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The Beginners Guide to Payroll Compliance

By Lars Lofgren

Payroll means paying your employees. But, at the same time, it also involves selecting a payroll schedule, calculating salaries, wages, and taxes, and ensuring everything is done accurately and on time.

When you’re running payroll, it can be easy to forget your compliance responsibilities governed by local, state, and federal law. Considering these regulations involving overtime, employee treatment, and income tax are crucial parts of payroll, payroll compliance becomes mandatory for every business owner.

Read on as I discuss payroll compliance and everything else you need to know to stay on the right track.

What Is Payroll Compliance?

Compliance means adhering to IRS and other federal, state, and local tax regulations about how employees are paid. These regulations play out a list of duties that an organization must fulfill, such as:

  • Social Security and Medicaid taxes (FICA)
  • Benefits reporting
  • Employee classification
  • Unemployment taxes (FUTA)
  • Reporting employee information and verifying employee eligibility
  • Employee paycheck withholdings/deductions
  • Paycheck garnishments
  • Weekly, quarterly, and annual tax deposits
  • Quarterly and annual tax filing
  • Data management and privacy (HIPAA)
  • Compensation categorization
  • Health coverage reporting (ACA)
  • Furnishing documents to employees

The tax code highlights the applicable mandates for you. You’ll find yourself paying costly fines and penalties if you fail to meet them. Even seemingly simple mistakes can jeopardize your tax credit eligibility, which, in turn, may have a significant impact on your bottom line—even put you out of business at times.

The Basics of Payroll Compliance

Payroll compliance is a continuous part of the employee life cycle that starts from the date of hiring and continues to even after they stop working for your company. Your payroll compliance responsibility is, of course, specific to your business, but there are a few universal regulations you should keep in mind.

Withholding the Federal Income Tax

Employers must withhold different taxes from their employees’ paychecks to meet payroll compliance requirements. One of these essential taxes is the federal income tax, which is determined based on the methods of the IRS, either by wage bracket or a percentage. It’s also based on the W-4 form exemptions designated by your employees.

You must hold the applicable federal income tax from the paychecks of every employee. Typically, the federal income tax amount can be between 10% and 37% and is reported to the IRS and the employee through the annual W-2 form.

Fulfilling the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) Guidelines

FICA taxes are crucial for payroll tax compliance since they’re required at the federal level. They comprise Medicare and Social Security taxes, each of which is to be withheld from your employees’ paychecks.

Since you’re responsible for paying these taxes on behalf of the employees, you must deposit the FICA taxes semi-weekly or monthly, depending on your business. Your company should do IRS reporting every quarter via IRS Form 941.

Paying FUTA is also your responsibility. This particular tax amount to 6% and is applicable against the initial $7,000 paid to an employee every year. You must pay the FUTA taxes quarterly and file them through IRS Form 940.

Withholding and Reporting Employee Fringe Benefits

As per the IRS, every fringe benefit, such as excessive mileage, clothing, and moving expense reimbursements, offered by an employer to their employee is taxable and should be included in the recipient’s paycheck unless the law excludes it.

Therefore, if you offer any similar benefits to your employees, you’ll be accountable for withholding taxes against these benefits and reporting the same on the W-2s of the respective employees.

Understanding Fair Labor Standards Act (FLSA) Law

The FLSA outlines rules related to overtime, record keeping, child labor standards, and minimum wage. As an employer, you have to adhere to these rules wherever applicable.

Out of the different categories under the FLSA, overtime is arguably the most important, especially from the payroll compliance perspective. Your job is to find and pay employees working overtime and then report the same.

Keep in mind the FLSA law also exempts some employees from overtime pay. This includes professional, administrative, and executive employees that meet specific criteria, certain small newspapers’ employees, farmworkers, seasonal, recreational, or amusement businesses, and so on.

Appropriate Employee Classification

In addition to payroll compliance, you must also adhere to other essential regulations, including correctly classifying employees who plan to hire.

Your responsibilities towards employees and independent contractors are different, which is why you have to categorize every person working for you and grant them benefits accordingly. This also extends to reimbursing specific expenses.

While withholding taxes and paying them on behalf of your employees is your responsibility, independent contractors are supposed to take care of their own taxes under the law.

Meeting State Requirements

Until now, I’ve covered the federal law requirements, but meeting state law requirements are equally crucial.

Your state obligations depend on the state you operate. So you must keep payroll compliance concerning your state rules only, which generally involves reporting new hires, withholding state income taxes, and following applicable laws concerning minimum wage, overpay, and any other employee pay.

5 Tools to Improve Payroll Compliance

Payroll compliance doesn’t have to be difficult.

You’ll find several efficient payroll service providers that offer a suite of tools and services that makes it easier to meet your tax obligations and pay your tax liabilities—all within the deadlines. Furthermore, they can also accurately report employee wages, benefits, and other information.

Below, I’ve compiled a list of the best tools that can simplify payroll compliance.

