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Payroll Compliance Checklist: Your Guide To Not Getting Sued

15 Dec


There’s no shortage of struggles when it comes to payroll. For most employers, it falls on them to withhold, deposit, report, and pay federal employment taxes for their employees correctly. But without guidance, you run the risk of missing critical steps.

For more insight into common payroll mistakes and how to avoid them, check out our fast guide on navigating payroll compliance below.

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What is Payroll Compliance?

Payroll compliance means adhering to all federal, state and local regulations that govern how employees are paid. Employers that violate any of these laws may face penalties that could negatively affect their bottom line or even put them out of business.

Why is Payroll Compliance Important?

Failing to comply with federal payroll requirements can result in harsh penalties including criminal liability, expensive fines, and even jail time. Penalties are time-sensitive, often accumulating increased fees as time goes on. In short, non-compliance is a non-option.

Common Payroll Mistakes that Lead to Compliance Issues

Compliance issues can be common. Here are some typical mistakes employees make that lead to payroll compliance issues:

  • Misclassifying Employees: This can lead to over or underpaying an employee. A common misclassification for employees is whether or not they should receive overtime pay.
  • Miscalculating Pay: Miscalculating pay can lead to missed payments for employees, as it takes a few days to correct payment issues. This can lead to employee frustration, as they may be unable to pay bills.
  • Incorrect W-2’s: Employees use W-2’s to file their annual taxes, which can cause many issues when filing taxes, including W-2 reissues and penalties.
  • Not Tracking Employee Hours: Time that is not logged correctly can lead to overtime payments that weren’t earned and can result in errors that are very time consuming to correct.

How Do You Stay Payroll Compliant?: Preventing Compliance Issues

It isn’t easy. Payroll tax filing can be a challenge when trying to keep up with ever-changing tax legislation and complex employee situations. Many organizations operating across the U.S. pay their employees accurately and on time, yet still find it difficult to be consistently compliant.

Perhaps it’s because there are so many components to manage- such as employee records, compensation, wages, bonuses and deductions. Taxes and benefits need to be properly deducted and paid, wages must meet minimum requirements, and retirement funds must be placed into the proper accounts. All these steps need to occur within the complicated framework of local, state and federal tax and regulatory requirements.

Some helpful tips to help you stay payroll compliant are:

  • Know the tax and reporting deadlines
  • Know your federal, state, and local payroll and tax laws
  • Keep accurate employee records
  • Use audit trails

Using a payroll software is also a way to help stay payroll compliant and avoid costly mistakes. The automated process not only makes the payroll process faster and more efficient, but it also removes the risk of human error.

Payroll Reporting & Record-keeping Requirements for Employers

Here are the essential reporting and record-keeping requirements to include in your onboarding and ongoing payroll management:

  • Records for the Federal Labor Standards Act (FLSA): The FLSA requires employers to track and record payroll and employee records for at least 3 years. There are variations on the time and requirements for each state as well, so make sure to identify additional details based on the state(s) in which your workforce is distributed.
  • SSN Verification: There are two options via Internet that you can verify employee names and SSNs. You can verify up to 10 names and SSNs (per screen) online with immediate results. (This is a great option for new hires.) Additionally, you can upload overnight files up to 250,000 names and SSNs as well.
  • E-Verify – employment verification: E-verify is a web-based system that allows employers to confirm whether or not an employee is able to work in the U.S. This verifies employees’ identities and employment eligibility by electronically matching information provided by employees on an I-9 Form with federal records.
  • New Hire Reporting: Employers are required to report all new hires to their state within 20 calendar days after hiring or by the first regularly scheduled payroll following the date of hire. This applies to rehires as well. Federal law does not require employers to include independent contractors, but many states do. If you have never reported a new hire before, report all employees you have hired within the last 180 days as a first step.
  • Employee Forms: As previously mentioned, certain forms will become part of your workforce management compliance. These directly affect payroll, so it’s critical that these are among the first onboarding documents you receive and keep up with as you pay and file taxes on behalf of your workforce. These include: W4 forms, I-9 forms, and state-specific forms.

Basics of Payroll Tax Compliance

All employers must calculate and submit federal income taxes (FIT) and withholdings correctly to avoid government fees or getting sued by members of their workforce. The Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) have both evolved a great deal as part of this process. Paying taxes into these programs funds Social Security, Medicare, unemployment benefits, and other important programs.

What Are The Laws that Govern Payroll Compliance?

  • FLSA
    • The FLSA, or Fair Labor Standards Act, sets minimum wage, overtime pay, and record keeping. It also sets the youth employment standards that affect employees in the private sector and Federal, State, and local governments. Those covered under FLSA are required to be paid a minimum wage of $7.25 per hour. Workers under FLSA are entitled to overtime pay that is at least one and a half times the employee’s normal pay.
  • FIT
    • FIT, or Federal Income Tax, is the amount of money that employers are required to withhold from employee wages to pay taxes. The amount depends on the information the employee puts on their W-4.
  • FICA
    • FICA is a federal payroll tax that stands for the Federal Insurance Contributions Act. FICA is deducted from each paycheck and is accurately recorded using an employee’s Social Security number. Employees earn credits for Social Security benefits as they work and pay FICA taxes.
    • Currently, the employee tax rate for social security is 6.2% and the employer tax rate for social security is also 6.2%, totalling to a sum of 12.4%. Furthermore, the social security part of the tax is capped at a maximum wage each year.
  • FUTA
    • FUTA, or the Federal Unemployment Tax Act, provides unemployment compensation to people who have lost their jobs. Typically, employers pay both a Federal and state unemployment tax. FUTA is only paid by the employer and is not taken from the employee’s paycheck.

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