How to Set Up a Salaried Employee in Gusto (w/Examples) + FAQs

Setting up a salaried employee in Gusto requires entering basic employee information, selecting salary compensation type, configuring tax withholding through Form W-4, setting up direct deposit, and enrolling them in benefits if applicable. The platform walks you through each step automatically once you create an employer account and register for federal and state payroll taxes.

The Fair Labor Standards Act (FLSA) requires employers to pay salaried employees at least $684 per week ($35,568 annually) to qualify for exempt status from overtime requirements. This federal threshold creates specific problems because employers who misclassify workers as exempt when they do not meet both the salary basis test and duties test face severe consequences. The immediate negative consequence is liability for back pay on unpaid overtime, liquidated damages that can double the amount owed, civil penalties ranging from $5,000 to $25,000 per violation in states like California, and potential criminal charges for willful tax evasion.

According to Bureau of Labor Statistics data from 2023, 43 percent of private businesses pay employees biweekly, making it the most common pay schedule across all industries.

What You Will Learn:

📋 How to navigate Gusto’s complete setup process for salaried employees from account creation through first payroll, including federal EIN registration, state tax account setup, and bank verification to avoid processing delays

💰 The exact salary thresholds and duties tests required under FLSA regulations to properly classify exempt versus non-exempt employees, preventing costly misclassification penalties that can reach $15,000 per violation

📝 Step-by-step W-4 and I-9 completion procedures within Gusto’s platform to ensure accurate tax withholding and employment eligibility verification, solving compliance issues before they trigger IRS audits

🏦 Direct deposit configuration and pay schedule selection methods that align with your business cash flow while meeting state-specific payment timing requirements for salaried workers

✅ Common mistakes that trigger payroll compliance violations and how to avoid them, including improper deductions from exempt employee salaries, incorrect overtime calculations for non-exempt salaried workers, and missing state registration deadlines

Understanding Salaried Employee Classification Under Federal Law

A salaried employee receives a predetermined fixed amount of compensation each pay period that does not vary based on hours worked or quality of work. The FLSA establishes the framework for classifying employees as exempt or non-exempt from minimum wage and overtime protections. This distinction matters because exempt employees do not receive overtime pay regardless of hours worked, while non-exempt employees must receive time-and-a-half for hours beyond 40 in a workweek.

The classification process involves three critical tests that all must be satisfied for exempt status. First, the salary basis test confirms the employee receives a fixed salary not subject to reduction based on quality or quantity of work performed. Second, the salary level test requires minimum weekly compensation of $684 ($35,568 annually) as of January 2026.

Third, the duties test examines whether the employee’s primary job responsibilities qualify under executive, administrative, or professional exemption categories. The executive exemption applies when an employee’s primary duty involves managing the enterprise or a department, regularly directs the work of two or more employees, and has authority to hire or fire other employees. The administrative exemption covers employees whose primary duty is office or non-manual work directly related to management or general business operations and who exercise discretion and independent judgment on matters of significance.

The professional exemption applies to employees whose work requires advanced knowledge in a field of science or learning customarily acquired through prolonged specialized intellectual instruction. Employers cannot simply assign a title and pay a salary to make someone exempt. The actual job duties performed determine classification, not the job title or description.

State-Specific Salary Thresholds and Requirements

Many states impose higher salary thresholds than the federal $684 weekly minimum, creating compliance obligations that exceed FLSA requirements. California requires salaried exempt employees to earn at least $68,604 annually ($1,320 weekly) as of January 1, 2025. This calculation equals two times the state minimum wage for full-time employment.

Colorado mandates a minimum of $1,086.25 per week for most exempt employees in 2025. Washington State requires salaried employees to earn 1.25 times the minimum wage to qualify as exempt, with rates varying based on employer size. New York implements different thresholds by region and employer size, with higher requirements for New York City and surrounding areas.

Maine sets its threshold at $845.21 per week for 2025. Some states like Oregon impose stricter duties tests in addition to higher salary requirements. The administrative exemption in Oregon cannot be satisfied based on duties relating to customers—the primary duty must relate to management or general business operations of the employer.

When an employee works in multiple states, employers must apply the most protective state law. Remote workers create particular complexity because their work location determines which state’s wage and hour laws apply. Employers must track where salaried employees physically perform work and ensure compensation meets that state’s threshold.

Creating Your Gusto Account and Initial Setup

Before you can add salaried employees in Gusto, you must establish your employer account with complete federal and state registration. The setup process requires specific documentation gathered in advance to prevent delays. Start by collecting your business legal name, entity type (LLC, S-Corp, C-Corp, sole proprietorship), primary business address, and industry classification.

You need your Federal Employer Identification Number (EIN) from the IRS. If you do not have an EIN, Gusto provides an option to obtain one during setup, though this adds processing time. Gather your business bank account information including routing number and account number for payroll withdrawals.

Register for state payroll tax accounts before beginning Gusto setup. Each state has different registration requirements and processing times. California employers must register with the Employment Development Department (EDD) within 15 days of paying more than $100 in wages in a calendar quarter.

The registration creates four separate accounts: Unemployment Insurance, Employment Training Tax, State Disability Insurance, and Personal Income Tax withholding. You receive an eight-digit employer payroll tax account number (State Employer Identification Number) after registration. Other states have similar but distinct processes.

Step-by-Step Gusto Account Creation

Navigate to the Gusto website and click “Get Started” to begin account creation. Enter your first name, last name, email address, work phone number, company name, number of employees, and create a password. You can alternatively sign up using your Google account credentials for faster access.

Gusto asks whether you plan to pay yourself through payroll. If you operate as an S-Corp owner, you must answer yes because IRS regulations require S-Corp owners to receive reasonable compensation through W-2 wages. The platform then requests your desired first payday to establish your payroll timeline and processing schedule.

