This guide shows you how to run payroll accurately—manually or with software—while staying compliant and on time.

For context: employee FICA withholding is generally 6.2% for Social Security and 1.45% for Medicare, per IRS Publication 15 (Employer’s Tax Guide). Overtime under the FLSA must be paid at 1.5× the regular rate for hours over 40 in a workweek.

Overview

This overview orients you to what a payroll run covers, who this article helps, and how to use it. Running payroll means calculating gross pay, withholding taxes and deductions, sending net pay, and depositing/filing payroll taxes on a tight calendar.

You’ll get vendor-agnostic steps, a worked gross-to-net example, advanced scenarios (overtime, tips, garnishments, multi-state), troubleshooting (off-cycle runs, voids/reversals), accounting tie-outs, and a provider selection framework with cost guidance.

As you read, you’ll see references to primary sources like IRS Publication 15 (Employer’s Tax Guide), DOL Fact Sheet #23, and the SSA Employer W‑2 Filing portal for authority and clarity. Keep notes on your pay schedule, deadlines, and funding windows as you go—we’ll build your payroll calendar step by step.

What a payroll run is vs a pay period and a pay date

This section clarifies three terms that drive timing, taxes, and employee expectations. A payroll run is the processing event where you calculate pay, approve, and fund net pay and taxes. The pay period is the span of time employees worked (e.g., week or two weeks) that you are paying for. The pay date is the date employees receive their wages.

The difference matters. Overtime and many state rules follow the workweek/pay period, while bank cutoffs and cash flow depend on the pay date you choose.

Your payroll run typically happens a few days before pay date to meet ACH funding timelines. Your payroll tax filings (for example, Form 941) are filed quarterly—generally by the last day of the month after the quarter ends.

Set these definitions in your calendar now so timekeeping, approvals, and funding all line up without last-minute rushes.

Setup checklist before your first payroll

Use this checklist to get compliant before you run a single paycheck. Before your first payroll, you need tax IDs, employee files, proper classification, benefits and deduction setups, and bank authorization to legally pay and report wages.

Treat this as your preflight ritual. Confirm each item before your first payroll run, and document where each record lives for audit readiness later.

Payroll calendars, ACH cutoff times, and funding timelines

This section helps you choose a pay schedule and plan funding so employees are paid on time even around holidays. Weekly pays fastest but costs more to process. Biweekly and semimonthly balance admin effort and employee cash flow. Monthly minimizes runs but can stress employees and increase corrections.

Choose a schedule by weighing:

For funding, standard ACH typically requires you to approve payroll one to two business days before the pay date. Many banks have same-day options, with fees and earlier cutoff windows.

Same Day ACH windows and posting rules are governed by Nacha Same Day ACH, but your actual cutoff times are bank‑specific, often late afternoon local time. Build your payroll calendar with “input close” (timesheets approved), “run approval” (before ACH cutoff), “pay date,” and “tax deposit dates,” and add Federal Reserve and state holiday calendars to avoid missed deposits.

How to run payroll manually

This section gives you a numbered, vendor-agnostic process from timesheets to net pay and tax deposits. You’ll also get a worked example you can mirror.

Manual payroll increases the risk of errors and penalties, so follow a consistent checklist and reference IRS Publication 15 (Employer’s Tax Guide) for withholding methods and deposit rules. As you work, keep copies of inputs, calculations, and outputs for audits and troubleshooting.

Step 1: Gather time, pay rates, and classifications

This step collects the inputs that drive gross pay, overtime, and deductions. Pull approved hours by type (regular, overtime, double time), piece rates, tips, and commissions. Confirm each worker’s classification (nonexempt vs exempt) and pay rate(s).

Identify pre‑tax deductions (e.g., Section 125 health premiums) and tax-deferred deductions (e.g., 401(k)). Note post-tax deductions (e.g., Roth 401(k), union dues) and any active garnishments. Check for pay period changes—rate changes, new hires/terminations, PTO payouts—and document them before you calculate.

Step 2: Calculate gross pay and overtime

This step computes regular earnings plus any overtime using the FLSA baseline. For nonexempt employees, calculate straight-time pay and then overtime at 1.5× the regular rate for hours over 40 in a workweek.

If employees earn different rates within a week, you’ll use a blended rate method later in this guide. For now, keep it simple: Gross pay = regular hours × base rate + overtime hours × 1.5 × base rate.

Include shift differentials and nondiscretionary bonuses in regular pay calculations when applicable. If you see unusual hours or pay codes, pause and verify before moving to tax withholding.

Step 3: Withhold taxes and deductions

This step withholds employee taxes and benefit deductions to arrive at net pay. Use Form W‑4 data and methods in IRS Publication 15 (Employer’s Tax Guide) to compute federal income tax. Withhold Social Security (6.2%) and Medicare (1.45%) from taxable wages (subject to wage bases), and apply state/local taxes as required. Then subtract pre‑tax/post‑tax deductions and garnishments in the correct order.

Worked gross-to-net example (illustrative):

Track employer taxes separately (employer Social Security and Medicare, and unemployment taxes) to record expense and schedule deposits. If numbers look off vs prior runs, recheck taxable wage bases and deduction setup before funding.

