Payroll regulations every employer needs to know come from three main sources: the Fair Labor Standards Act sets wage and hour floors, the Internal Revenue Code governs tax withholding and deposits, and state laws layer additional requirements on top. To stay compliant, an employer has to pay at least minimum wage and overtime to non-exempt workers, classify each worker correctly, withhold and deposit federal payroll and income taxes on time, report new hires, honor garnishment orders, keep accurate records, file W-2s and 1099s by the annual deadline, and follow whichever state rule is more favorable to the employee when it conflicts with federal law.
Minimum Wage and Overtime Under the FLSA
The federal minimum wage is $7.25 per hour and has been since 2009.1U.S. Department of Labor. Wages and the Fair Labor Standards Act Non-exempt employees who work more than 40 hours in a single workweek are entitled to one and a half times their regular rate for every extra hour.2U.S. Department of Labor. Overtime Pay A workweek is any fixed block of 168 consecutive hours. Averaging hours across two weeks to dodge overtime is not allowed, even when the two-week total looks reasonable.
Overtime turns on classification. Exempt employees do not get overtime; non-exempt employees do. To qualify as exempt, a worker generally must earn at least $684 per week on a salary basis and perform executive, administrative, or professional duties involving independent judgment.3U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemptions Misclassifying a non-exempt employee as exempt can produce back pay plus an equal amount in liquidated damages, effectively doubling what the worker was underpaid.4Office of the Law Revision Counsel. 29 USC 216 – Penalties
One recurring error inflates that liability: leaving non-discretionary bonuses out of the regular rate. A production bonus or shift differential has to be folded into the hourly rate before the overtime multiplier is applied. Employers who calculate overtime off the base hourly wage alone underpay every overtime hour the worker logs.
Tipped Employees
In tipped industries, an employer can pay a cash wage as low as $2.13 per hour and take a “tip credit” for the rest, as long as tips bring the worker up to the full $7.25 minimum.5Office of the Law Revision Counsel. 29 USC 203 – Definitions If tips fall short in any workweek, the employer must cover the gap. Before claiming the credit, the employer has to tell workers what cash wage is being paid, how much credit is being taken, and that tips belong to the employee unless there is a valid tip-pool arrangement. Skip that notice and the credit is forfeited. Several states prohibit tip credits altogether.
What Counts as Work Time
Any time spent for the employer’s benefit is compensable. A normal home-to-work commute is not, but travel between job sites during the day is. If an employee is sent on a one-day assignment to another city and returns home the same day, that travel is compensable minus the usual commute. On overnight trips, travel that falls during the employee’s normal working hours counts as work, even on a weekend; time spent as a passenger outside normal hours generally does not. Required training, mandatory meetings, and employer-controlled waiting time also count toward the 40-hour threshold.
Classifying Workers Correctly
Whether someone is an employee or an independent contractor determines whether the employer must withhold taxes, pay overtime, and issue a W-2. Two federal agencies apply two different tests, and either can trigger liability on its own.
The IRS weighs three categories: behavioral control (does the company dictate how and when the work gets done), financial control (does the company direct expenses and payment methods), and the relationship itself (written contracts, benefits, and whether the work is a key part of the business).6Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor No factor is decisive; the agency looks at the whole picture.
The Department of Labor uses an economic reality test under FLSA regulations, asking whether the worker is economically dependent on the employer or genuinely running an independent business. The factors include opportunity for profit or loss based on the worker’s initiative, whether investment in tools is entrepreneurial, how permanent the relationship is, and how much control the employer exercises.7eCFR. 29 CFR Part 795 – Employee or Independent Contractor Classification Under the Fair Labor Standards Act A worker who sets their own schedule, markets to multiple clients, and buys their own equipment looks like a contractor. Someone who shows up at the same place every day, uses company tools, and works for one firm looks like an employee, whatever the contract says.
Getting this wrong opens the employer to unpaid overtime, the employer’s share of FICA, and information-return penalties. The base penalty for a missing or incorrect W-2 is $250 per form, dropping to $50 per form if corrected within 30 days of the filing deadline.8Office of the Law Revision Counsel. 26 USC 6721 – Failure to File Correct Information Returns Intentional disregard raises the floor to $500 per form with no annual cap. Figures are adjusted for inflation.
Payroll Taxes the Employer Must Handle
Social Security and Medicare
Under the Federal Insurance Contributions Act, both employer and employee pay 6.2% for Social Security on wages up to $184,500 in 2026.9Office of the Law Revision Counsel. 26 USC Chapter 21 – Federal Insurance Contributions Act10Social Security Administration. Contribution and Benefit Base Wages above that cap are not subject to Social Security tax. Medicare adds another 1.45% each with no wage cap.
An Additional Medicare Tax of 0.9% applies once an employee’s wages exceed $200,000 in a calendar year. The employer starts withholding in the pay period where wages cross that line and continues through year-end.11Internal Revenue Service. Topic No. 560, Additional Medicare Tax There is no employer match on this piece. The $200,000 withholding trigger does not account for filing status, so employees whose actual liability differs (the joint-filer threshold is $250,000) reconcile when they file.
Federal Unemployment Tax
FUTA is a 6% tax on the first $7,000 of wages paid to each employee per year, and it falls entirely on the employer.12Office of the Law Revision Counsel. 26 USC Chapter 23 – Federal Unemployment Tax Act13Internal Revenue Service. Federal Unemployment Tax Employers who pay their state unemployment taxes on time receive a credit that reduces the effective rate to 0.6%, capping the cost at $42 per employee per year. The $7,000 base is set by statute and has not moved in decades.14Office of the Law Revision Counsel. 26 USC 3306 – Definitions
Federal Income Tax Withholding
Every employer paying wages has to deduct and withhold federal income tax.15Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source The amount depends on what the employee reports on Form W-4: filing status, other jobs, claimed credits and deductions, and any additional withholding requested.16Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate If an employee never turns in a W-4, the employer withholds as if the worker is single with no adjustments, which usually produces the highest withholding.