ACA Compliance Dashboard and Reporting

The Affordable Care Act (ACA) represents thousands of pages of complicated tax code. To simplify this, you can use an ACA dashboard that offers individual employee tracking to monitor compliance. It’ll automatically notify you about employees who will soon be eligible for health coverage and those who are losing their eligibility too.

Let’s not forget other useful ACA dashboard features like time-saving payroll integration to eliminate employee data duplication and early warning alerts for misclassified employees, unaffordable insurance, and enrollment problems. You also get multi-company status management and support for look-back management, which could help you save thousands of dollars for every new hire.

Customized Payroll Reporting

When it comes to payroll tax compliance, standardized reports don’t always meet business requirements. On the other hand, customized payroll reports let you gauge compliance by allowing you to enter customized employee information.

Custom fields and reports can help you make important decisions regarding employee salaries without risking non-compliance.

For instance, if you want to know which of your employees worked overtime on a specific project or you need to factor employee tips into earnings, you can match projects to employee hours, incorporate tips, and other types of compensation into total wages and display the results at a glance via custom fields and reports.

Fully Integrated Time and Attendance Solution

Many consider employee tracking to be the most complicated part of payroll. The good news is using time and attendance software can simplify the whole process.

You can use the tool to generate accurate reports, calculate tax liabilities, and ultimately, achieve payroll compliance. Running payroll, attendance, and annual summary reports for any specific date range is also possible.

Considering FICA and FUTA tax liabilities are based on employee wages, accurate reporting like this can be incredibly useful to ensure compliance.

Employee Self-Service and Onboarding

Using employee self-service and onboarding software can reduce reporting errors, ensure organization-wide compliance, and allow staff free time to focus on more critical projects to facilitate business growth.

You’ll find many cloud-based online tools that can reduce your HR team’s total time managing employee data. They can also help new employees complete vital documents and verify Social Security numbers to establish eligibility to work in the United States.

Employees can use self-service tools to adjust withholdings or enroll in benefits programs too. New hires will have to complete I-9 and W-4 forms, Work Opportunity Tax Credit and Equal Employment Opportunity information, direct deposit information, and review the employee handbook.

Moreover, all information is stored digitally for easy form generation, retrieval, and reporting, making it even easier for you to comply with the tax code.

Payroll Cards

Today, several employees are opting for payroll debit cards instead of traditional bank accounts. The absence of paper checks and direct deposit information makes tracking employee wages more challenging, which, in turn, also affects reporting accuracy and payroll tax compliance.

Fortunately, several payroll solutions are designed to track every payroll card issued to employees, which help simplify reporting and maintain payroll compliance.

4 Tricks for Payroll Compliance

Keeping up with all the payroll compliance requirements can leave anyone overwhelmed. Here are a few tricks to streamline your payroll processes and set yourself up for success.

Using Payroll Software

Getting payroll software is the best way to simplify your payroll procedures and monitor compliance. A modern and efficient software solution lets you automate your processes, store information in one place, calculate employee paychecks and withholdings, and file taxes on your behalf—all within a short time.

Moreover, you’ll find various offerings on the market—each with specific features, price points, pros, and cons. You can check out my list of modern and highly efficient online payroll services to find an option that’s user-friendly and meets all your requirements.

Create Payroll Compliance Checklists

You can make a payroll compliance checklist for all kinds of reasons. You can have one for consulting every new employee or contractor, for every time you run payroll, to consult one every quarter or year—or for all three.

For each checklist, make sure you have every step (determining exempt or non-exempt, setting up direct deposit, etc.) and the points you need to remember (adding employee to the payroll system and reporting new hire information to the state, adding reports to the business database, etc.) to stay in compliance with payroll-related laws.

These payroll checklists allow you to have a point of reference to help you through all your processes. You can use them to train your HR team and other employees to manage and set up payroll.

Use Audit Trails

Look for software that offers audit trail functionality.

This feature allows you to link made every transaction with supporting information, such as purchase orders and invoices, to validate any payments that may look unusual. Audit trails can also help you guide against fraud, provide insights into the well-being of your company, and ensure the accuracy of all your corporate accounts.

Get Expert Advice

Don’t be afraid to talk to an expert if you need help with payroll compliance and legislation.

Accountants, for example, have a good knowledge of payroll compliance and can help you with regulations, important changes, and updates. They can also help you maintain up-to-date records in addition to filing returns and remitting taxes.

Similarly, many other experts can support you regarding payroll issues and for handling discrepancies in records.

What to Do Next

Staying on top of legislation is crucial, and considering the number of things you’ll have to remember to ensure compliance, this isn’t exactly the easiest feat.

After finding out about the tax and regulations to fulfill, you’ll have to submit all payroll information on time. Late submission can risk your business being penalized, so make sure you factor in enough time to get all tasks—meeting tax deadlines, shifting paydays, quarterly reporting—done on time.

Below are a few other guides that you can use to get all the necessary information to ensure payroll compliance and minimize errors:

  • Best Time and Attendance Systems
  • Best Onboarding Software

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