Payroll: Understanding the Basics

Net vs. Gross Pay

When it comes to payroll, there are a lot of ways to talk about the wages your employees get paid. Two important terms to understand are net pay and gross pay.

Gross pay is the amount of money your employees receive before any taxes and deductions are taken out. For example, when you tell an employee, “I’ll pay you $50,000 a year,” it means you will pay them $50,000 in gross wages.

Net pay is the amount of money your employees take home after all deductions have been taken out. This is the money they have in their pocket on payday.

How to Register With State Tax Agencies

Learn how to register to file and pay payroll taxes in your state. Access essential forms for your employees, including Form W-2.

Links to our state registration information are here & regularly updated. 

Employee Classification Types

Your employees can be classified in different ways based on their salary and the type of work that they do. Once you determine your employee's correct classification, make sure their status is entered correctly in your account. 

• Keep in mind: Most employees are not exempt from overtime, and misclassifying your employees can result in decreased employee morale and having to pay historical wages.

If you aren't sure how your employees should be classified, the Department of Labor has published some helpful guidelines.

Generally, there are three classifications: 

Hourly/Eligible for overtime (Hourly/Non-exempt)

Earns wages based on the amount of hours the employee works & earns overtime pay when applicable. This is the most common classification since most employees in the United States are required to be paid at least the federal minimum wage for all hours worked plus overtime pay at one and one-half times the regular hourly rate for all hours worked over 40 hours in a workweek. 

Salary/Eligible for overtime (Salary/Non-exempt)

Earn a fixed salary if they work 40 hours or less per week. Earn overtime if they work more than 40 hours per week (regulations vary per state). 

Salary/No overtime (Salary/Exempt)

Earns a fixed salary regardless of how many hours the employee works. Some employees may be exempt from overtime pay if they are employed as an executive, administrative, professional or outside sales, as well as certain computer employees. However, job titles alone do not determine exempt status.

To be exempt from overtime, employees generally should be paid on a salary basis of at least $684 per week (equivalent to $35,568 per year for a full-year worker), and their specific job duties must meet a certain set of requirements. 

• Keep in mind: The DOL permits employers to use non-discretionary bonuses and incentive payments (commission wages, sales incentives and other rewards), as well as housing allowances for certain ministers/pastors, to satisfy up to 10 percent of the standard salary level.
• If you have an employee that will be receiving commission or other types of incentive payments to help meet the standard salary level, check the box, "This employee will receive commissions or other types of additional compensation."
• Commissions and other types of additional compensation can be added each time payroll is run.
  
  

Commission Only/Eligible for overtime (Commission Only/Non-exempt)

Earn wages based only on commission. Commission only employees need to make at least minimum wage for hours worked.

• If you have your payroll on Autopilot®, you'll need to enter a commission before the payroll runs—they're set to a $0 salary so they won't be paid if no commission is entered. 
  
  

Commission Only/No overtime (Commission/Exempt)

Earns wages based only on commission. Some employees may be exempt from overtime pay if they are employed as an executive, administrative, professional or outside sales, as well as certain computer employees. However, job titles alone do not determine exempt status. 

To be exempt from overtime, employees generally should be paid at least $684 per week (equivalent to $35,568 per year for a full-year worker), and their specific job duties must meet a certain set of requirements. 

If you have your payroll on Autopilot®, you'll need to enter a commission before the payroll runs—they're set to a $0 salary so they won't be paid if no commission is entered. 

Hiring Remote Workers

2020 fundamentally changed how jobs are performed, and where people are getting their work done. The work location you enter into your payroll account for a new hire depends on several things: where your employees decide to live and work, how long they’ll live or work in a given state, if the states have reciprocity, and a variety of other factors. 

Employee work location

In most cases, you’re required to withhold taxes in the state where your employee physically works—which can either be their resident or non-resident state.

• Resident state: This is your worker’s permanent home address.
• Non-resident state: This is any state that your worker commutes to for work or works in for a short amount of time, but it’s not their permanent home.

Preparation for hiring a remote worker

The golden rule is that taxes are owed in the place where work is done. When preparing to hire a remote worker in a new state, you’ll usually need to register with at least one state tax agency (and possibly others)—so it’s important to understand your withholding obligations in that state.

