Payroll
Gross to net, the employer's taxes, deposits and filings, and how a payroll posts to the books.
8 lessons3 nested pages99 min3 exercisesFree
How does payroll work in the US, and what does an employee really cost? This track answers it on the books of Northwind Traders, Inc., the one company every track in the course is taught on.
The 8 lessons
- Hiring your first employeeHow do I hire my first employee and put them on payroll?
- Gross to net payHow do you calculate net pay from gross pay?
- The employer's payroll taxesWhat payroll taxes does an employer pay on top of wages?
- Payroll tax depositsWhen are payroll taxes due, and how do I deposit them?
- Payroll tax returns: 941, 940 and W-2What payroll tax returns does an employer file, and when?
- Exempt or non-exempt: overtime and minimum wageWhat is the difference between exempt and non-exempt employees?
- Recording payroll in the booksHow do you record payroll in the books?
- Payroll providers, PEOs and paying foundersShould a startup use a payroll provider or a PEO, and how do founders get paid?
The words this track teaches
Each links to its glossary definition, with the authority behind it.
- Worker classificationDeciding whether a worker is an employee or an independent contractor — federally by the common-law control test (behavioral, financial and relationship facts), in some states by the stricter ABC test. It decides who withholds and pays employment taxes
- ABC testA state test presuming a worker is an employee unless the hiring entity proves all three: (A) free from its control, (B) work outside the usual course of its business, and (C) customarily engaged in an independent trade — California (AB 5), Massachusetts, and New Jersey for unemployment
- Form W-4The form a new employee gives the employer to set federal income tax withholding — filing status, the two-jobs checkbox, credits, other income, deductions and extra withholding. Kept by the employer, not sent to the IRS unless it asks. A state with an income tax may use its own certificate, such as California's DE 4
- Form I-9The Department of Homeland Security form proving a new hire may work in the US. The employee completes Section 1 by the first day of work; the employer examines documents and completes Section 2 within three business days. Kept on file, never filed with the government
- New-hire reportingThe employer's report of each new employee — name, address, SSN, start date and the employer's EIN — to the State Directory of New Hires where the employee works, within 20 days of hire or sooner if the state says so. It feeds child support enforcement
- Voluntary Classification Settlement ProgramThe IRS program letting an employer prospectively reclassify contractors as employees by paying 10% of one year's employment tax liability, computed at the reduced §3509 rates — no interest or penalties, and no audit of the prior classification. Applied for on Form 8952
- Monopolistic state fundA state workers' compensation fund that is the only insurer allowed — North Dakota, Ohio, Washington and Wyoming — so coverage cannot be bought privately (Ohio and Washington permit self-insurance)Convention
- Gross payWhat an employee earned for the pay period before anything is withheld — salary, or hours times rate, plus overtime, bonuses and commissions. Payroll expense in the books is the gross, not what reached the bank
- Net payGross pay less every withholding — income taxes, the employee's Social Security and Medicare, benefit deductions — and so what reaches the employee's bank. Always the remainder, never a separately computed figureConvention
- Payroll registerThe record of one payroll run, a row per employee: gross pay, each withholding, net pay and the employer's taxes, footed. The subledger the payroll journal entries summarize, and what each Form 941 is reconciled toConvention
- Federal income tax withholdingThe income tax an employer withholds from each paycheck, worked out from the employee's Form W-4 by a method in IRS Pub. 15-T — in an automated payroll, the percentage method and Worksheet 1A — and deposited with FICA
- FICASocial Security tax — 6.2% of wages up to the year's wage base — and Medicare tax — 1.45% of all wages — each paid twice: withheld from the employee and matched by the employer. 7.65% a side below the wage base
- Social Security wage baseThe maximum annual wages subject to the 6.2% Social Security tax, for employee and employer each — $184,500 in 2026, $176,100 in 2025, indexed every year. Medicare tax has no cap
- Additional Medicare TaxA further 0.9% Medicare tax an employer must withhold on an employee's wages over $200,000 in a calendar year, from the pay period they pass it. Employee-only: there is no employer match
- Supplemental wagesPay that isn't regular wages — bonuses, commissions, overtime, severance, back pay. Federal income tax on it may be withheld at a flat 22% for 2026, and must be at 37% on an employee's supplemental wages over $1 million in the year
- FUTAThe federal unemployment tax an employer pays — 6.0% of the first $7,000 of each employee's wages, reduced to a net 0.6% by the state credit unless the state is a credit-reduction state; filed on Form 940