Enter your company’s legal business name exactly as it appears on your EIN confirmation letter from the IRS. Select your business entity type from the dropdown menu. Input your company’s physical address where the business operates.

Gusto uses your industry selection to apply appropriate compliance rules, workers’ compensation classifications, and Standard Occupational Classification codes. Choose the industry category that most closely matches your primary business activity. If you have an accountant or bookkeeper, add their contact information so Gusto can grant them access to your account.

Configuring Federal and State Tax Information

The tax information step is one of the most critical in the entire setup process. Enter your Federal Employer Identification Number exactly as the IRS issued it. Gusto validates this number with IRS records, so any error halts the process.

Input your state employer payroll tax account number for each state where you have employees. In California, this is your EDD account number. Washington requires registration with both the Employment Security Department and Department of Revenue.

Provide your state unemployment insurance tax rate assigned by your state agency. New employers receive a standard rate, while established businesses have experience-rated percentages based on their history of unemployment claims. Enter your Employment Training Tax rate if your state requires this additional employer-paid tax.

Some states require workers’ compensation insurance details during payroll setup. Add your workers’ compensation insurance identification number and policy information if applicable. Gusto automatically calculates and tracks workers’ compensation premiums based on employee wages and job classifications.

Connecting Your Business Bank Account

Gusto withdraws payroll funds, tax payments, and service fees from your connected business account. Never use a personal bank account for business payroll as this creates tax complications and audit risks. The platform requires your bank’s routing number, account number, and account type (checking or savings).

Gusto sends small test transactions to verify your bank account. This verification process takes two to four days depending on your bank’s processing speed. You cannot run payroll until Gusto confirms your bank account is active and can process debits.

Maintain a sufficient cash buffer in your payroll account before each payroll run. Failed debits due to insufficient funds create immediate compliance issues because employee paychecks bounce and tax payments miss deadlines. Calculate your total payroll liability including gross wages, employer taxes (Social Security, Medicare, federal unemployment), state unemployment insurance, and Gusto’s service fees.

Set up a separate payroll bank account from your operating account if possible. This segregation helps you maintain required funds for payroll obligations and simplifies reconciliation. Some businesses transfer funds into the payroll account one to two days before each payroll to ensure availability.

Adding a Salaried Employee in Gusto

Once your Gusto account is fully configured with tax information and bank verification complete, you can add salaried employees to the system. Navigate to the “People” or “Team” section of your Gusto dashboard and click “Add a Team Member” or “Hire a New Person”. Gusto presents two options: employee (W-2) or contractor (1099).

Select “Employee” for salaried workers who will receive W-2 forms at year-end. The platform offers two onboarding methods: manual entry where you input all employee information yourself, or self-onboarding where the employee completes their own forms. Self-onboarding reduces administrative burden and minimizes data entry errors because employees provide their own information directly.

If you choose self-onboarding, you only enter basic information to send the employee an invitation. Input the employee’s first name, last name, start date, work address, manager name (optional), and personal email address. Gusto sends an automated invitation email to this address with a secure link for the employee to complete onboarding documents.

The employee receives a customized onboarding checklist that includes essential documents like tax forms, direct deposit setup, and company policies. They can complete paperwork securely from any location using electronic signatures, which benefits businesses with remote teams. The platform tracks onboarding progress and sends reminders for incomplete tasks.

Entering Employee Compensation Details

The compensation section determines how the employee’s pay is calculated and processed each pay period. Click on the job title field and enter a descriptive title that accurately reflects the employee’s role. You can select “This is a new job” to create a job category or choose from existing jobs if you have multiple employees in the same role.

Select “Salary” as the employee type from the dropdown menu. This designation tells Gusto to pay the employee a fixed amount each pay period regardless of hours worked. Enter the annual salary amount in the compensation field. For example, if you are hiring someone at $52,000 per year, type “52000” in the salary box.

Specify the pay frequency from the available options: weekly, biweekly, semimonthly, or monthly. Biweekly means the employee receives payment every two weeks (26 pay periods per year). Semimonthly means twice per month on specific dates like the 15th and last day (24 pay periods per year).

For a $52,000 annual salary paid biweekly, Gusto automatically calculates each paycheck as $2,000 ($52,000 ÷ 26). With monthly pay, each check would be $4,333.33 ($52,000 ÷ 12). The platform handles all calculations automatically once you input the annual amount and frequency.

Indicate whether the employee will receive commission or other types of conditional compensation. This affects how overtime is calculated if the employee is classified as non-exempt. Enter default hours per day if you want to track standard work schedules, though this is optional for salaried employees.

Determining Exempt or Non-Exempt Status

Gusto asks whether the salaried employee should be eligible for overtime. This question determines if the employee is classified as exempt or non-exempt under FLSA regulations. The answer must be based on the actual duties test, not your preference or convenience.

Review the employee’s job responsibilities against the executive, administrative, and professional exemption criteria. If the employee primarily performs managerial duties, supervises two or more employees, and has hiring/firing authority, they likely qualify for the executive exemption. Administrative employees whose work involves office operations, exercise of discretion, and matters of significance may qualify for that exemption.

Professional exemptions require advanced knowledge in a field of science or learning acquired through prolonged specialized education. Examples include licensed professionals like lawyers, doctors, architects, and engineers. Creative professionals in fields like music, writing, and graphic arts may also qualify under different standards.

If the employee does not meet an exemption’s duties test even though they receive a salary, you must classify them as non-exempt. Non-exempt salaried employees receive their fixed salary plus overtime pay at 1.5 times their regular rate for hours over 40 in a workweek. The regular rate for salaried non-exempt employees is calculated by dividing their weekly salary by the number of hours the salary is intended to compensate.

Mark the employee as “Eligible for Overtime” in Gusto if they are non-exempt. This ensures the system tracks hours worked and calculates overtime correctly. Leave them as overtime-exempt if they meet all three FLSA tests for exemption.

