Home » Bookkeeping articles » A Payroll Compliance Checklist For Us Companies

A Payroll Compliance Checklist For Us Companies

June 3, 2021
Bill Kimball

payroll compliance

If an employee sues you for a payroll issue, you can use your records as evidence. Certain federal, state, or local government agencies might request to see your payroll records, especially if they suspect an issue. Be sure to check out your state payroll and labor laws to remain compliant.

The likelihood is that you will have a state unemployment tax as well. Employers must withhold a mandated percentage of employee wages and pay it to the federal government. One of the factors contributing greatly to that complexity is compliance with the various federal, state and local legislation. As an employer there are all kinds of obligations on you – all with the intent of ensuring fairness, of course – and what follows here is a quick checklist of the key federal requirements for HRMS payroll. It will also make things easy for the government – the tax office in particular. Payroll compliance means you’ll have all the information you need to complete and return tax forms on time. You could outsource the work to a company that specializes in payroll.

payroll compliance

In essence, this means that there are considerations you need to take every time you run payroll, as well as on quarterly and annual bases for business tax purposes. Payroll compliance, therefore, is a continuous part of the employee life cycle—from the day you hire someone until even after they’ve stopped working at your business. Some fringe benefits are taxable, such as bonus pay, paid time off, and the use of business vehicles outside of work. And, you must pay unemployment taxes and your portion of FICA taxes.

Minimum Wage Rules

Proper documentation is one of the most important factors that will help you avoid fines and penalties. When you start paying employees, it is important to set a pay schedule on which they’re regularly paid. Weekly, biweekly, and semimonthly are the most common pay periods, but some businesses pay out monthly.

  • If employers fail to prepare a Form W-2 for employees, or willfully furnish incorrect ones, they will be subject to a penalty per each statement that should have been sent or that was incorrectly prepared.
  • When employers register their business with the IRS and any other authorities, they are given a payment schedule.
  • If a separate statement is provided and employees receive a paper Form W , the statement should be included with the Form W-2.
  • These payroll categories range from the minimum required rest periods and minimum wages from state to state to agricultural employment-related payroll regulations.
  • That being said, you probably, if you’re just getting started, don’t need the option that the Fortune 100 company is gonna choose.
  • They couldn’t build up the muscle and the discipline to have a budget, stick to it, and actually become profitable.

The FLSA takes into consideration things like recordkeeping, overtime, child labor standards, and minimum wage. It is your duty as an employer to adhere to FLSA rules regarding the same. Out of all these, overtime pay holds a lot of importance from the payroll compliance perspective as an employer is required to not only figure out the overtime working employees but pay them and report the same also. Payroll compliance comes into play right from the day an employee becomes a part of your organization to his last. In other words, payroll compliance is essential throughout the employee lifecycle and comes with the following benefits for both employees and employers.

As a result, they minimize tax and payment compliance risks, possibly reduce taxes and other expenses, and efficiently handle all aspects of the tax filing and remittance process. Also, to assure payroll tax compliance, employers have to follow laws as they adjust at the federal, state, and local levels of government.

With all of the payroll compliance requirements you must adhere to as a small business owner, it’s easy to feel overwhelmed. Luckily, there a number of simple ways you can streamline your payroll processes and set yourself up for success. As we explained earlier, it’s important to accurately classify your employees vs. contractors because of the different tax implications of each. Once again, although there’s no authoritative definition to indicate the difference, you should make sure that you carefully consider this distinction with each individual you hire.

Keeping Payroll Tax Records

When it comes to when, where and how much they work, gig workers have more freedom and autonomy than employees. But gig workers aren’t entitled to employment benefits such as health insurance or overtime pay. And, legislation ensures that governments receive the funding they need for certain programs. When you get into overtime laws and proper compensation, you wanna make sure that you’re having people track their time properly and accurately. Second, it helps you figure out where you’re profitable and where you’re not in your business.

You’ll typically receive an income withholding order if an employee is behind on child support. You can also receive an earnings withholdings order for other debts that other parties have been awarded in a lawsuit. Another important law that affects your payroll compliance is the workers’ compensation insurance requirement.

If deciding to create a presence there, it is important to review the most significant regulations that are likely to affect your payroll strategy. These include laws pertaining to income tax, the minimum wage, overtime pay and employee benefits. After gathering all the necessary information and proper forms, employers need to follow instructions provided by the IRS in order to secure payroll tax compliance and avoid any errors. Payroll taxes are all taxes that are collected by federal, state, and local governments, based on salaries and wages paid to employees. These taxes must be withheld from wages by all businesses that have employees. They are remitted on a monthly or semi-weekly basis, depending on the quantity owed.

When it comes to withholdings, paycheck calculations, and tax responsibilities, consulting an accountant or tax advisor can be a great way to supplement the benefits of using payroll software. These professionals can check your calculations, inform you on tax forms and deadlines, and help you complete any necessary paperwork.

