Payroll compliance is something that every employer in the United States must navigate. Keeping up with regulations can be very challenging but necessary. Slip-ups could lead to hefty fines, unhappy employees, or damage to your company’s image and reputation—things no company wants.
So, let this article be a guide, shining some light on the essential parts of payroll in the US and helping you navigate these tricky regulations.
What Is Payroll Compliance?
Payroll compliance is all about keeping up with the tax laws, like wages, working hours, and other necessary rules tied to payroll. This includes keeping the correct forms for every worker, holding back and submitting taxes, nailing the right tax codes for the company, filing garnishments, following overtime rules, and many other things.
In short, it’s about ensuring that your team gets paid right and that you follow all federal and state laws about payroll compliance. Sounds easy, right? Well, there are nuances and details that you need to be aware of. Knowing the differences between federal, state, and local laws will save you time and money in the future.
Before we dive in, please note that we are not attorneys, accountants, or payroll compliance experts. We have a lot of experience with HR law and payroll compliance. Still, we always recommend consulting with your professional advisors to ensure you are doing things correctly for your company and location.
Laws That Govern Payroll Compliance
Federal, state, and local laws all contribute to guiding compliance. Here is a quick overview on the federal side of things when it comes to payroll in the US.
1. Fair Labor Standards Act (FLSA)
This federal law establishes minimum wage, overtime pay, recordkeeping, and child labor standards for employees in the private sector as well as federal, state, and local governments.¹
2. Internal Revenue Code (IRC)
This is the federal tax code in the US that outlines income tax withholding, Social Security and Medicare (FICA) taxes, and other payroll-related tax obligations.²
3. Social Security Act
This federal law establishes the Social Security program, which includes Old Age, Survivors, and Disability Insurance (OASDI). Employers and employees contribute a portion of wages to fund this program.³
4. Federal Unemployment Tax Act (FUTA)
This law imposes a tax on employers to fund unemployment compensation for workers who have lost their jobs. FUTA works in conjunction with state unemployment insurance programs.⁴
5. Consolidated Omnibus Budget Reconciliation Act (COBRA)
A federal law requires employers to offer continued health coverage to employees and their dependents who would otherwise lose coverage due to specific events.⁵
6. Family and Medical Leave Act (FMLA)
A federal law that provides eligible employees with job-protected leave for specified family and medical reasons.⁶
Challenges Associated With Payroll Compliance and How to Navigate Them
Understanding how to navigate the nuances of payroll regulations can help you avoid mistakes. Here are some of the things to keep in mind to keep your processes compliant, transparent, and smooth.
1. Classify Exemptions Correctly
Employees may be tax-exempt or subject to tax withholding. An employee claiming exemption from tax withholding indicates they meet specific criteria allowing them to forego federal income tax withholding. This might be due to expectations of no tax liability.
Quick tip! Employees are almost always subject to withholding unless they have particular circumstances that make them tax-exempt.
An employee indicating that they are tax exempt does not necessarily equate to complete tax exemption; that is, between the employee and the IRS. They are only signifying a request for no tax withholding. If an employee’s circumstances change, encourage them to update their Form W-4 to ensure accurate tax withholding.
2. Correct Classification of Employees Versus Independent Contractors
Classifying workers as independent contractors instead of employees can lead to unpaid payroll taxes and overtime or denial of benefits. So, differentiating between the two categories is important and involves factors like control over work, independence, and the nature of the working relationship.
If an individual manages both the manner and execution of the work while the employer maintains authority over the outcome, they might be classified as an independent contractor. Such workers are subject to self-employment tax, as employers do not withhold taxes from their pay.
On the flip side, if the employer has the majority of control over how, when, and where the work is done, then the individual is usually considered an employee. In this case, the employer would deduct necessary payroll taxes. Government entities tend to lean towards people being treated as employees, entitling them to the benefits and protections of that classification. If you are classifying someone as an Independent Contractor, do your due diligence to ensure that they truly meet the criteria for that classification.
3. Navigating Overtime Regulations
Employees fall into two categories–exempt and non-exempt–based on their responsibilities and compensation structure. Overtime pay is a critical aspect of payroll compliance. The FLSA mandates that non-exempt (hourly) employees receive overtime pay at a rate of 1.5 times their regular hourly wage for hours worked beyond 40 in a workweek. Some states or localities have additional overtime laws, which may be more stringent than federal regulations. Meticulous tracking of hours worked is required and can help calculate overtime pay accurately. Again, government entities seek to ensure employees receive any overtime they are entitled to. If you classify an employee as exempt (salaried), thoroughly evaluate the role and document your assessment that it qualifies as an exempt position.