Supplemental Wages
Bonuses, commissions, and severance are supplemental wages. When identified separately from regular pay, they can be withheld at a flat 22%. Once an employee’s supplemental wages pass $1 million in a calendar year, the rate on the excess is 37%.17Internal Revenue Service. Publication 15 (Circular E), Employer’s Tax Guide Employers who lump supplemental payments in with regular pay have to use standard withholding tables, which can produce erratic results on bonus checks.
Deposit Deadlines and Personal Liability
Withheld payroll taxes belong to the government from the moment they come out of the paycheck. Falling behind triggers a graduated penalty:
- 1 to 5 days late: 2% of the unpaid amount
- 6 to 15 days late: 5%
- 16 or more days late: 10%
- More than 10 days after the first IRS notice: 15%
Collecting payroll taxes and failing to turn them over invites a much harsher consequence. The Trust Fund Recovery Penalty holds any “responsible person,” including owners, officers, payroll managers, and bookkeepers with check-signing authority, personally liable for 100% of the unpaid trust fund taxes.18Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax The penalty pierces the corporate veil, so the IRS can pursue individuals directly rather than only the business.19Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty
Willful tax evasion is a felony. Conviction carries fines up to $100,000 for individuals or $500,000 for corporations, plus up to five years in prison.20Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax Criminal cases are relatively rare and tend to involve patterns of deliberate non-payment rather than honest mistakes.
New Hire Reporting
Every new employee must be reported to the state’s Directory of New Hires within 20 days of the hire date.21Office of the Law Revision Counsel. 42 USC 653a – State Directory of New Hires The report includes the employee’s name, address, and Social Security number along with the date services began and the employer’s name, address, and EIN. Employers who file electronically can send two monthly batches spaced 12 to 16 days apart instead. State-set penalties for missing a report cap at $25, or $500 if the employer and employee conspired to skip reporting. The system exists mainly to enforce child support orders.
Garnishment Orders
When a court or agency orders wages withheld for a debt, the employer has to comply. For ordinary consumer debts, federal law caps garnishment at the lesser of 25% of disposable earnings or the amount by which weekly earnings exceed 30 times the federal minimum wage.22Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment For workers near minimum wage, that second formula often protects more of the paycheck.
Child support allows larger deductions. The ceiling is 50% of disposable earnings if the employee supports another spouse or child, and 60% if not. Either figure rises by 5 percentage points when payments are more than 12 weeks in arrears. Child support generally takes priority over other garnishments; where orders compete, state priority rules control, and distributing funds in the wrong order can create liability to the creditor who should have been paid first.
Records You Have to Keep
For every non-exempt worker, the FLSA requires the employer to maintain the employee’s full name, Social Security number, address, hours worked each day and each week, regular hourly rate, total straight-time and overtime earnings, all additions and deductions, total pay per period, and the dates each period covers.23U.S. Department of Labor. Fact Sheet 21: Recordkeeping Requirements Under the Fair Labor Standards Act Format is up to the employer; the information just has to be accurate and available for inspection.
Core payroll records must be kept at least three years. Supporting documents like timecards, schedules, and wage rate tables must be preserved for two. When an employer cannot produce adequate records during a Department of Labor investigation, courts can accept the employee’s own account of hours worked and wages received as fact.
W-2 and 1099 Filing Deadlines
W-2 forms must be furnished to employees and filed with the Social Security Administration by February 1, 2027, for the 2026 tax year, whether the filing is on paper or electronic.24Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) An employee who leaves before year-end can be given a W-2 any time after separation, but no later than the standard deadline.
Payments to independent contractors of $600 or more in a year go on Form 1099-NEC, due to recipients and the IRS by the end of January following the tax year. Correcting an incorrect information return within 30 days of the deadline cuts the per-form penalty from $250 to $50.8Office of the Law Revision Counsel. 26 USC 6721 – Failure to File Correct Information Returns
State Rules That Sit on Top of Federal Law
Federal law is the floor. Where a state or local rule is more favorable to the worker, that rule controls. Which jurisdiction applies depends on where the employee physically performs the work, a question remote arrangements have made harder to answer.
Over 30 states have minimum wages above $7.25, with several exceeding $16 or even $17 an hour.25U.S. Department of Labor. State Minimum Wage Laws Some cities go higher than their states. Payroll systems that default to one rate across locations are a common source of underpayment claims.
Every state runs its own unemployment insurance program funded by employer taxes, with rates set by each employer’s experience rating. New employers start at a default rate and earn an experience-based rate after a few years. Some states also require paycheck withholdings for disability insurance or paid family leave.
States regulate pay frequency, from weekly to monthly, and some mandate more frequent pay for particular occupations. Late pay under a mandated schedule can carry per-employee, per-period penalties. A growing number of states also require paid sick leave, typically accrued at one hour for every 30 hours worked, with caps and notice rules that vary by jurisdiction.
Final paychecks are the sharpest state-federal split. The FLSA lets an employer wait until the next regular payday. State laws often demand faster payment, sometimes on the spot when an employee is fired, and several states impose waiting-time penalties that accrue for every day the check is late. Check the rule for the state where the work was performed before releasing anyone, because the cost of guessing wrong compounds by the day.