How to Do Construction Payroll: A Step-by-Step Guide for Contractors

1Collect employee information and required forms

Get the paperwork right before the first paycheck. Missing or wrong forms are the source of many withholding errors later.

• Form W-4 for federal income tax withholding.
• Arizona Form A-4 for state income tax withholding. Employees choose a withholding rate from 0.5% to 3.5% of gross taxable wages. If a new employee doesn't turn one in, withhold at the 2.0% default.
• Form I-9 to verify identity and work authorization. The employee completes Section 1 by the first day of work, and you complete Section 2 within three business days of the start date.
• E-Verify. Arizona requires every employer to use E-Verify for new hires.
• New hire report. Report each new hire and rehire to the Arizona New Hire Reporting Center within 20 days of the hire date.
• Pay details: pay rate or rates, pay schedule, direct deposit authorization if you offer it, and the trade or job classification the person was hired for.

Construction tip: rehires are common when work picks back up. A returning worker still needs to be reported as a rehire, and you should check whether their W-4, A-4, and I-9 are still current before the first check.

2Set employee pay rates and a pay schedule

Pay rates. Write down each worker's rate, and every rate they can earn if they do more than one kind of work. Arizona's statewide minimum wage is $15.15 an hour in 2026. Flagstaff ($18.35) and Tucson ($15.45) set higher local minimums, so a crew working inside those city limits may need a higher floor. Day rates and piece rates are allowed, but they still have to average at least minimum wage for all hours worked, and they don't remove overtime.

Pay schedule. Arizona requires at least two paydays each month, no more than 16 days apart, so monthly payroll doesn't work for most crews. Weekly pay is common in construction; biweekly works too. Wages for each period generally have to be paid within five business days after the period ends (ten days if your payroll is run from outside Arizona), and overtime pay no later than 16 days after the period ends.

Final pay. If you let someone go, Arizona requires their final wages within seven working days or by the end of the next regular pay period, whichever comes first. If an employee quits, final pay is due by the regular payday for that pay period.

3Track employee hours across multiple jobsites

Payroll is only as accurate as the hours that go into it. For every worker, every day, you want:

• Actual start and stop times, including unpaid meal breaks
• Which job or project the time belongs to
• What kind of work was done, if it affects the pay rate or the workers' comp classification
• Who approved the time, usually the foreman or superintendent

Travel between sites counts. Under federal rules, time spent traveling from one jobsite to another during the workday is work time and has to be paid. A normal commute from home to the first site of the day generally isn't. Time spent at the shop before heading out, such as loading the truck or getting the day's assignments, generally starts the paid day.

A time-tracking app that records the job and cost code with each clock-in makes the rest of this guide much easier. Paper timesheets work if they're filled in daily, not reconstructed on Friday.

4Calculate regular wages and overtime

Under the federal Fair Labor Standards Act (FLSA), non-exempt employees earn overtime for hours over 40 in a workweek, at one and a half times their regular rate. Arizona has no separate daily overtime rule, so a 10-hour day isn't overtime by itself.

• The workweek is fixed. Pick a set seven-day period and stick with it. You can't average two weeks together, even on a biweekly payroll.
• The regular rate can be more than the base wage. Non-discretionary bonuses, such as production, attendance, or safety bonuses that workers expect when they hit a target, generally have to be included when you figure the regular rate.
• Multiple rates in one week are usually handled with a weighted average, shown below.

Paying overtime at the lower $24 rate would shortchange this worker. The FLSA also allows paying overtime at the rate for the work actually performed during the overtime hours, but only if you and the employee agreed to that before the work was done. Ask your payroll provider which method it uses.

For day rates, per diem, bonuses, and drive time in more detail, see construction overtime rules in Arizona.

New for 2026: because of the federal deduction for qualified overtime, the IRS expects employers to track the FLSA-required overtime premium (the extra half-time, in this example $65) separately and report it on employees' 2026 Forms W-2. Overtime paid only because of company policy or a union contract generally doesn't count. Make sure your payroll system can separate it.

5Manage multiple pay rates and employee classifications

"Classification" means three different things in construction payroll, and each one matters.

• Employee or independent contractor. Someone you schedule, supervise, and supply tools to is usually an employee, even if they call themselves a sub. The IRS and the U.S. Department of Labor each apply their own tests. Arizona has a Declaration of Independent Business Status (A.R.S. § 23-1601) that can support contractor status, but it doesn't settle federal tax or wage questions on its own. Misclassification can mean back taxes, back overtime, and penalties. More on 1099 vs. W-2 in construction.
• Exempt or non-exempt. Almost all field workers, including working foremen, are non-exempt and earn overtime. Salaried office or management roles may be exempt only if they meet both the duties test and the salary test.
• Job or trade classification. The kind of work determines the pay rate and, separately, the workers' comp code (step 7). On prevailing-wage jobs it also determines the required wage (step 9).

Set up each pay rate as its own earning code in payroll, and have hours recorded against the right code every day. A worker who runs equipment two days and does labor three days should show up that way on the timesheet, not as one blended number.

6Understand employer payroll taxes and withholding

Every paycheck involves two kinds of tax: amounts you withhold from the employee's pay and send in for them, and taxes the business pays itself.

Before your first payroll you need a federal EIN, an Arizona withholding account with the Department of Revenue, and an unemployment insurance account with the Department of Economic Security. Withheld taxes belong to your employees and the government, not to the business. Depositing them late is one of the most expensive payroll mistakes there is.

7Handle workers' compensation payroll classifications

Arizona employers with workers regularly employed in the business generally must carry workers' compensation. For construction, the premium is mostly driven by payroll: your insurer assigns classification codes for the kinds of work your people do, and each code has its own rate per $100 of payroll. Roofing, for example, rates very differently from clerical work.

• Splitting one worker's payroll between codes is generally allowed only if your records show the actual hours and pay in each type of work. Estimates or percentages usually aren't accepted, and without proper records the auditor can put all of that worker's payroll in the highest-rated code that applies.
• Overtime premium. Under the rating rules most states use, including Arizona, the extra half-time portion of overtime can usually be left out of workers' comp payroll if your records show it separately. Confirm with your carrier.
• The audit. After the policy year, the carrier audits actual payroll by code and adjusts the premium. Clean payroll reports by classification make the audit faster and fairer. See common contractor class codes.
• Subcontractors. Collect a current certificate of insurance from every sub. Payments to uninsured subcontractors may be added to your payroll at audit.

8Track payroll costs by construction project

Job costing shows what each project actually cost you, so you can tell which jobs made money and bid the next one better. Labor is usually the cost that drifts the most.

The true labor cost of a job is more than the wages on the timesheet. It's wages plus the labor burden: employer payroll taxes, workers' comp premium for the codes involved, and any benefits you pay for.

• Give every job a job number, and code every hour to one.
• Use cost codes for phases or tasks if you want to see where a job ran long.
• Each month, check that the hours and wages in your job-cost reports add up to your payroll register. If they don't, some time wasn't coded.

9Understand certified payroll and prevailing wage, when they apply

Not every construction business needs certified payroll. Most private residential and commercial work never requires it.

Certified payroll is a weekly report, signed by the contractor, showing that each worker on a covered project was paid at least the required prevailing wage and fringe benefits for their classification. In Arizona it usually comes from federal money:

• Davis-Bacon and Related Acts. Federal construction contracts over $2,000, and many projects paid for with federal grants or loans, require prevailing wages and weekly certified payrolls. That includes city, county, and state projects that use federal funding.
• Subcontracts. The requirements flow down from the prime contract, so a sub can owe certified payroll without ever bidding public work directly.
• State and local public works. Arizona law bars state agencies and local governments from requiring prevailing-wage provisions in their public works contracts (A.R.S. § 34-321), so purely state- or city-funded jobs generally don't carry a state prevailing-wage requirement.

The Department of Labor's optional form WH-347 is the classic format, and many projects now use online reporting systems. Your contract documents say which applies. See how to fill out the WH-347, prevailing wage in Arizona, and what to ask a provider.

10Process payments, keep records, and file reports

Each payroll

1. Collect and approve hours, coded to job and classification.
2. Enter any changes: new hires, rate changes, terminations, deductions.
3. Run the payroll and review it before it's final. Compare total hours and gross pay to last period and look for anything unusual.
4. Pay by direct deposit or check, with a pay statement. Arizona's paid sick time rules also require telling employees, each payday, how much paid sick time they have available, have used, and have been paid.
5. Deposit withheld and employer taxes on your federal and state deposit schedules.

Quarterly and yearly filings

Recordkeeping

Arizona requires payroll records to be kept for four years (A.R.S. § 23-364), and the IRS expects employment tax records to be kept at least four years too. Keep time records, pay rates, payroll registers, tax filings, job-cost reports, workers' comp audit reports, and certified payroll reports together where you can find them.

Common construction payroll mistakes

• Overtime at the wrong rate. Using the lowest rate, or the base rate without bonuses, instead of the regular rate for the week.
• Averaging workweeks. A 50-hour week followed by a 30-hour week still owes 10 hours of overtime.
• Timesheets filled in after the fact. Hours rebuilt from memory on Friday are where missing travel time and wrong job codes come from.
• Unpaid time between jobsites. Treating the drive from one site to the next as a commute.
• Calling employees "subs." Paying regular crew members on a 1099 to avoid payroll taxes and workers' comp.
• Lumping all payroll into one workers' comp code. Or splitting it without the daily records that support the split.
• Job costing on wages alone. Leaving out payroll taxes, workers' comp, and benefits makes every job look more profitable than it was.
• Missing a local minimum wage. Paying the state rate on a job inside Flagstaff or Tucson city limits.