On December 5, 2019, the IRS issued the redesigned 2020 Form W-4 that was expected ever since the enactment of the Tax Cuts and Jobs Act in 2017. The 2020 Form W-4, Employee’s Withholding Certificate, is an updated version of the previous Form W-4, Employee’s Withholding Allowance Certificate.

Since employers are responsible for withholding, reporting, and paying taxes, they need to understand the differences between payroll and income tax to achieve maximum payroll tax compliance. Federal Unemployment Tax is approximately 1 percent of the first $7,000 in wages paid to an employee and is paid in full by the employer. Technically, the federal unemployment insurance payroll tax is 6.2 percent of the first $7,000 of an employee’s wages. However, employers in states with their own unemployment insurance tax programs receive a 5.4 percent credit toward their federal tax payment, reducing their tax rate to 0.8 percent. Since all states have federally approved programs, the effective FUTA rate is 0.8 percent.

Consider Outsourcing Payroll

On top of all the federal laws, each state has its own laws, too. Your state likely has laws on pay stubs, acceptable ways to pay employees, state unemployment insurance, workers’ compensation, new hiring reporting, state income tax, and more. For both employers and employees, the Medicare payroll tax rate is 1.45% on all earnings.

When you become an employer, you must follow all payroll laws to avoid financial penalties, lawsuits, and even worse, being forced to close your business. Payroll laws specifically govern how you pay your employees and taxes as well as how you report this information.

Typically, employers have to remit their share of Social Security taxes for each employee’s covered wages on a semi-weekly or monthly basis. However, Section 2302 of the CARES Act allows employers to defer certain payroll taxes incurred between March 27, 2020, and December 31, 2020. The 2020 Form W-4 no longer uses the concept of withholding allowances to account for additional income, deductions, and tax credits.

According to the National Small Business Association , the top two burdens on small businesses are income and payroll taxes. You are responsible for several recordkeeping requirements for payroll, which may not seem intuitive when thinking about payroll. One best practice many employers follow is to keep all payroll records, like paycheck stubs, year-end tax forms, new hire tax forms, time sheets, etc., for at least four years.

If you don’t have some sort of software or technology that’s helping you track that, there are some payroll that actually have it integrated within the payroll software provider. So make sure you’re looking at that as a factor when you’re going through analyzing your technology and your systems.

The IRS made few changes for 2018 and determined that employees would not be required to complete a new Form W-4 for 2018. However, it was strongly recommended and for some people, it may be advisable. Employers send the Form W-2 to the Social Security Administration by the end of February. The forms can be submitted online to the SSA by using their Business Online service. In case there are 250 or more W-2 forms, employers have to submit them to the SSA online. Every state with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, has an income tax. Tennessee and New Hampshire only tax dividends and interest income, but not wages.

payroll compliance

Because there’s a difference between actual payroll expense, that gross pay, and what’s actually coming out of the account to go into your employee’s bank account. So we wanna make sure that your payroll expense is accurate as well. We’re a CPA firm with a big focus on helping small business owners all around the country pay as little tax as legally possible. have gathered some tips to help you keep your payroll, your finances, and your business as a whole organized and compliant. My name is Tyler McBroom, and we are in the middle of a series, taking a deep dive into the importance of payroll for small business owners.

One of the biggest problems small businesses have is complying with employment legislation. Ask for advice, and choose the right software if you’re not outsourcing the work. Ask for recommendations from business associates, accountants and suppliers. Don’t rush the decision, because good payroll software will stay with you as your business grows. Business advisors, local chambers of commerce and accountants are all good sources of advice. In other countries it’s optional, but many employers do it anyway.

Each state has its own minimum pay frequency requirements, so be sure to check yours. Federal law requires you pay employees extra if they work overtime.

Dol Payroll Regulations

It is easy to disregard some of the IRS requirements, especially when it comes to different forms that all seem similar. However, if taxes are paid without the proper form or with a form that contains inadvertent or deliberate errors, the taxes are not considered paid in full, resulting in penalties. Therefore, to avoid huge and costly mistakes and maintain payroll tax compliance, employers have to understand the differences between various IRS forms. Form W-2 is an IRS tax form used in the United States to report wages paid to employees and the taxes withheld from them. Employers must complete a Form W-2 for each employee to whom they pay a salary, wage, or other compensation as part of the employment relationship. An employer must mail out the Form W-2 to employees on or before January 31.

Most lawsuits come about because companies have records that are incomplete or difficult to understand. If you don’t practice good record keeping, class-action wage and hour lawsuits can easily be lost, damaging your company’s bottom line and reputation. Having solid payroll practices in place along with an online payroll software will go a long way toward helping ensure compliance. The most common roles that are excluded from receiving overtime pay are “white-collar exemptions” for executive, administrative and professional employees. To qualify, the employee must be paid a salary , earn minimum annual pay of $35,568, and regularly perform certain duties.