Completing W-4 Tax Withholding Setup

The Form W-4 determines how much federal income tax Gusto withholds from each paycheck. Employees complete this form to indicate their filing status, claim dependents, and request additional withholding if desired. The IRS redesigned the W-4 in 2020 to improve accuracy and align with changes from the Tax Cuts and Jobs Act.

If you selected employee self-onboarding, Gusto sends the W-4 form electronically for the employee to complete. The employee accesses their Gusto account, navigates to the personal or tax information section, and finds the W-4 form displayed on screen. Step 1 requires the employee’s name, address, Social Security number, and filing status (single, married filing jointly, married filing separately, or head of household).

Step 2 addresses employees with multiple jobs or married couples where both spouses work. The employee can check a box indicating multiple jobs, use the IRS online estimator, or complete a worksheet to calculate proper withholding. This step ensures sufficient tax is withheld when the employee has income from multiple sources.

Step 3 allows employees to claim credits for qualifying children and other dependents. The form provides specific dollar amounts to multiply by the number of dependents. These credits reduce the employee’s tax liability and therefore decrease the amount withheld from each check.

Step 4 includes optional adjustments like additional income not from jobs (interest, dividends), deductions beyond the standard deduction, and extra withholding amounts. Employees who want more tax withheld to avoid a balance due at tax time can request a specific additional dollar amount per pay period.

Step 5 requires the employee’s signature and date to certify the information is correct. The signature can be electronic within Gusto’s platform. Employees can update their W-4 at any time during the year if their circumstances change, such as marriage, divorce, or birth of a child.

Gusto automatically calculates federal income tax withholding based on the W-4 information using IRS Publication 15-T methods. The system applies the appropriate tax tables based on the employee’s filing status, wage amount, and payroll period. Employers cannot override these calculations without employee authorization.

Setting Up Direct Deposit and Payment Method

Direct deposit allows employees to receive their net pay directly into their bank account without physical paychecks. This method is faster, more secure, and reduces administrative work compared to paper checks. Gusto supports direct deposit for all employees at no additional cost on most plans.

Navigate to the employee’s profile in Gusto and locate the payment method section. If the employee chose self-onboarding, they enter their own banking information through their secure employee portal. Click “Add Method” or “Add Bank Account” to begin setup.

The employee provides their bank’s routing number (nine digits), account number, and account type (checking or savings). Most employees use checking accounts for payroll deposits. Enter a display name for the account like “Personal Checking” to identify it if multiple accounts exist.

Gusto performs test transactions to verify the account information is accurate. This validation process prevents payroll from depositing into incorrect accounts. If Gusto receives an error during verification, the employee must update the information and wait for re-verification, which can take several days.

Some Gusto plans offer next-day direct deposit, while standard plans process deposits in two to four days depending on the plan tier. The processing timeline determines when you must approve payroll relative to the employee’s pay date. For example, four-day processing requires you to submit payroll four business days before the pay date.

Employees can split their direct deposit between multiple accounts. This feature allows them to allocate a percentage or dollar amount to savings while depositing the remainder in checking. Configure split deposits by adding a second bank account and specifying the distribution method.

Completing Employment Eligibility Verification (I-9)

Federal law requires employers to verify every employee’s identity and authorization to work in the United States. The I-9 form serves as the employment eligibility verification document. Employers must complete Form I-9 for all employees hired after November 6, 1986, regardless of citizenship status.

Gusto includes I-9 functionality in its onboarding workflow. The employee completes Section 1 of Form I-9 by providing their full legal name, address, date of birth, Social Security number, and attestation of work authorization status. Employees select one of four categories: citizen of the United States, noncitizen national, lawful permanent resident, or alien authorized to work.

The employee must complete Section 1 no later than their first day of work. They sign the form electronically through Gusto to certify under penalty of perjury that the information is true and they are authorized to work in the United States. Electronic signatures are legally acceptable for I-9 forms.

Section 2 requires the employer or authorized representative to physically examine the employee’s original documents proving identity and work authorization. The employee must present documents from List A (proving both identity and work authorization) or one document from List B (proving identity) plus one from List C (proving work authorization).

Common List A documents include U.S. passports, permanent resident cards (green cards), and Employment Authorization Documents. List B includes driver’s licenses and state ID cards, while List C includes Social Security cards and birth certificates. Employers cannot specify which documents employees must present as long as they are acceptable and appear genuine.

The employer examines the documents, records information from them on the I-9 form, and signs Section 2 within three business days of the employee’s start date. You cannot hire someone without completing this verification within the required timeframe. Gusto stores the completed I-9 forms electronically in the employee’s file.

Employers must retain Form I-9 for three years after the hire date or one year after employment ends, whichever is later. Gusto maintains these records in your account for easy access during audits. The platform also alerts you when re-verification is needed for employees with temporary work authorization that expires.

Configuring Pay Schedules in Gusto

Your pay schedule determines how frequently employees receive paychecks and affects both cash flow management and employee satisfaction. Gusto supports multiple pay schedules, allowing you to pay different employee groups on different frequencies if needed. Navigate to “Company Details” in your Gusto dashboard and select “Pay Schedules” to configure this setting.

Click “Add Pay Schedule” to create a new schedule. Choose the pay frequency from the dropdown menu: weekly (52 pay periods per year), biweekly (every two weeks, 26 pay periods), semimonthly (twice per month on specific dates, 24 pay periods), or monthly (12 pay periods). Biweekly is the most common option because it aligns well with both employee budgeting and employer cash flow.

Select the day of the week when paychecks will be issued. Most employers choose Friday to give employees access to funds before the weekend. Gusto displays the earliest possible first payday based on your account setup and bank verification status. This date must allow sufficient processing time based on your plan’s direct deposit speed.