Step 4: Pay employees and record entries

This step disburses net pay and books accounting entries that tie out later. Pay via direct deposit, paper checks, or pay cards, and provide a pay stub that shows gross, taxes, deductions, and net pay. Direct deposit requires enough lead time to clear ACH before the pay date.

In your accounting system, post a journal entry for total payroll; for the example above, a simplified entry looks like:

If you print checks, secure check stock and use dual control. If you use a clearing account, reconcile it to zero after each funding batch.

Step 5: Deposit and file payroll taxes

This step ensures timely tax deposits and sets you up for quarterly filings. Based on your deposited taxes in a lookback period, you’ll be on a monthly or semiweekly deposit schedule for federal taxes.

Deposit via EFTPS and follow thresholds and timing described in IRS Publication 15 (Employer’s Tax Guide). File Form 941 quarterly and annual forms (e.g., Form 940 for FUTA) on time, and keep proof of deposits and filings.

Add these deposit dates to your payroll calendar and cross-check each run’s liability report so nothing slips.

How to run payroll with software

This section gives a neutral view of running payroll with software, which automates calculations, filings, and funding timelines. Most platforms let you import approved hours, set pay items (overtime, tips, bonuses), preview taxes/deductions, and then approve/fund the payroll run by ACH in line with your bank’s cutoff times.

You’ll confirm cash required (net pay plus employer taxes), see per‑employee pay stubs, and schedule tax deposits and filings automatically or on your chosen cadence. Accuracy checks matter: review variance reports, first/last run comparisons, and exception lists (missing W‑4, garnishment limits, negative net pay) before you click approve.

Sync payroll to accounting on pay date or accrual date. Reconcile the payroll clearing account after funding posts.

Overtime, tips, and complex pay calculations under the FLSA

This section covers blended-rate overtime, shift differentials, bonuses, and tipped employees so your payroll matches the law and your policy. Under the FLSA, overtime is 1.5× the regular rate for hours over 40 in a workweek.

The regular rate generally includes all remuneration except statutory exclusions (e.g., discretionary bonuses, certain gifts). You must allocate nondiscretionary bonuses and differentials into the regular rate, per DOL Fact Sheet #23.

Blended-rate overtime example:

Shift differentials and nondiscretionary bonuses also increase the regular rate and the overtime premium.

For tipped employees, the federal tip credit allows an employer to count a portion of tips toward minimum wage if all requirements are met and tips make up the difference; see details and strict notice rules in DOL Fact Sheet #15: Tipped Employees. Many states prohibit or limit the federal tip credit.

If you pool tips, ensure valid pools, track declared tips, and tax reported tips. Mandatory service charges are not tips and are taxed as wages.

When in doubt, document your regular rate computation with a worksheet and keep it with the payroll run.

Off-cycle runs, corrections, and troubleshooting

This section shows how to handle payments and fixes outside your normal cycle without compounding errors. Off-cycle payroll includes bonuses, commissions, corrections, retro pay, missed hours, and terminations.

You’ll choose whether to add a separate run, adjust next payroll, or void/reverse a funded run.

Use this practical flow:

Document the reason, method, and approvals for each correction. After any fix, reconcile the run against liability and cash reports to confirm payables, deposits, and GL all tie.

Garnishments and child support orders

This section explains how to set up, prioritize, cap, and remit wage withholding orders, especially child support. When you receive an order, verify identity, set up the deduction with limits (e.g., disposable earnings caps under the Consumer Credit Protection Act), and follow the order’s remittance address and deadline.

If multiple orders exist, apply statutory priority and order of assignment. Child support and tax levies often have priority, but sequences vary by jurisdiction, so read the order carefully.

Employers have specific responsibilities and timelines—find detailed steps and contacts via the Office of Child Support Enforcement employer guidance. Communicate with the employee about start dates and amounts and keep orders and remittances on file. Recheck garnishment calculations when pay or deductions change to avoid exceeding caps or under‑withholding.

Multi-state payroll, local taxes, and reciprocity

This section helps you pay employees who live and work across state lines without double withholding. First, determine nexus (your obligation to withhold/pay taxes) where employees work. Then set up registrations for state withholding and unemployment in each work state as needed.

As a rule of thumb, you withhold in the state where the employee works. If there’s a reciprocity agreement between the work and home states and the employee files the proper exemption, you may withhold only in the home state instead.

Local income taxes exist in some areas (e.g., municipalities or school districts), so confirm local registration and filing when onboarding an employee. For example, if an employee lives in New Jersey and works in Pennsylvania, a reciprocity agreement can allow you to withhold New Jersey tax (with the employee’s certification) instead of Pennsylvania. Check each state’s current reciprocity rules and forms.

Also plan for state-specific rules on final paychecks, PTO payout at termination, and wage notices—these vary widely. Include a state compliance checklist in your onboarding and offboarding process.

Payroll taxes and filings: FICA, FUTA, SUTA; Forms 941, 940, W-2/W-3, 1099-NEC

This section summarizes core payroll taxes and filing cadences you’ll manage throughout the year. FICA includes Social Security (generally 6.2% employee and 6.2% employer up to the wage base) and Medicare (1.45% employee and 1.45% employer, with an additional 0.9% for employees over a threshold). FUTA is a federal unemployment tax paid by employers. SUTA is your state unemployment insurance.

