Running payroll for a contracting business takes eight steps: get an EIN and state tax accounts, bind workers compensation, collect a W-4 and I-9 from every hire, capture hours against a job code and a class code, calculate gross to net, fund the run, deposit the taxes, and file quarterly. The first three are one-time setup. The last five repeat every week.
That much is true of any small business. What makes contractor payroll different is a single structural fact that almost none of the guides ranking for this query mention: for a contractor, payroll is not an accounting event. It is a job costing event and an insurance event that happens to also produce paychecks. If your hours arrive as a number of hours per person per week, you have run payroll correctly and learned nothing, and you will overpay your workers compensation premium on top of it.
Step 1 to 3: the setup you do once
Before the first pay run you need three sets of credentials, and they have different lead times. Start them in parallel.
| What | Where | Why it gates payroll |
|---|---|---|
| EIN | IRS, online, issued immediately | Every federal filing keys off it |
| State withholding account | State revenue department | You cannot legally remit withheld income tax without it |
| State unemployment account | State workforce agency | Determines your SUTA rate, which drives your FUTA credit |
| Workers comp policy | Broker or state fund | Often required by GCs and homeowners before site access |
| W-4 and I-9 per hire | Collected by you, retained | I-9 must be completed within three days of the start date |
The workers comp policy is the one that surprises people, because it is the only item on this list that can be refused. A remodeling operator on r/Contractor described a family business that ended up restricted to the California state fund after a single jobsite accident roughly twenty years earlier, and was still dealing with the consequences of that placement fifteen years later. Get quotes early and get an actual broker rather than buying direct.
Watch out
Do not assume a single employee puts you under a mandatory coverage threshold and therefore off the hook. Coverage thresholds and practical requirements are different questions. Every experienced contractor answering the first-hire question on r/Contractor gave the same one-word answer on workers comp: always.
Step 4: capture hours against a job and a class code
This is the step that separates contractor payroll from small business payroll, and it is the step most owners get wrong for years.
A payroll run needs to know how many hours each person worked. A contracting business needs to know how many hours each person worked on which job, and doing what kind of work. Those two extra dimensions have to be attached when the hour happens. Nobody remembers on Friday afternoon which Tuesday hours went to the Henderson kitchen and which went to the warranty callback across town.
A contractor on r/Accounting who moved to field time capture put it plainly: crews clock in against a specific job and classification from their phones, so by the time it reaches payroll the data is already sorted, and admin time collapsed because it stopped being spent on cleanup. The same person made the sharper observation that a twenty hour weekly payroll process is almost always a data problem upstream rather than a payroll platform problem. If time still arrives as texts or end-of-week self-reporting, even good software spends most of its time reconciling rather than processing.
The second dimension, the class code, is worth real money, and is covered below.
Step 5 and 6: gross to net, and the taxes that actually apply
Once hours are clean, the arithmetic is mechanical. For 2026, the numbers you are working with:
| Item | Rate | Base |
|---|---|---|
| Social Security | 6.2% employee, 6.2% employer | First $184,500 of wages |
| Medicare | 1.45% each side | No cap |
| FUTA | 6.0%, less a 5.4% credit for timely SUTA, so 0.6% | First $7,000 per employee |
| SUTA | State assigned, commonly 2% to 4% for new employers | State wage base |
The Social Security wage base for 2026 is $184,500 per the Social Security Administration, up from $176,100 in 2025. Employer FICA therefore totals 7.65% until a worker crosses that base, which most field employees never will.
FUTA looks trivial and mostly is. At the effective 0.6% rate it caps at $42 per employee per year. Two details matter anyway. First, you deposit only once your cumulative liability crosses $500 in a quarter, otherwise it rolls forward, and you reconcile on Form 940 by January 31. Second, the 5.4% credit is not guaranteed. If your state borrowed from the federal unemployment trust fund and did not repay, it becomes a credit reduction state and your effective rate rises. Symmetry lists California, Connecticut, New York and the US Virgin Islands as carrying Title XII balances into 2026.
One point that gets lost when owners outsource payroll and stop paying attention: the IRS position is that the employer remains the responsible party even when a third party makes the deposits, and can be held personally liable for unpaid federal taxes. A provider missing a filing is still your penalty, running from 2% to 15% of the unpaid amount plus interest.