4. Tax Withholdings and Reporting
Accurate tax withholdings and reporting are paramount to payroll compliance. Employers are responsible for withholding federal income tax, Social Security tax, and Medicare tax from employees’ wages. Additionally, state and local tax withholdings may apply.
These deductions must be remitted to the appropriate agencies on time, and accurate tax forms, such as W-2s, must be provided to employees at the end of the year.
5. Compliance With Benefits and Deductions
If you offer benefits such as health insurance, retirement plans, and flexible spending accounts, ensure compliance with regulations like the Employee Retirement Income Security Act (ERISA). Deductions for benefits and other items like wage garnishments must be executed within legal requirements to avoid legal challenges. In addition to federal laws, you may also need to comply with additional state or local laws regarding benefits or deductions.
6. Record-Keeping and Documentation
Maintaining meticulous records is not only a good business practice but also a legal requirement. Employers should retain payroll records for a specified period, including timesheets, wage rates, tax withholdings, and benefit information. Compliance audits may necessitate presenting these records as proof of adherence to regulations.
Payroll Compliance Best Practices
Avoiding payroll compliance mistakes involves paying close attention and staying ahead of the game. Here are some pointers to help you comply with the different laws and regulations:
1. Stay in the Know
As with everything, knowledge is power—so keep an eye on federal, state, and local payroll laws. Stay updated by checking official government websites, joining seminars, or chatting with legal or payroll experts. Remember, you must comply with employment laws wherever the employee works, not just where your company is located. The rise in remote and flexible work has led to some unpleasant surprises for employers who did not realize their employees had moved to a new city, state, or even country!
2. Use Reliable Payroll Software
Invest in trustworthy payroll software to help crunch numbers, taxes, and other payroll tasks. Most payroll services will help you stay in regulation and may help with documentation and other compliance-related items.
3. Give Payroll a Once-Over
Take the time to review your payroll records to catch any errors, oddities, or things that just don’t add up. Conduct regular in-house audits to spot any holes in your payroll process and get them patched up. These audits serve as a preventive measure, allowing employers to rectify errors before they escalate.
4. Self-Service for Staff
Think about setting up self-service portals so your team can easily see their pay stubs, tax info, and perks. It’s a smart way to reduce slip-ups and catch employee status or location changes.
5. Tax Double-Check
Tax rates can change, so it’s a good idea to check any municipality or other tax rates that may have been updated. Good payroll software will help with this. It is also important to process and revisit employee tax forms such as W-4s.
6. Talk It Out
Keep those lines of communication open with your employees. Let them know about pay updates, benefit changes, and any policy or rule tweaks that could affect them.
7. Use Lists
Craft detailed checklists or process documents to walk you through the payroll steps like a champ. It’s your go-to guide to getting it all right.
Seeking Professional Guidance
Given the intricacies of payroll compliance, we recommend that employers seek professional guidance. Hiring an experienced accountant, payroll specialist, or HR consultant can provide invaluable insights into navigating the complex landscape. These professionals can help interpret regulations, implement best practices, and ensure that the organization remains compliant.
While hiring a professional does incur additional costs, it ensures you follow the right payroll path. Even one mistake could cost you far more in penalties, fees, time, and stress to resolve. Pay a professional and get your mind off payroll so you can focus more on what you do best to keep your company growing and thriving.
LET PORTFOLIO CREATIVE HELP WITH HIRING DUTIES
Payroll compliance can be overwhelming, but with the right tools and resources, navigating the intricacies of payroll can be manageable. And with a staffing firm, managing your employees can be a lot easier!
At Portfolio Creative, we don’t just look for anyone to fill a seat. We look for the right creative and marketing talent for each client, ensuring we provide the best candidates. From sourcing to onboarding, legal compliance to payroll, you don’t have to worry about anything. Portfolio Creative has you covered!
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1. “Wages and the Fair Labor Standards Act.” US Department of Labor, www.dol.gov/agencies/whd/flsa. 12 Sep. 2023.
2. “Tax Code, Regulations, and Official Guidance.” IRS, www.irs.gov/tax-code-regulations-and-official-guidance. 12 Sep. 2023.
3. “Social Security Program Data.” SSA, www.ssa.gov/progdata. 12 Sep. 2023.
4. “Federal Unemployment Tax.” IRS, www.irs.gov/federal-unemployment-tax. 12 Sep. 2023.
5. “Continuation of Health Coverage (COBRA).” US Department of Labor, www.dol.gov/health-plans/cobra. 12 Sep. 2023.
6. “Family and Medical Leave (FMLA).” US Department of Labor, www.dol.gov/fmla. 12 Sep. 2023.