For biweekly schedules, specify whether the pay period ends on the payday or a few days before. Many employers end the pay period on Sunday and pay the following Friday, giving them time to review hours worked and approve payroll. This lag period is called the pay period end date versus the pay date.

Semimonthly schedules require you to select two specific dates each month. Common choices include the 15th and last day of the month, or the 1st and 15th. Semimonthly creates inconsistent pay dates due to varying month lengths and weekends, which can complicate cash flow planning.

Three Common Pay Schedule Scenarios

Scenario 1: New Small Business with Five Salaried Employees

Sarah launches a consulting firm with five salaried employees earning between $45,000 and $75,000 annually. She selects a biweekly pay schedule with payday every other Friday. The pay period runs Sunday through Saturday, with payday the following Friday.

Sarah benefits from biweekly’s consistency and employee preference. The three-payday months (which occur twice per year) require extra cash planning. She sets calendar reminders for payroll approval deadlines to ensure timely processing.

Scenario 2: Growing Company Converting from Checks to Direct Deposit

Marcus operates a marketing agency that previously paid its 12 salaried employees with paper checks on the 15th and last day of each month. He switches to Gusto and changes to biweekly direct deposit for better employee satisfaction and reduced administrative work.

Marcus communicates the change to employees 30 days in advance. He explains that while individual paychecks are smaller with biweekly pay, annual compensation remains identical. The transition requires one adjustment paycheck to shift from semimonthly to biweekly alignment.

Scenario 3: Retail Business with Mixed Hourly and Salaried Staff

Jennifer owns three retail locations with 35 hourly employees and eight salaried managers. She sets up two different pay schedules in Gusto: weekly for hourly staff to match their shift-based schedules, and biweekly for salaried managers.

Jennifer uses Gusto’s time tracking add-on to monitor hourly employee hours. The salaried managers receive consistent paychecks that do not require timesheet approval. This dual-schedule approach increases complexity but serves each employee group’s needs effectively.

Enrolling Employees in Benefits and Deductions

Gusto provides benefits administration integrated with payroll processing. Salaried employees often receive comprehensive benefits packages including health insurance, retirement plans, and paid time off. Navigate to the “Benefits” tab in your Gusto dashboard to access the benefits setup section.

Click “Set Up Benefits” to begin configuration. Gusto presents a range of benefit options: health insurance (medical, dental, vision), 401(k) retirement plans, Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), commuter benefits, life insurance, and disability coverage. Select the benefits you want to offer based on your company’s budget and competitive positioning.

Enter your business details including location, company size, and industry. Gusto uses this information to connect you with appropriate benefit providers and generate quotes. The platform works with licensed brokers to offer health plans with no separate administration fees beyond the insurance premiums themselves.

Determine employer contribution amounts for each benefit. For health insurance, you might cover 50% of employee-only premiums, 25% of dependent coverage, or offer a fixed dollar amount. Specify employee contribution rates if applicable. These elections determine how much is deducted from employee paychecks.

Setting Up Pre-Tax and Post-Tax Deductions

Gusto automatically calculates standard payroll deductions including federal income tax, Social Security tax (6.2% of wages up to the annual wage base), and Medicare tax (1.45% of all wages). Additional voluntary deductions for benefits require configuration.

Health insurance premiums are typically deducted pre-tax through a Section 125 cafeteria plan. This reduces the employee’s taxable income and saves both the employee and employer on taxes. Navigate to the employee’s profile and add the health insurance deduction under “Benefits & Deductions”.

Enter the “Employee Deduction Per Pay Period” amount. For a biweekly pay schedule where the employee’s health insurance costs $200 per month and the employer covers 50%, the employee’s share is $100 monthly. Divide monthly amounts by 2.17 to convert to biweekly deductions: $100 ÷ 2.17 = $46 per biweekly paycheck. For semimonthly or monthly schedules, the calculation differs.

Traditional 401(k) contributions are also pre-tax deductions that reduce current taxable income. Roth 401(k) contributions are post-tax, meaning taxes are paid now but withdrawals in retirement are tax-free. Set up 401(k) deductions by specifying either a percentage of gross pay or a flat dollar amount per pay period.

HSA contributions for employees with high-deductible health plans are triple tax-advantaged: pre-tax going in, tax-free growth, and tax-free withdrawals for qualified medical expenses. Configure HSA deductions with annual contribution limits in mind ($4,300 for individuals, $8,550 for families in 2026).

Post-tax deductions include Roth retirement contributions, union dues, wage garnishments for child support or debt, and certain insurance premiums. These deductions come from net pay after all taxes are calculated. Mark each deduction as pre-tax or post-tax in Gusto to ensure proper tax treatment.

Configuring Paid Time Off Policies

Salaried employees typically receive PTO benefits as part of their compensation package. Gusto allows you to create multiple PTO policies for different employee groups. Navigate to “Time Off” in your Gusto dashboard to set up PTO policies.

Choose between accrual-based PTO where employees earn time off gradually, or lump-sum PTO where they receive their full annual allocation on a specific date. Accrual-based policies grant one hour of PTO for every 30 hours worked, or a set amount per pay period. For salaried employees, assume 40 hours per week for accrual calculation purposes.

For example, if you offer 15 days (120 hours) of PTO annually to salaried employees paid biweekly, they accrue 4.62 hours per pay period (120 hours ÷ 26 pay periods). Gusto automatically tracks accruals and updates employee balances. Lump-sum policies grant the entire 120 hours on January 1st or the employee’s anniversary date.

Define accrual caps to prevent excessive accumulation and financial liability. For instance, limit accrual to 1.5 times the annual grant (180 hours for a 120-hour policy). Once employees reach the cap, they stop accruing additional PTO until they use some time off.

Establish rollover rules for unused PTO at year-end. Some employers allow unlimited rollover, while others permit rolling over a maximum number of hours (like 40) and forfeit the rest. Some states including California mandate payout of unused PTO at termination regardless of company policy.