What your first employee actually costs
This is the question the guides answer badly. When a Texas couple posted on r/Contractor about hiring their first helper at $18 to $20 an hour, the most useful reply told them to treat that wage as the tip of the iceberg and to build an all-in hourly rate. Here is that build, on a $20 an hour hire working 2,080 paid hours.
| Line | Amount |
|---|---|
| Base wages | $41,600 |
| Employer FICA at 7.65% | $3,182 |
| FUTA at 0.6% on $7,000 | $42 |
| SUTA, illustrative 3% on a $10,000 base | $300 |
| Workers comp, illustrative $4.00 per $100 of payroll | $1,664 |
| Statutory total | $46,788 |
That is roughly 12.5% over base wages, and it includes no benefits, no paid time off, no truck, no phone, no tools and none of your own admin time. Construction Business Owner, cited by Payroll4Construction, puts total employment costs for a non-union contractor at 24% to 33% over wages, and 60% to 70% for a union contractor. The gap between the 12.5% above and that 24% to 33% is everything discretionary you have not added yet.
Then comes the denominator that decides whether any of it was priced correctly. You paid for 2,080 hours. You did not bill 2,080 hours. Weather, drive time, shop time, warranty callbacks and gaps between jobs are real. At a realistic 1,700 billable hours, that $46,788 becomes $27.52 per billable hour against a $20 wage. Bid the $20 and you lose money on every hour the person works. This is the same denominator problem covered in more depth in what should my labor burden rate be.
By the numbers
Statutory payroll costs add about 12.5% to a $20 wage. Real burden runs 24% to 33% for a non-union contractor. Divided by billable rather than paid hours, the number you must actually bid against is closer to $27.50.
Step 6 continued: workers comp is a payroll line you control
Most owners treat workers compensation as a fixed insurance bill that arrives and gets paid. It is not fixed. It is calculated as your payroll divided by 100, multiplied by a rate attached to a class code, and both inputs are things your payroll records determine. Three mechanics are worth knowing.
Overtime premium is excluded. NYSIF states it directly: the extra portion of overtime pay is excluded from the payroll premium is charged on. A worker earning $10 straight time and $15 at time and a half has $5 per overtime hour removed from the premium base. On double time, half the payment is excluded. To get the credit you have to separate overtime properly per worker and show the total for each classification. If your records do not break it out, you pay premium on the whole thing.
Payroll can be split across class codes. NYSIF confirms that in construction, the payroll for an individual worker can be separated among different classifications, provided the separated work is not incidental to the primary work. The critical condition: the split must be based on actual time worked in each code, not on percentages. Without a defensible separation, all of your payroll may be assigned to your highest rated classification.
That condition is where people get burned. The California remodeler above was told by the state fund that they could not be classified as both an office worker and a jobsite employee, so bidding, billing and planning hours all had to sit under a construction trade code. The remedy is not arguing with the auditor, it is contemporaneous time records that show the split, which brings you back to Step 4.
Subcontractor certificates are payroll too. If you cannot prove a sub carried coverage while on your site, NYSIF adds their payroll to yours at audit and charges you premium on it. A contractor on r/Contractor made the same point to a first-time hirer: document that every sub on site has workers comp or a signed and notarized exemption, or you get charged for insuring them after the audit.
Most of the payroll pain in this article is a data problem, not a payroll problem. If your hours arrive as texts and paper sheets and then get retyped into payroll, into your job costing, and into a GC's spreadsheet, we build the custom CRM layer that captures each hour once against the job and the class code and pushes it everywhere it needs to go.
Certified payroll: only if you take public work
Certified payroll is a separate product from payroll, and buying it before you need it is the most common expensive mistake in this category.
Under the Davis-Bacon Act, contractors and subcontractors on federally funded construction projects valued over $2,000 must submit weekly Form WH-347 reports to the Department of Labor, listing each worker's name, classification, hours, pay rate, gross wages, deductions and fringe benefits, with a signed compliance statement. Many states run their own prevailing wage regimes with their own formats. If your work is private residential or commercial, none of this applies to you.
The most honest guidance on this came from an eBacon representative answering the question on r/ConstructionTech, who opened by declaring the bias and then argued against the sale: construction payroll is four different headaches wearing one name tag, and if you are not doing certified payroll or prevailing wage, a Gusto or a Paychex will do you just fine and cost less.
If you do take public work, three things separate a workable setup from a miserable one.
Fringe paid as cash is a tax leak. Prevailing wage obligates a total package of base wage plus fringe. You can satisfy the fringe portion with employer-paid benefits or with cash in lieu. Cash is simpler and strictly more expensive, because it converts a benefit obligation into taxable payroll. As the same eBacon commenter put it, pay it as cash and you get taxed on money that never needed to be cash, with FICA and workers comp and general liability all taking a bite. Funding it into a qualifying plan meets the same requirement without inflating the base your premiums are priced on.
