Auto Dealerships: Payroll Setup Guide (2026)

Step 1: accounts and registrations

Every auto dealership starts with an EIN, a withholding account in each state where someone works (unless that state has no wage tax), an unemployment insurance account in each of those states, and access to each state's new hire directory. New employers deposit federal employment taxes monthly during the first calendar year because there is no lookback period yet.

Step 2: classify salespeople and finance managers before the first check

For the 13(b)(10)(A) overtime exemption, a mechanic is an employee primarily engaged in mechanical work on vehicles; employees primarily doing nonmechanical work such as washing, cleaning, painting, polishing, tire changing or lubricating are not mechanics and are owed overtime. Primarily engaged means over 50 percent of the employee's time in the workweek.

Step 3: build the auto dealership pay codes

Front-end and back-end commission structures, flat-rate tech pay, F&I chargebacks and draw-against-commission each become a pay code with its own taxability and overtime treatment. Building them before the first run is cheaper than correcting a quarter of 941s afterward.

Under IRC section 132(j)(3), qualified demonstration use of a dealership vehicle by a full-time automobile salesperson is a working condition fringe excluded from wages, so the dealer does not withhold income tax or pay FICA on that value. The full exclusion requires use within the dealer's sales area (safe harbor radius of 75 miles) and personal use outside working hours, less commuting, averaging no more than 10 miles per day.

Step 4: set the records up to be kept

For each employee treated as exempt under section 7(i), the employer must keep a symbol or notation on payroll records identifying the employee, a copy or written summary of the commission agreement including the representative period and its dates, and total compensation for each pay period showing commissions separately from noncommission straight-time earnings.

Dealers must keep records showing each employee's name, hours worked, rates of pay, regular and overtime pay, home address, date of birth if under 19, sex and occupation.