You’ll deposit federal taxes on a monthly or semiweekly schedule depending on your lookback period and file Form 941 quarterly—typically due the last day of the month after quarter‑end—per the IRS Instructions for Form 941.

Annually, file Form 940 for FUTA and prepare W‑2s for employees and 1099‑NEC for applicable contractors. Submit W‑2s to the SSA and furnish copies to employees by January 31 via the SSA Employer W‑2 Filing portal.

Check your state’s withholding and unemployment filing/deposit calendars as they can differ from federal schedules. Keep a running checklist of upcoming deposits and filings in your payroll calendar to prevent penalty letters and costly catch‑up work.

Accounting and cash flow: GL mapping, reconciliations, and funding options

This section connects payroll to your accounting and cash management so you can trust your numbers and never scramble for funds. Map earnings and taxes to your general ledger: debit wage expense and employer tax expense; credit cash/payroll clearing for net pay funded; credit liabilities for employee withholdings and employer taxes until they are deposited. Many teams use a payroll clearing account so they can match the funding debit and then zero it out with the payroll entry and bank feed—this simplifies reconciliation.

A simple payroll journal entry on pay date might look like:

For cash flow, maintain a payroll reserve equal to at least one payroll plus taxes. Use a separate payroll bank account, and set approval deadlines to avoid same‑day fees.

If you must pay tomorrow, ask your provider about same-day ACH or wires. These can work in a pinch but carry higher fees and earlier cutoff windows.

Consider pay cards for unbanked employees, but implement strong controls and disclosures. Finally, anticipate workers’ comp audits by reconciling “wages by class code” each period, and explore pay‑as‑you‑go workers’ comp integrations to smooth cash flow over the year.

Recordkeeping, retention, security, and privacy

This section outlines what to keep, how long, and the security posture you should expect from tools and processes. Maintain payroll registers, timecards, W‑4s, I‑9s, garnishment orders, tax deposits, and filings for the required federal and state periods. Many employers keep payroll/tax records at least four years. I‑9s must generally be retained for a defined period after termination.

Store documents in a secure system with role‑based access, audit logs, and multi‑factor authentication. Minimize who can see full SSNs and bank details.

Expect your payroll provider to maintain strong security and availability practices such as SOC 2 reporting, encryption in transit and at rest, data retention policies, and tested disaster recovery. Periodically audit user access and bank change logs to catch fraud or errors early.

Good retention and security make audits smoother and speed up corrections if you need W‑2c or 941‑X adjustments later.

Provider selection, switching, and total cost of ownership

This section gives you a decision framework to choose payroll software, estimate total cost, and switch without chaos. Evaluate providers on multi‑state/local tax coverage, garnishment handling, off‑cycle payroll, same‑day/next‑day ACH funding, year‑end W‑2/1099 processing, benefits and workers’ comp integrations, accounting sync, support SLAs, uptime/security (look for SOC 2), and error/penalty guarantees.

Typical pricing is a base fee plus a per‑employee fee; in the market you’ll often see base fees in the modest double digits per month and per‑employee fees in the single digits to low double digits, with add‑ons for benefits, garnishments, or same‑day ACH. Watch for hidden or variable fees: per‑run vs unlimited payroll, year‑end W‑2/1099 processing, garnishment administration, check printing, amendments, and bank reversal fees.

Estimate ROI by time saved per run (timekeeping import, tax filing automation, GL sync) and avoided penalty risk. Include your cash‑flow value from faster or more predictable funding.

For switching, plan a 2–4 week migration: export year‑to‑date wages/taxes and active deductions from your current system, collect employee data and direct deposit forms, set up tax accounts and e‑file/e‑pay authorizations, connect the bank, run a parallel test payroll, and schedule your go‑live at a clean break (often the start of a quarter).

Communicate the change to employees, especially if pay dates or pay stub portals are changing. Leave your old account open through year‑end to access reports for W‑2/1099 reconciliation.

Year-end reconciliation and audits

This section shows how to tie out wages and taxes, issue year-end forms, and walk into audits prepared. Run a year‑to‑date payroll register and reconcile it to all quarterly Forms 941 and state filings. Differences must be resolved before you generate W‑2s and 1099‑NEC.

Verify employee names/SSNs, addresses, and taxable fringe benefits (e.g., group‑term life over limits, personal use of company car). Ensure pre‑tax benefits and retirement plan deferrals are correctly reported.

Submit W‑2s through the SSA Employer W‑2 Filing system and deliver employee copies by January 31. Follow reporting and deposit rules in IRS Publication 15 (Employer’s Tax Guide) for the new year.

If you find errors after filing, correct with W‑2c and 941‑X and keep a clear paper trail that ties back to your GL.

As part of audit readiness, archive approvals, pay run summaries, bank proofs, and deposit confirmations for the year. Roll forward your payroll calendar with updated rates, wage bases, state SUTA rates, and bank holiday dates so your first January payroll runs smoothly.