Create clear request and approval procedures. Specify how far in advance employees must request time off, whether requests require manager approval in Gusto, and blackout periods when PTO is restricted. Configure these rules in Gusto’s PTO policy settings to automate enforcement.

Running Your First Payroll with Salaried Employees

After completing all setup steps and adding your salaried employees, you are ready to process your first payroll. Navigate to the “Payroll” section of your Gusto dashboard and click “Run Payroll”. Gusto displays any blockers that prevent payroll from processing, such as missing employee bank accounts or unsigned company documents.

Ensure all blockers are resolved before proceeding. Common issues include employees who have not completed their W-4 forms, missing direct deposit information, or unverified company bank accounts. Address each item on Gusto’s checklist until payroll is unblocked.

Select “Run Regular Payroll” from the payroll options. Gusto presents a spreadsheet-style interface showing all active employees. For salaried employees, the system automatically populates their gross pay based on the annual salary and pay frequency you configured.

Review each employee’s earnings to ensure accuracy. The gross pay for a salaried employee should equal their annual salary divided by the number of pay periods per year. For a $52,000 salary paid biweekly, verify the gross shows $2,000. For monthly pay, confirm $4,333.33 displays.

Adjusting Payroll for Bonuses and Additional Earnings

Salaried employees sometimes receive additional compensation beyond their base salary such as bonuses, commissions, or reimbursements. Click on the employee’s row in the payroll screen to add these supplemental earnings. Select “Add Earnings” or click the appropriate box to enter the additional amount.

Bonuses are considered supplemental wages subject to specific tax withholding rules. The IRS allows employers to withhold federal income tax from bonuses at a flat 22% rate if the bonus is separately stated from regular wages and you have withheld income tax from the employee’s regular wages in the current or prior year.

For bonuses over $1 million, the excess is taxed at 37%. Gusto applies these rules automatically when you designate the payment as a bonus. Alternatively, you can aggregate the bonus with regular wages and withhold based on the combined amount using normal W-4 calculations.

Enter reimbursements for business expenses separately from wages. Accountable plan reimbursements for documented business expenses are not taxable wages and should not have taxes withheld. Mark these payments appropriately in Gusto to exclude them from taxable income.

Commissions for salaried employees are supplemental wages. If the employee is non-exempt and commissions are part of their regular compensation, these amounts must be included when calculating the regular rate for overtime purposes. Gusto handles this calculation when you properly classify the employee as non-exempt and enter commission amounts.

Reviewing and Approving Payroll

After entering all earnings, deductions, and adjustments, carefully review the payroll summary. Gusto displays total payroll including gross wages, employee tax withholdings (federal income tax, Social Security, Medicare, state income tax), employee benefit deductions, employer tax obligations, and net pay for each employee.

Verify the tax calculations are accurate. Federal income tax withholding should align with each employee’s W-4 elections. Social Security tax equals 6.2% of gross wages up to the annual wage base ($176,100 in 2025). Medicare tax is 1.45% of all wages, with an additional 0.9% on earnings over $200,000 for the employee portion.

Check state tax withholdings match your state’s requirements. California has progressive tax brackets ranging from 1% to 13.3%. Other states have flat rates or different bracket structures. Gusto applies the correct rates based on the employee’s state of residence and W-4 elections.

Review employer tax liabilities. Employers pay matching Social Security and Medicare taxes equal to the employee’s contribution. Federal unemployment tax (FUTA) is 6% on the first $7,000 of each employee’s wages annually, though most employers receive a credit reducing the effective rate to 0.6%. State unemployment rates vary widely based on your industry, experience rating, and state.

Confirm the debit date and employee pay date displayed by Gusto. The debit date is when funds withdraw from your business bank account. This date must have sufficient funds available to cover total payroll. The employee pay date is when employees receive their direct deposits.

Click “Review and Submit” after verifying all details. Gusto presents a final confirmation screen showing total payroll costs broken down by wages, taxes, benefits, and fees. Review this summary one final time before clicking “Submit Payroll” to process the payments.

Once submitted, Gusto begins processing. The platform calculates final amounts, initiates direct deposits, files payroll taxes with federal and state agencies, and generates paystubs for employees. Employees can access their paystubs through the Gusto mobile app or web portal.

Common Mistakes to Avoid When Setting Up Salaried Employees

Mistake 1: Misclassifying Employees as Exempt Without Proper Analysis

Employers frequently assume that paying someone a salary automatically makes them exempt from overtime. This misconception leads to costly misclassification penalties. Simply giving an employee a salary and a manager title does not satisfy FLSA requirements.

The negative outcome includes liability for years of unpaid overtime with interest. Courts can award liquidated damages equal to 100% of the unpaid wages, effectively doubling the amount owed. California adds civil penalties of $5,000 to $15,000 per willfully misclassified employee, with an additional $10,000 to $25,000 for patterns of violations.

Employers must perform a thorough duties analysis for every salaried position. Document the employee’s actual day-to-day responsibilities, not just their job description. If more than 50% of their time involves non-exempt work like customer service, manual labor, or following detailed instructions, they likely do not qualify for exemption regardless of salary level.

Mistake 2: Making Improper Deductions from Exempt Employee Salaries

Exempt employees must receive their full predetermined salary for any week in which they perform work, with limited exceptions. Employers cannot dock an exempt employee’s pay for partial day absences, quality of work issues, or business slowdowns. Making improper deductions can destroy the salary basis and convert the employee to non-exempt status entitled to overtime for all hours worked.

Permissible deductions include full-day absences for personal reasons when the employee performs no work, full-day disciplinary suspensions for serious safety violations, FMLA leave, the initial or final week of employment when they do not work the full week, and offsets for jury duty or military pay. Employers must have a clearly stated policy of making only proper deductions.

