How to Pay Employees Without Payroll: Withholding, Deposits, and Filing

To pay employees without payroll software, you handle every step by hand: get a federal Employer Identification Number, collect the right hiring forms, calculate each paycheck’s gross pay and tax withholdings yourself, pay the employee, deposit the withheld taxes electronically with the IRS on a set schedule, and file quarterly and annual returns. It works fine for a business with a few workers, but the IRS holds you personally responsible for the taxes you collect, so every calculation and deadline has to be right.

Set Up Before the First Paycheck

You cannot legally withhold or report employment taxes without a federal Employer Identification Number (EIN). Apply online at IRS.gov for free; the number is issued immediately.¹

For each new hire, three things have to happen at or near the first day of work:

Form I-9. The employee completes Section 1 no later than their first day. You complete Section 2 within three business days after examining their original identity and work-authorization documents.²
Form W-4. The employee’s withholding certificate tells you how much federal income tax to hold back. You need a completed W-4 in hand before you calculate the first paycheck.³
New hire report. Federal law requires you to report each new employee to your state’s designated agency within 20 days of hire. Some states set a shorter deadline.⁴

Confirm the Worker Is an Employee, Not a Contractor

Nothing that follows applies to independent contractors. Federal regulations use common-law rules that weigh how much you control the way the work is done, how much you control the financial side (tools, expense reimbursement), and what kind of ongoing relationship exists.⁵ If you direct not only the result but also how, when, and where the work happens, the worker is generally an employee. A contractor controls their own methods, works for other clients, and covers their own business expenses.

For a contractor, you do not withhold anything. You pay the agreed amount and, if you paid $600 or more during the year, file Form 1099-NEC. Reclassification by the IRS is expensive: back taxes, penalties, and interest for everything you should have withheld. The rest of this guide is about employees.

Calculate Gross Pay

Gross pay is what the employee earned before any deductions. For hourly workers, hours times rate. For salaried employees, annual salary divided by pay periods in the year. That figure is the starting point for every tax calculation that follows.

Two federal rules constrain the number:

The federal minimum wage is $7.25 per hour. If your state’s minimum is higher, use the state rate.⁶
Non-exempt employees who work more than 40 hours in a workweek must be paid at least one and a half times their regular rate for every hour over 40. You and the employee cannot waive this by agreement.⁷

Withhold Federal Taxes

IRS Publication 15 (Circular E) is the general employer tax guide. Publication 15-T holds the actual withholding tables you’ll use to look up federal income tax amounts.³⁸

Federal Income Tax

How much you withhold depends on what the employee put on Form W-4: filing status, credits claimed, and any adjustments. Match those details against the tables in Publication 15-T to find the correct dollar amount for the pay period.⁸

Social Security and Medicare (FICA)

Withhold the employee’s share of Social Security tax at 6.2% of gross wages, up to an annual wage base of $184,500 for 2026.⁹¹⁰ Once year-to-date wages reach that cap, stop withholding Social Security for the rest of the year. Medicare is 1.45% with no wage cap.

You owe an employer match from your own funds: another 6.2% for Social Security and 1.45% for Medicare.¹¹ On $1,000 of gross wages, that’s $62 and $14.50 withheld from the employee, plus $76.50 from the business.

Additional Medicare Tax

Once an employee’s cumulative wages for the year cross $200,000, withhold an extra 0.9% Medicare tax from anything above that. There is no employer match on this piece.⁹

State and Local Taxes

Most states require you to withhold state income tax. Eight states have no individual income tax, so no state withholding is needed there. Elsewhere, rates and methods vary, and you’ll need the tables and forms from your state’s revenue or taxation department. Some cities and counties add their own local income tax with separate withholding rules.

Nearly every state also charges state unemployment insurance (SUTA or SUI), which you pay as the employer. It is not deducted from the employee’s wages. The tax funds unemployment benefits and goes to your state workforce agency. New-employer rates vary by state, and yours can change over time based on your claims history.¹²

Get to Net Pay and Hand Over the Money

After federal, state, and local taxes, subtract any voluntary deductions the employee has authorized: health insurance premiums, retirement contributions, wage garnishments. What’s left is net pay, the amount you actually give the employee.

