goals and constraints.

Step by Step instruction: How a Small Company Should Pay Employees

Payroll must be set up before you can begin paying employees. Make sure the system you choose makes sense to you.

Let’s first explore the details of payroll processing. Then, we may look at the top payroll choices for proprietors of tiny businesses.

Gather Employee Paperwork

Ask both new hires and current workers to complete and return the following tax forms:

Form IRS W-4 for withholding federal taxes
State form (such as DE 4 in California)
Any additional state forms that are needed, along with the local withholding forms
USCIS 1-9 form to confirm eligibility for employment

You will also need to get their banking details if you intend to pay your staff by direct deposit.

Determine Pre-Tax Earnings

Choose a payment schedule for your staff: weekly, biweekly, semi-monthly, monthly, or on a different interval entirely. Next, determine the gross salary of your staff for the given pay period:

Hourly workers: multiply their hourly rate by the total number of hours worked. Don’t forget to deduct any unplanned time off they may have taken from your estimates.

Employees who receive a salary: Divide their salary by the total number of pay periods listed in your annual payroll plan.

Commission workers: Establish their base compensation, either hourly or salaried. Then, based on the commission structure of your business, add their commission earnings for that pay period.

Figure out withholding

To determine the appropriate amount of pre- and post-tax withholding from an employee’s pay, consult the documentation you received from them:

Federal income taxes
Income taxes at the state level
Local levies
Payroll taxes, often known as FICA (Federal Insurance Contributions Act) taxes, are made up of Social Security and Medicare taxes.
Benefit deductions for things like health insurance, RRSPs, flexible spending accounts, and commuting

You should also take into account the cost of unemployment insurance, which includes the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA), if applicable. This is usually paid for by the employer rather than withheld from employee paychecks.

Paying an Employee: Determine Net Pay

You know how much to deduct from your employees’ paychecks for taxes and what their gross compensation is. Subtract the amount withheld from their gross salary to determine their net compensation.

An employee earns $1,820 on payday, for instance, if their gross salary for the pay period was $2,500 and $680 must be deducted for taxes.

Give Your Employees Their Paychecks

It’s time to give your staff their earned net pay. The two most widely used methods of paying employees are checks and direct deposits.

Refer to the bank details your employees provided you with if you use direct deposit. As an alternative, you can have employee checks cut by your bank or payroll service. With apps like Hourly, you can pay your staff immediately and provide them access to pay stubs on their phones. This eliminates the need for paper checks and saves you time.

Submit your taxes

Taxes must be paid by you on behalf of your W-2 workers. Take the amount of the employee’s paycheck that has been withheld (ascertained in step three) and allocate that money to the appropriate accounts for your tax filings. In particular, make sure to file your taxes with the IRS, the tax collecting agency of your state, and, if relevant, the tax collection agency of your municipality. Be aware that the employer is the only one who pays some taxes.

Fund Benefits

The government will not receive all of the withheld salary. It may vary depending on your employer and go toward benefits for staff members.

This could involve making contributions to:

Health coverage
Retirement
Benefits for commuters
Accounts for health savings
Accounts for flexible spending

If your company has an employee benefits program, deposit money into the appropriate accounts on your employees’ behalf.

Make Payroll Record Updates

In the event of an audit, you will need to preserve your payroll documents for a number of years. Maintain a current, accessible, and well-organized payroll register. Provide details on the people who worked, how much they were paid, who got paid, and what taxes were deducted.

Payroll Solutions for Small Businesses: The Best Way to Pay Employees

Payroll seems like a difficult task, isn’t it? How do owners of small businesses manage it?

Businesses at the enterprise level have internal teams tasked with compensating staff members. Payroll specialists may be too expensive for small organizations, or they may not even have enough employees to cover the costs. Nonetheless, most of the time, even one-person operations are accountable for paying taxes and complying with labor laws.

The most efficient way for small businesses to pay their staff is through payroll software. It saves both money and time. As we just discussed, payroll software actually automates every stage of the complex payroll process, including the money distribution procedure.

How to Use a 1099 to Pay a Worker

Paying a 1099 worker is as simple as giving them their gross pay. Put differently, proceed with your regular payroll procedure without deducting their taxes.

In theory, 1099 workers do not qualify as employees. They are regarded as self-employed contractors.

Payroll taxes are the responsibility of independent contractors. They will be the ones to file both their federal and state taxes. An independent contractor falls into this category if the client, who is paying for the work, has influence over the outcome or end product but not over the method of completion.

Can you pay an hourly 1099 employee then? You can. You have the option of paying your 1099 contractors a predetermined charge for deliverables or an hourly rate.

A 1099 contractor would receive $1200 in gross pay or compensation for 60 hours of labor at $20 per hour. The contractor would get the whole $1200 from you. It would be the contractor, not your company, who would manage quarterly tax payments to the IRS and state and local treasuries.

Independent contractors may be paid a set fee, but you are not allowed to give them a salary; if you did, they would be regarded as non-exempt workers and require a W-2 from you.

Is it possible to pay a worker who has a W-2 and a 1099? Indeed. Let’s take the case of being a restaurant owner. Harriet, one of your employees, works for you as a W-2 and 1099 employee. She receives a W-2 for her full-time managerial position at your restaurant. She is expected to work at the restaurant and adhere to the procedures you have established in her capacity as manager.

Apart from her managerial responsibilities at the restaurant, Harriet also offers graphic design services for advertisements and menus. Labor performed by independent contractors would apply to this task. Although you, the restaurant owner, give suggestions for the deliverables’ appearance, Harriet is in charge of determining how to put your suggestions into practice. When, where, and how she makes the images are all up to her.

It’s important to speak with legal advice if you’re not sure if someone is an employee or an independent contractor. They can explain how federal legislation from the Department of Labor relate to your business. You must make sure that you are paying your employees in accordance with the FLSA in order to stay out of legal hot water and prevent future litigation.

Have a quick question? We answered nearly 2000 FAQs.

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