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 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.