Paper Checks

Fill in the net amount in both numbers and words to prevent alterations. Note the pay period and hours on the memo line. Issue checks on a consistent schedule; most states require payment at regular intervals such as weekly, biweekly, or semimonthly.

Cash

Paying in cash is legal but adds documentation work. Have the employee sign a receipt or payment voucher each time, showing the date, the net amount, the pay period, and both signatures. That receipt is your primary proof of payment.

Pay Stubs

Most states require a written pay statement with each paycheck. Even where it’s not required, providing one protects both sides. A complete stub shows the employee’s name, pay period dates, gross earnings, each tax and deduction listed separately, and net pay.¹³

Keep the Records

Federal law requires you to keep specific records for each non-exempt employee: hours worked each day, total hours each workweek, the basis of pay, regular hourly rate, straight-time earnings, overtime earnings, all additions to or deductions from wages, total wages paid each period, and the payment date and period covered.¹³

Payroll records have to be kept at least three years. Supporting documents like time cards, work schedules, and wage rate tables have to be kept at least two.¹³ Without software logging each calculation automatically, your handwritten ledger is the only evidence that you paid correctly. Build the habit from the first paycheck.

Deposit and File Employment Taxes

Depositing What You Withheld

All withheld federal income tax plus the full FICA amount (both employee and employer shares) must be deposited electronically. The IRS accepts payment through the Electronic Federal Tax Payment System (EFTPS), Direct Pay for businesses, or your business tax account at IRS.gov.¹⁴

Your deposit schedule is either monthly or semi-weekly, set before the start of each calendar year based on your total tax liability during a lookback period. Smaller employers generally deposit monthly, by the 15th of the following month. Larger employers deposit semi-weekly.¹⁴

Quarterly and Annual Returns

Every quarter, file Form 941 to report wages paid, federal income tax withheld, and both shares of Social Security and Medicare tax. It’s due by the last day of the month after each quarter ends: April 30, July 31, October 31, and January 31.¹⁵

Once a year, file Form 940 for federal unemployment tax (FUTA). FUTA applies only to the first $7,000 of wages paid to each employee during the calendar year, and only the employer pays it.¹⁶

By January 31 of the following year, give each employee a Form W-2 showing total wages and taxes withheld, and file copies with the Social Security Administration. If you paid any independent contractors $600 or more during the year, file Form 1099-NEC with the IRS by the same January 31 deadline.¹⁷

What Late or Missing Deposits Cost

The IRS applies escalating penalties on missed deposits:¹⁸

1 to 5 days late: 2% of the unpaid deposit
6 to 15 days late: 5%
More than 15 days late: 10%
More than 10 days after the first IRS notice: 15%

The percentages do not stack. A deposit that’s 20 days late incurs a flat 10%, not 2% plus 5% plus 10%.¹⁸

The heaviest consequence is the Trust Fund Recovery Penalty. Taxes withheld from employee paychecks are trust fund taxes; you hold that money for the government. If a responsible person willfully fails to turn it over, the IRS can impose a penalty equal to the full unpaid amount, making that person personally liable for 100% of what was owed.¹⁹ That personal liability is the reason manual payroll works only when every step above is done on time.

1
Internal Revenue Service. Get an Employer Identification Number
2
U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification
3
Internal Revenue Service. Publication 15 (2026), Circular E, Employers Tax Guide
4
The Administration for Children and Families. New Hire Reporting
5
eCFR. 26 CFR 31.3121(d)-1 – Who Are Employees
6
U.S. Department of Labor. State Minimum Wage Laws
7
U.S. Department of Labor. Fact Sheet 23 – Overtime Pay Requirements of the FLSA
8
Internal Revenue Service. 2026 Publication 15-T Federal Income Tax Withholding Methods
9
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
10
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
11
Social Security Administration. Social Security and Medicare Tax Rates
12
U.S. Department of Labor. Unemployment Insurance Tax Topic
13
U.S. Department of Labor. Fact Sheet 21 – Recordkeeping Requirements Under the FLSA
14
Internal Revenue Service. Depositing and Reporting Employment Taxes
15
Internal Revenue Service. Instructions for Form 941 (Rev. March 2026)
16
Internal Revenue Service. Instructions for Form 940
17
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
18
Internal Revenue Service. Failure to Deposit Penalty
19
Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax