How to Do Healthcare Payroll: A Step-by-Step Guide for Practices and Agencies

1Gather employee information and payroll forms

• Form W-4 for federal income tax withholding.
• Arizona Form A-4 for state withholding. Employees choose a rate from 0.5% to 3.5% of gross taxable wages; use the 2.0% default if a new employee doesn't turn one in.
• Form I-9, with Section 1 done by the first day of work and Section 2 within three business days. Arizona requires every employer to use E-Verify for new hires.
• New hire report to the Arizona New Hire Reporting Center within 20 days of hire or rehire.
• Pay details: each pay rate, the pay schedule, exempt or non-exempt status, direct deposit, and benefit elections.

Keep it separate: licenses and certifications belong in HR records, and patient information never belongs in payroll at all.

2Set up hourly and salaried payroll

Most healthcare staff are non-exempt and paid hourly: CNAs, caregivers, medical assistants, LPNs, techs, and front-desk staff. A salary alone doesn't make someone exempt from overtime. For the professional, administrative, and executive exemptions, the employee generally has to be paid a salary of at least $684 a week and meet the duties test for that exemption.

• Registered nurses can be exempt professionals when salaried at that level and doing professional nursing work. RNs paid by the hour are not exempt.
• LPNs and most other healthcare workers generally don't qualify for the professional exemption, whatever they're called.
• Physicians practicing medicine are exempt without a salary requirement; dentists and some other licensed practitioners have similar treatment.
• Per-visit or per-session pay is allowed, but non-exempt employees paid that way still need overtime figured on their hourly regular rate.

Arizona's minimum wage is $15.15 an hour in 2026, with higher local rates in Flagstaff ($18.35) and Tucson ($15.45). Arizona requires at least two paydays a month, no more than 16 days apart; weekly and biweekly are both common in healthcare.

3Track shifts and hours

Healthcare time tracking misses hours in predictable places. Capture actual start and stop times, by location and role, and watch for:

• Shift report and handoff before or after a scheduled shift. If they're working, it's paid time.
• Interrupted meal breaks. An unpaid break has to be a real break. A nurse who answers call lights through lunch is working.
• On-call time. On-call time where the employee can't use the time for themselves is generally paid; time they're free to spend as they like, with only a phone to answer, generally isn't until they're called in.
• Required training and meetings, including required continuing education during work hours.
• 24-hour shifts. Federal rules may allow excluding up to 8 hours of sleep time from a shift of 24 hours or more, but only with an agreement in advance, adequate sleeping facilities, and uninterrupted sleep. Get advice before using it.

4Calculate overtime accurately

Under the federal Fair Labor Standards Act, non-exempt employees earn overtime at one and a half times their regular rate for hours over 40 in a workweek. Arizona has no separate daily overtime rule. The workweek is a fixed seven days, and you can't average two weeks together.

The 8-and-80 system, for those who qualify

Hospitals and residential care establishments, meaning facilities where residents live and receive care, can use a 14-day work period instead of the workweek for employees who agree to it before the work is done. Overtime is then owed for hours over 8 in a day and over 80 in the 14 days. Home care agencies, clinics, and most medical and dental practices don't qualify and use the 40-hour week.

New for 2026: the IRS expects employers to track the FLSA-required overtime premium separately and report it on 2026 Forms W-2 for the federal overtime deduction. Overtime paid only under company policy, such as daily overtime outside 8-and-80, generally doesn't count.

For exemptions, 24-hour shifts and sleep time, and more examples, see healthcare overtime rules in Arizona.

5Handle night, weekend, and holiday shift differentials

Differentials are part of the regular rate, so they raise the overtime rate too. Paying overtime on base pay alone is one of the most common healthcare payroll errors.

Holidays. Neither federal law nor Arizona law requires holiday pay. If you pay a true holiday premium of at least time and a half for hours worked on a holiday, federal rules generally let you leave that premium out of the regular rate and credit it toward overtime. A smaller holiday bump is a differential and goes into the regular rate.

On-call stipends, call-back guarantees, and pick-up shift bonuses have their own rules. See shift differentials, on-call, and call-back pay.

6Manage part-time and as-needed staff

• Keep PRN staff active in payroll between shifts rather than terminating and rehiring, unless they truly leave. Rehires need a new hire report and may need a new I-9.
• Overtime still applies. A PRN nurse who picks up extra shifts and passes 40 hours earns overtime like anyone else.
• Paid sick time accrues for part-time and PRN employees too, at least one hour per 30 hours worked.
• Health coverage rules. Once you have 50 or more full-time-equivalent employees, federal rules require tracking variable-hour staff to see who counts as full time for coverage. Benefit eligibility for part-time staff depends on plan rules.
• PRN isn't a 1099. As-needed staff who work your shifts under your supervision are generally employees. 1099 vs. W-2 for healthcare workers.

7Withhold and pay payroll taxes

Nonprofit hospitals and agencies should check their own rules: 501(c)(3) organizations are exempt from FUTA and may have other unemployment options in Arizona.

8Record paid leave and benefit deductions

• Arizona paid sick time. Required for employees: at least one hour per 30 hours worked, up to 40 hours a year at employers with 15 or more employees and 24 at smaller ones, unless you allow more. Employees must be told each payday how much they have available, have used, and have been paid.
• Vacation and other PTO. Not required by Arizona law. If you offer it, your written policy sets how it's earned, used, and whether it's paid out when someone leaves, and payroll should follow it exactly.
• Family and medical leave. The federal FMLA provides unpaid, job-protected leave at employers with 50 or more employees. Any paid family leave is your choice and your policy.
• Benefit deductions. Set up pre-tax deductions (such as health premiums under a cafeteria plan and traditional retirement deferrals) separately from after-tax ones, and update them at open enrollment and life events.

If you're building a benefits package to recruit and keep staff, see the benefits healthcare employers can offer.

9Pay caregivers who work across multiple locations

• Travel between locations is work time. Driving from one client home, clinic, or facility to the next during the day is paid and counts toward overtime. The commute to the first stop generally isn't.
• Add every location together. Hours worked at all of your sites in the same week count toward the 40.
• Mileage reimbursement at a reasonable rate isn't wages and stays out of the overtime math. Unreimbursed vehicle costs can effectively drop pay below minimum wage.
• Local minimum wages apply where the work is done, so a caregiver serving clients in Flagstaff or Tucson may need a higher rate for those hours.
• EVV. For Medicaid-funded in-home services, AHCCCS requires electronic visit verification, which can feed payroll hours directly.

For a full caregiver example with travel time, mileage, and two pay rates, see caregiver payroll services, and for the rules in detail, caregiver travel time and mileage.

10Maintain records and submit payroll reports

Arizona requires payroll records to be kept for four years (A.R.S. § 23-364), and the IRS expects employment tax records for at least four years. Keep time records, pay rates, sick time balances, differentials, tax filings, and workers' comp audit reports together (see workers' comp class codes for healthcare). Final pay for a terminated employee is due within seven working days or by the end of the next pay period, whichever is sooner.