One improper deduction does not necessarily eliminate exempt status if it is an isolated incident without a pattern. However, systematic deductions for tardiness, early departures, or time off in hourly increments violate FLSA salary basis requirements. The consequence is reclassification of the entire class of employees improperly docked, triggering overtime liability.

Mistake 3: Failing to Register for State Payroll Taxes Before Running Payroll

Some employers attempt to run payroll through Gusto before completing state tax registration. This creates an impossible situation because Gusto cannot file and pay state taxes without valid account numbers. The platform blocks payroll until you provide state employer identification numbers.

The negative outcome is delayed employee paychecks and frustrated workers. Rush registration with state agencies can take several weeks depending on the state’s processing time. California requires registration within 15 days of paying over $100 in wages, but processing can take 7-10 business days.

Register for all required state accounts before setting up Gusto. California employers need EDD registration for unemployment insurance, employment training tax, disability insurance, and income tax withholding. Each state has different agency names and requirements. Complete registration through each state’s online portal or by mailing forms.

Mistake 4: Not Tracking Hours for Non-Exempt Salaried Employees

Employers sometimes believe that salaried employees do not require time tracking. This is only true for employees properly classified as exempt. Non-exempt salaried employees must have their hours tracked to calculate overtime compensation.

The consequence of not tracking hours is inability to calculate and pay required overtime. Department of Labor audits specifically examine timekeeping records. Missing or incomplete time records create a presumption that violations occurred and shift the burden of proof to the employer.

Implement a reliable time tracking system for all non-exempt employees regardless of whether they are salaried or hourly. Gusto offers time tracking add-ons that integrate with payroll. Employees can clock in and out through the mobile app, and hours automatically flow to payroll calculations.

Mistake 5: Ignoring State-Specific Salary Thresholds

Employers often apply only the federal $684 weekly minimum without checking state requirements. Many states set higher thresholds that override federal law. Using the federal amount when state law requires more results in misclassification.

California’s $68,604 annual minimum is nearly double the federal threshold. An employee earning $40,000 who meets the duties test is exempt under federal law but non-exempt in California. The employer owes overtime and faces California’s steep misclassification penalties.

Research salary threshold requirements for every state where you have employees. Create a reference chart showing federal and state minimums. For employees who work remotely, apply the law of the state where they physically perform work. Update your chart annually because states frequently adjust thresholds.

Mistake 6: Miscalculating Regular Rate for Overtime on Non-Exempt Salaried Employees

When non-exempt employees receive salaries, calculating their overtime rate is more complex than for hourly workers. Employers must determine the regular rate by dividing the weekly salary by the number of hours the salary is intended to compensate.

If a non-exempt employee receives $800 per week salary for a 40-hour week, the regular rate is $20 per hour ($800 ÷ 40). Overtime hours are paid at $30 per hour (1.5 × $20). If the employee works 45 hours, they receive their $800 salary plus 5 hours of overtime at $30, totaling $950.

Some employers incorrectly pay only half-time for overtime hours worked by salaried non-exempt employees, forgetting that the salary already compensates the employee for the first 40 hours. The overtime rate must be calculated at time-and-a-half of the regular rate, not time-and-a-half added to the salary.

Do’s and Don’ts for Salaried Employee Setup in Gusto

Do’s: Best Practices for Success

Do verify exempt classification annually through a comprehensive job duties analysis. Review each exempt employee’s actual responsibilities to confirm they still meet the executive, administrative, or professional tests. Job duties evolve, and an employee who qualified for exemption at hire may no longer meet the requirements after reassignment or organizational changes.

Do maintain complete payroll records for at least three years as required by FLSA. Gusto stores digital records, but employers should regularly download backup copies. Records must include employee name, Social Security number, address, sex, occupation, hours worked each day and week, regular rate of pay, overtime earnings, deductions, total wages paid, and pay period dates.

Do communicate pay schedule and PTO policies clearly in writing. Include these in your employee handbook and require signed acknowledgment. Employees should understand how their salary is calculated, when paychecks arrive, how PTO accrues, and what happens to unused time at termination.

Do reconcile Gusto payroll data with your accounting software after each payroll run. Verify that total wages, tax liabilities, and benefit deductions match between Gusto and your general ledger. Catch discrepancies immediately rather than discovering them months later during year-end close.

Do respond to tax notices promptly when received from IRS or state agencies. Gusto handles most tax filings, but ultimate responsibility remains with the employer. Contact Gusto support immediately if you receive any tax notice to ensure proper response.

Do separate payroll funds from operating funds in your business bank account. Transfer the exact amount needed for upcoming payroll plus a buffer a few days before each run. This prevents insufficient fund failures that delay employee payments and damage morale.

Don’ts: Critical Errors to Avoid

Don’t assume job titles determine exemption status without analyzing actual duties performed. An “Assistant Manager” who spends 90% of their time performing routine tasks alongside other employees does not qualify for executive exemption. The title is irrelevant; only duties matter for FLSA classification.

Don’t dock exempt employees’ pay for partial day absences, tardiness, or leaving early. This destroys salary basis and converts them to non-exempt employees entitled to overtime. If you must address attendance issues with exempt employees, use disciplinary measures other than pay deductions except in very limited circumstances.

Don’t mix W-2 employees and 1099 contractors in Gusto without proper classification analysis. Misclassifying employees as contractors to avoid taxes and benefits creates severe IRS penalties. Use the IRS Common Law test examining control over work, financial arrangements, and relationship type to determine proper classification.

Don’t skip the bank account verification step by running payroll before Gusto confirms your account. Failed deposits leave employees without pay and destroy trust. Always complete the 2-4 day verification process before scheduling your first payroll.

Don’t ignore state-specific requirements by assuming Gusto handles everything automatically. While Gusto files taxes and forms, you must provide correct state account numbers, rates, and employer-specific information. The platform cannot register you for state accounts; that is your responsibility.