- FUTA credit reductionThe cut to the 5.4% state credit against FUTA for employers in a state that has carried a federal unemployment loan for two consecutive January 1 balances and not repaid it by November 10 — 0.3 points, growing each further year. For 2025: California 1.2%, US Virgin Islands 4.5%
- SUTAThe state unemployment insurance tax an employer pays on each employee's wages up to a state wage base, at an experience-rated rate assigned by the state
- Payroll liabilitiesWhat an employer owes on wages it has already paid — the income tax and the employees' share of Social Security and Medicare withheld from their pay, plus the employer's own payroll taxes — until it is deposited with the government. The withheld part was never the employer's money: IRS Pub. 15 calls it trust fund taxesConvention
- Payroll tax offsetAn election by a qualified small business — gross receipts under $5 million and none before the last five years — to apply up to $500,000 a year of its research credit against the employer share of Social Security and then Medicare tax. Elected on Form 6765 with a timely original return, claimed on Form 8974 from the next quarter
- Lookback periodThe four quarters — July 1 two years back to June 30 last year — whose Form 941 tax decides a year's deposit schedule: $50,000 or less, monthly; more, semiweekly. A new employer's lookback quarters count as zero
- Monthly schedule depositorAn employer whose lookback-period tax was $50,000 or less, and every employer in its first year: the federal income tax withheld and both halves of FICA on a month's paydays are deposited by the 15th of the next month
- Semiweekly schedule depositorAn employer whose lookback-period tax was over $50,000: taxes on Wednesday-to-Friday paydays are deposited by the next Wednesday, Saturday-to-Tuesday paydays by the next Friday. Reports its liability by payday on Schedule B (Form 941)
- Next-day deposit rule$100,000 or more of employment tax accumulated on any day is due the next business day, on either schedule — and turns a monthly depositor semiweekly for the rest of the year and the next
- EFTPSThe Treasury's free system for federal tax deposits. Every federal payroll deposit must be made electronically — through EFTPS, IRS Direct Pay or the IRS business tax account — and an employer whose provider deposits for it can check each one in EFTPS
- Trust fund recovery penaltyA penalty of 100% of the withheld income tax and employee FICA a business failed to pay over, assessed personally on each responsible person who acted willfully — an officer, or anyone who signs the checks
- Form 941The quarterly return of wages paid, federal income tax withheld and both halves of Social Security and Medicare tax, reconciled to the quarter's deposits. Due April 30, July 31, October 31 and January 31 — ten days later if every deposit was on time
- Form 940The employer's annual FUTA return, due January 31 of the next year — February 10 if every FUTA deposit was on time — with Schedule A for wages paid in a credit-reduction state
- Form W-2The year-end statement of an employee's wages and withholding — boxes 1, 3 and 5 for income tax, Social Security and Medicare wages — furnished to the employee and filed with the SSA by January 31, with no automatic extension
- Form W-3The transmittal that totals every Form W-2 an employer files with the SSA. Its totals should equal the year's four Forms 941
- Exempt employeeAn employee the FLSA's overtime and minimum-wage rules don't cover — for the executive, administrative and professional exemptions, one paid a salary of at least $684 a week whose primary duties meet the exemption's test. A job title decides nothing
- Non-exempt employeeAn employee owed at least the minimum wage and overtime at one and one-half times the regular rate for hours over 40 in a workweek — salaried or hourly
- WorkweekA fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods — that overtime is measured in. Hours are never averaged across workweeks: 30 hours one week and 50 the next owe ten hours of overtime
- Regular rateThe hourly rate overtime is computed from. For a salary meant to cover 40 hours, the weekly salary divided by 40 — a monthly salary is first turned weekly by multiplying by 12 and dividing by 52
- Minimum wageThe lowest hourly rate an employer may pay a non-exempt employee — $7.25 federally since July 24, 2009. A higher state or city minimum still applies; the FLSA excuses no one from it
- Accrued liabilityAn obligation for goods or services received but not yet invoiced or paid — wages, interest, professional fees — recorded by an accrual
- Payroll service providerA firm that runs payroll under the employer's own EIN — paychecks, deposits, Forms 941, 940 and W-2. It isn't liable for the employer's employment taxes; the employer stays liable for every deposit it makes
- Professional employer organizationA firm that co-employs a client's staff and runs payroll, benefits and HR under its own EIN for a fee. Only a PEO the IRS has certified (a CPEO) is generally treated as the employer for employment tax on the wages it pays
- Reasonable compensationThe wages an S corporation must pay a shareholder who works in the business, for that work, before it makes non-wage distributions to them. A C corporation's founder on payroll is an employee too, but the rule is the S corporation's