Overtime on prevailing wage is not intuitive. The half-time premium applies to the base rate only. The fringe is paid flat across all hours and does not get multiplied. Practitioners consistently flag this as the calculation where generic payroll tools break on prevailing wage work.
Verify the platform before you buy. Multiple contractors reported the same trap: the GC or awarding agency mandates a specific electronic submission platform, and software that does not export to it leaves you doing manual work anyway. One operator described having to get on the phone with their payroll provider to explain exactly what LCPtracker wanted, taking multiple rounds of corrections before reports were accepted.
The volume of manual work here is not small. A person handling payroll for a small paving company described five to six hours a week checking apprentice classifications, wage rates, fringe amounts and progression dates by hand, and caught an apprentice who had passed a six-month progression date and was still on the old rate. They also described entering identical data three times: their own system, the state website, and a GC's custom spreadsheet with the columns rearranged.
Choosing what to run it on
Three tiers, and the honest test is which problem you actually have.
| Tier | Fits | Trade-off |
|---|---|---|
| General payroll, Gusto or Paychex tier | Private work, no prevailing wage, under roughly 20 employees | Cheapest and easiest. No job costing depth, no certified payroll |
| Construction-specific payroll | Prevailing wage, union, or multi-state | Handles fringe, CPR and class codes natively. Costs more, longer onboarding |
| PEO | You want HR, benefits and comp bundled | Group buying power on workers comp can offset the fee. Still needs someone internal |
The PEO route deserves a caveat that gets buried. An operator quoted roughly $150 per employee per month and found it attractive against hiring someone in house. A responder with HR background flagged the catch: office work and skilled trades are rated completely differently for workers comp, and a lot of PEO quotes bury that in a blended admin fee so you do not see the comp portion until several pay cycles in. Get the workers comp component broken out by class code before comparing providers. A separate commenter added the operational reality that a PEO removes the admin machinery but not the need for someone on your end to push the buttons.
Note also that many contractors deliberately split time capture from payroll processing rather than buying one system. A multi-state roofing operator described field time tracking with certified payroll reporting in one tool and a separate processor for the pay runs, chosen so hours get coded to the job as they are logged. If you are weighing this against your existing accounting stack, job costing in QuickBooks Online covers where that combination holds up.
The cash timing problem nobody warns you about
Payroll is weekly. Receivables are not. This gap is the single most common way a growing contractor gets into trouble, and it gets worse with success rather than better.
A contractor on r/Contractor described the shape of it after his best quarter ever, moving from a $4M to a $6M run rate and finding himself more stressed about money than ever while floating payroll for crews that would not bill out for another 60 days. His books were the cleanest they had been in five years. That is the point. Profitable growth consumes cash, and payroll consumes it first because it cannot wait.
The practical guardrails, from operators who have been through it:
- Hold at least one month of fully burdened payroll in reserve before the first hire, and never treat withheld taxes as available cash. That money is not yours.
- Collect a materials deposit and a labor deposit up front where your market allows it, so the first pay period on a job is not funded entirely from reserves.
- Stop work at a defined missed-progress-payment threshold rather than floating a slow client through another cycle.
- Understand that late pay is unrecoverable as an employer. As one commenter put it, the first time you are late with pay, people walk.
The weekly checklist
Once setup is done, the recurring cycle is short. Run it in this order.
- Close time by a hard cutoff. Every hour carries a job code and a class code, or it does not get approved.
- Review exceptions, not everything. Missing job codes, overtime over a threshold, anyone who crossed a classification.
- Verify classifications on public work. Apprentice progression dates and wage determinations, before the run rather than after.
- Process gross to net and fund the run. Confirm the cash is there before you submit, not after.
- Confirm the tax deposit went out on your assigned schedule.
- Push job-coded labor cost into job costing the same day, while the week is still fresh.
- File the certified payroll report if the job requires it, in the format the agency or GC actually accepts.
- Quarterly and annually: Form 941 each quarter, Form 940 by January 31, W-2s by January 31.
Steps 1 and 6 are the two that generic payroll advice omits entirely, and they are the two that decide whether running payroll produces a paycheck or produces a business you can actually price from. If you can tell on Monday what last week's labor cost on each open job, your payroll process is working. If you find out at the end of the month from your bookkeeper, it is not, no matter how correct the paychecks were.