How to Pay Payroll

The U.S. Department of Labor administrates the federal wage and hours laws. The state labor department enforces the state labor laws. The Internal Revenue Service administrates the federal payroll taxes employers are required to withhold from employees' paychecks. Most state revenue agencies require state income tax withholding. The employer should consider all these requirements when paying payroll.

• 1

  Pay nonexempt employees at least the federal minimum wage of $7.25 per hour, effective July 24, 2009. If federal and state minimum wage laws apply, pay the employee the higher rate. Nonexempt employees are those not exempt from overtime pay under the Fair Labor Standards Act. Most hourly employees are nonexempt, and are paid according to their time card data.

• 2

  Multiply the employee's total regular hours by her regular pay rate to arrive at gross regular earnings. Regular hours are work hours up to 40 for the workweek.

• 3

  Multiply the employee's total overtime hours worked by her overtime rate to arrive at gross overtime wages. Under federal law, overtime hours are work hours that exceed 40 for the workweek. Compensate overtime at 1.5 times the employee's normal pay rate. Check with your state labor department for its overtime laws. Some states require overtime pay for work hours exceeding eight for the workday.

• 4

  Compensate exempt employees. Exempt employees are excluded from overtime pay under the FLSA. Most exempt workers are salaried, but in rare cases, such as a doctor or schoolteacher, the employee can be exempt yet hourly. The employer should check with its state labor department if unsure of how to classify and pay the employee. To arrive at salary per pay period, divide the annual salary by the number of annual pay periods. A weekly payroll has 52 pay periods, a biweekly payroll has 26, a semimonthly payroll has 24 and a monthly payroll has 12.

• 5

  Subtract pretax voluntary deductions from gross income, if applicable. Pretax deductions are those that meet IRS Section 125 requirements, such as a traditional 401k or medical plan. These deductions are made from gross pay before withholding taxes, and therefore, reduce taxable wages.

• 6

  Use IRS Circular E's withholding tax tables and the employee's W-4 form to figure federal income tax. Calculate Social Security tax at 6.2 percent of gross income and Medicare tax at 1.45 percent. Apply your state revenue agency's policies to figure state income tax.

• 7

  Subtract wage garnishment, if applicable. Then deduct post-tax voluntary deductions--those not classified as pretax under IRS Section 125 code. The result is the employee's take-home pay.

• 8

  Give employees a pay stub if state law mandates it. Federal law does not require it, but many states do.