Don’t treat all salaried employees identically for overtime purposes. Non-exempt salaried employees must receive overtime for hours over 40 per week even though they have fixed salaries. Configure Gusto to track their hours and calculate overtime properly.

Pros and Cons of Different Compensation Structures for Salaried Employees

Pros of Standard Salary with Exempt Status

Predictable labor costs make budgeting simpler for employers because the same amount is paid each period regardless of hours worked. A team of five exempt employees earning $60,000 each costs exactly $300,000 annually plus benefits and employer taxes. This consistency helps cash flow planning.

Reduced administrative burden because exempt employees do not require hour-by-hour time tracking. Employers avoid the complexity of monitoring clock-ins, calculating overtime, and managing timesheets. Gusto processes exempt payroll with minimal input since the salary amount is fixed.

Attracts professional talent who expect salaried positions in their field. Senior-level hires, managers, and knowledge workers typically seek salary plus benefits rather than hourly compensation. Offering competitive salaries positions your company to recruit experienced professionals.

Flexibility for both parties allows exempt employees to manage their own schedules within reason. They can attend appointments without requesting approval for every absence. Employers benefit from employees working beyond 40 hours when projects demand it without overtime costs.

Higher perceived value than hourly wages even at equivalent pay rates. An employee earning $52,000 salary feels more professional than one making $25 per hour, though the annual amount is identical. This psychological benefit aids retention and engagement.

Cons of Standard Salary with Exempt Status

Misclassification risks create expensive liability if employees do not actually qualify for exemption. Penalties include back overtime pay, liquidated damages doubling the amount, state fines up to $25,000 per employee, IRS tax penalties for unpaid employment taxes, and potential criminal charges for willful violations.

No cost reduction during slow periods because exempt employees receive full salary even when work is light. Hourly employees can have reduced hours during downturns, cutting costs proportionally. Exempt salaries remain fixed regardless of business volume.

Potential for abuse exists when employers overwork exempt employees without additional compensation. Some companies exploit exempt status by requiring regular 60-70 hour weeks. This drives burnout and turnover despite the salary appearing competitive.

Lower overtime motivation compared to non-exempt employees who earn premium pay. Exempt employees gain nothing from working extra hours, reducing incentive to complete rush projects. Non-exempt workers welcome overtime opportunities to boost income.

Complex state variations make nationwide compliance difficult. California, New York, Colorado, and other states have different thresholds and duties tests than federal law. Multi-state employers must track various requirements and adjust compensation by location.

Pros of Salary with Non-Exempt Status

Guaranteed minimum income provides employees financial stability from the fixed salary. Unlike purely hourly workers whose paychecks fluctuate, non-exempt salaried employees know their baseline compensation. This helps with personal budgeting.

Overtime opportunities allow employees to increase earnings during busy periods. The fixed salary covers regular hours, and overtime pays 1.5 times the regular rate for additional hours. Employees appreciate the chance to earn more when needed.

Reduced misclassification risk because these employees are clearly designated as non-exempt and eligible for overtime protections. The salary structure does not create confusion about exemption status. Employers avoid FLSA violations by treating them as non-exempt.

Simpler payroll processing than hourly because the base amount is fixed. Gusto pays the standard salary automatically plus any overtime hours tracked during the pay period. This combines predictability with compliance.

Employee morale benefits from perceived salary status while maintaining overtime protections. Workers feel valued by receiving salary designation rather than hourly classification. They still receive overtime pay when warranted.

Cons of Salary with Non-Exempt Status

Time tracking requirement adds administrative work because non-exempt employees need documented hours. Employers must implement time clock systems and monitor compliance. Failure to track hours prevents proper overtime calculation and creates audit liability.

Overtime costs can exceed budgets during busy seasons when non-exempt salaried employees work extended hours. Unlike exempt employees who work extra hours without additional pay, non-exempt overtime creates 1.5x compensation. This unpredictability complicates budgeting.

Employee confusion about their status sometimes occurs when workers do not understand they are salaried but still non-exempt. They may question why they complete timesheets despite having a salary. Clear communication is essential.

Complicated rate calculations for overtime require dividing the weekly salary by hours to determine regular rate, then multiplying by 1.5. Bonuses and commissions must be included in the regular rate calculation. These computations are more complex than hourly overtime math.

Limited flexibility exists because non-exempt employees are subject to wage and hour rules about break periods, meal periods, and minimum wage. Exempt employees have more freedom from these regulations. The salary structure provides less flexibility than full exemption.

Year-End Processes for Salaried Employees

Preparing and Distributing W-2 Forms

Employers must furnish Form W-2 to each employee by January 31 following the tax year. The W-2 reports total wages paid, federal income tax withheld, Social Security and Medicare taxes, state wages and taxes, and other compensation elements. Gusto automatically generates W-2 forms for all employees based on annual payroll data.

Review employee information for accuracy before year-end. Verify that employee names match their Social Security cards exactly. Even a single transposed digit in the Social Security number causes W-2 rejection by the Social Security Administration. Update addresses for employees who moved during the year.

Confirm that all payroll runs processed correctly throughout the year. Reconcile year-to-date totals for gross pay, federal withholding, Social Security wages, Medicare wages, and state withholding. Check that manual checks, bonuses, and off-cycle payments are included in annual totals.

Gusto begins W-2 preparation immediately after the final payroll of the tax year. The platform electronically files Copy A with the Social Security Administration by the January 31 deadline. Electronic filing is required for employers with 10 or more W-2 forms.

Employees can access their W-2 forms through Gusto’s employee self-service portal. The platform provides electronic delivery options with proper employee consent, eliminating the need to mail paper copies. Employees who prefer paper forms can request them, and Gusto mails physical copies.

Form W-3 serves as the transmittal document accompanying W-2s filed with SSA. The W-3 summarizes all W-2 data for the employer’s entire workforce. Gusto automatically generates and files Form W-3 when submitting W-2s.