For employees who work and live out of state

State laws vary. If you have employees working in another state, you’ll need to understand that state’s legislation to determine if an individual’s “work” address should be listed there, or you can consult a legal or tax advisor who can help you.

For employees who live out of state, but work in your business’ state(s)

Here too, the golden rule is that taxes are owed to the state where the work is done. But—some states have agreements that allow employees who work in one state and live in another to only pay income taxes to their state of residency (aka their home state). This is called a reciprocal agreement. Whether the states you’re dealing with have these agreements could affect an employee’s income tax withholdings.

Labor laws and compliance in the new state

When hiring a remote employee, you’ll need to follow the pay and labor laws in the state where they are—which could differ from the laws in the state where your business is located. 

Here are some considerations to familiarize yourself with for each employee that works in another state, so you stay compliant:

• Minimum wage: you’ll need to pay your workers at or above the highest minimum wage.
• Overtime: learn when you’ll need to pay overtime to your employees and at what premium rate (e.g. 1.5x the regular rate). 
  • Some employees are exempt from overtime but state and local laws vary, so be sure to check when the employee will be eligible for overtime and how much to pay him or her.
• Pay frequency: determine payday (frequency) requirements in the new state.
  • Some states only allow semi-weekly or monthly payroll, while others also allow weekly and bi-weekly payroll. Additionally, some states have payday requirements based on the work your employee does. 
  • If your pre-existing payroll frequency isn’t allowed in a remote worker’s state, you’ll need to follow the payday laws in that state.
• Final paycheck rules: there are state-specific rules about how a regular paycheck or final paycheck should be delivered–you’ll need to deliver your employee’s final paycheck within the timeframe dictated by their state laws and this timeframe may vary if your employee quits or is terminated. 
• Meal and rest breaks: every state has laws about how many paid and unpaid breaks you need to provide employees. Be sure you communicate these laws to your employees and provide the mandatory break periods. 
• Disability insurance: withholding money from employee’s paychecks for state disability insurance is required in five states–California, New Jersey, Rhode Island, Hawaii and New York. If your employee works in California, New Jersey, Rhode Island or Hawaii, this is taken care of within your payroll account. If your employee works in New York, you can elect to have this withheld as you process payroll, but you’ll have to remit the payments to the agency directly. 
• Workers’ Compensation Insurance: requirements can vary by state, industry, and the size of your company. 

Hiring remote contractors

While hiring a remote contractor is generally less complicated than hiring a remote employee, misclassifying an employee as a contractor could lead to serious tax penalties. 

Bank Holidays

Payrolls and direct deposits do not process on Federal bank holidays. If a bank holiday falls on the day you typically run payroll, pay employees, or anytime in between, you must run your payroll on the prior business day. 

Check Date vs. Pay Period vs. Debit Date
What’s the difference between a check date, pay period, and debit date?

• Check date is the date that the paycheck will be made for—the day your team receives their wages for a corresponding pay period.
• Pay period is the timeframe during which your employee worked. 
• Debit date is the date the funds will be taken out of your company bank account in order to pay employees by the check date. 
  

Payroll Schedule Frequencies

Your pay schedule is a combination of two pieces of info: your pay period & your pay date. The pay period is the timeframe during which your employee worked. The pay date is the day they receive their wages for the pay period.

If there's a delay between your pay period and your pay date, this is called paying in arrears–this is very common for hourly employees because it gives you time to collect their hours and process payroll. 

• For example: your employee works from January 1-7, and you pay them for that week on January 13. Your pay period is January 1-7 and your pay date is January 13. 

You can pay your employees on one of the following payroll schedules:

• Weekly: Every week on a specific day of the week (52 payrolls per year).
  • Example: every Friday.
• Bi-Weekly: Every two weeks on a specific day of the week (26 payrolls per year).
  • Example: every other Friday.
• Semi-Monthly: Twice per month on two specific dates of the month (24 payrolls per year).
  • Example: the 15th and the last day of the month.
• Monthly: Every month on a specific date of the month (12 payrolls per year).
  • Example: on the 26th.

Many states have regulations surrounding pay schedules and types of employees. Find your state on the Department of Labor website to learn more about regulations in your state.