Handling State-Specific Year-End Reporting

Many states require additional year-end wage reporting beyond federal W-2 filings. California employers file quarterly wage reports with EDD throughout the year, but year-end reconciliation ensures annual totals are accurate. Some states impose separate year-end reporting deadlines or unique forms.

Verify that state unemployment insurance wages and taxes reconcile to your quarterly filings. The sum of all four quarters should equal your annual totals. Address any discrepancies before year-end to avoid notices from state agencies.

Review workers’ compensation reporting if your state requires annual filings. Some states mandate employers submit year-end payroll figures to their workers’ compensation carrier for premium adjustment. Gusto provides reports showing total payroll by job classification.

Local income tax jurisdictions may require year-end reporting separate from state filing. Cities like New York City, Philadelphia, and Detroit impose local income taxes with distinct reporting obligations. Ensure Gusto has correct local tax information for employees working in these jurisdictions.

Benefits Reconciliation and 1095 Forms

Employers subject to the Affordable Care Act employer mandate must provide Form 1095-C to full-time employees. This form reports the health insurance coverage offered and months of coverage. Applicable Large Employers (50+ full-time equivalents) must complete this requirement.

Gusto generates 1095-C forms for employers offering health insurance through its benefits platform. The deadline to furnish 1095-C to employees is March 31 following the tax year. Filing with the IRS uses Form 1094-C as the transmittal.

Reconcile all benefit deductions for accuracy. Verify that health insurance premiums, 401(k) contributions, HSA deposits, and FSA withholdings match your year-to-date totals. Confirm these amounts reconcile to payments made to benefit providers.

Review 401(k) contributions against annual limits. For 2025, employees under 50 can defer up to $23,000, while those 50 and older can contribute $30,500 including catch-up contributions. Gusto flags employees approaching limits, but employers should verify compliance.

HSA contribution limits must also be checked. Single coverage allows $4,300 while family coverage permits $8,550 in 2026. Employees 55 and older can add $1,000 catch-up contributions. Excess contributions must be corrected before tax filing deadlines to avoid penalties.

Frequently Asked Questions

Can I pay a salaried employee less than minimum wage?

No. Salaried employees must receive at least the federal minimum wage of $7.25 per hour for all hours worked unless they qualify for an exemption. Calculate hourly equivalent by dividing weekly salary by total hours worked that week.

Do all salaried employees qualify as exempt from overtime?

No. Salary alone does not create exemption; employees must also meet salary threshold ($684 weekly minimum federally) and duties tests for executive, administrative, or professional categories.

Can I dock a salaried exempt employee’s pay for being late?

No. Deducting pay from exempt employees for tardiness or partial-day absences violates salary basis requirements and can eliminate their exempt status, creating overtime liability.

Must I track hours for salaried employees in Gusto?

It depends. Exempt salaried employees do not require hour tracking for pay purposes, but non-exempt salaried workers must have hours documented to calculate required overtime compensation.

Does Gusto automatically register me for state payroll taxes?

No. You must register separately with each state agency before adding state tax information to Gusto; the platform files taxes but cannot complete initial registration on your behalf.

Can salaried employees receive bonuses through Gusto?

Yes. Add bonuses as supplemental wages in Gusto’s payroll interface; the platform applies 22% federal withholding rate for bonuses separately stated from regular wages under $1 million.

Is biweekly or monthly better for salaried employees?

It varies. Biweekly is most common (43% of businesses) and preferred by employees for budgeting, while monthly reduces processing frequency and simplifies accounting for some employers.

Do I need separate W-4 forms for federal and state taxes?

It depends. The federal W-4 covers IRS withholding; some states like California require separate state withholding forms (DE 4), while others use federal W-4 information.

Can I change an employee’s classification from exempt to non-exempt?

Yes. Employers can reclassify employees at any time; simply update their overtime eligibility status in Gusto and begin tracking hours for newly non-exempt workers.

What happens if I miss the January 31 W-2 deadline?

Penalties apply. The IRS assesses $60 per W-2 filed late within 30 days, $130 if filed after 30 days but before August 1, and $330 for later filing.

Does Gusto handle multi-state payroll for remote salaried employees?

Yes. Gusto Plus and Premium plans support multi-state payroll, automatically applying correct state tax rates and withholding for employees in different locations.

Can I offer different PTO policies to different salaried employees?

Yes. Gusto allows multiple PTO policies for different employee groups as long as you apply policies consistently within each group to avoid discrimination claims.

Must salaried employees sign up for direct deposit?

No. While most employees prefer direct deposit, employers can issue paper checks if employees do not provide bank information or opt out of electronic payment.

How do I handle a salaried employee’s first partial paycheck?

Prorate salary. Divide the annual salary by 365 to get daily rate, multiply by days worked in first pay period, or use Gusto’s proration feature.

Can I require salaried employees to use PTO for partial day absences?

It depends. Exempt employees can be required to use PTO in full-day increments without affecting salary basis, but hourly PTO deductions may violate exemption rules.

Does Gusto automatically calculate year-end bonuses?

No. You must manually add discretionary bonuses to payroll; Gusto calculates proper tax withholding once you enter the bonus amount as supplemental wages.

What if my salaried employee works in a state different from my business location?

Apply both states’ rules. You may need to register in the employee’s work state, withhold that state’s income tax, and comply with that state’s wage laws.

Can I pay salaried employees different amounts in different pay periods?

Not truly salaried. Fluctuating pay contradicts salary definition; however, you can add supplemental earnings like bonuses or commissions to base salary in specific periods.

How long must I keep payroll records for salaried employees?

Three years minimum. FLSA requires maintaining payroll records for at least three years; keep time cards and wage computation records for two years minimum.

Does Gusto automatically update state salary thresholds for exemptions?

No. Gusto processes payroll based on information you provide; you must monitor state threshold changes and update employee compensation and classification accordingly.